Basic Costing Chapter 3,4,5

  Raw materials – the materials bought by manufacturing organisations and used to manufacture the finished products. Work-in-progress – the name given to partly-completed items in a manufacturing organisation. Finished goods – the items that have been manufactured and are ready for sale. First in first out (FIFO) – a method of inventory valuation that assumes that goods will be used up in order that they are acquired (for valuation purposed only). This means that the remaining balance will be valued based on the prices of more recent purchases. Last in first out (LIFO) – this method of inventory valuation assumes that the most recently acquired inventory will be used first, leaving the earlier acquisitions to make up the value of the remaining balance. This does not have to correspond with the actual order of usage. Average costs (AVCO) – this inventory valuation method involves calculating a new weighted average cost of goods each time that a new purchase is made, and using this valuation for subsequent issues and balances until further purchases are made. Manufacturing account – this cost statement is produced at the end of a period to summarise costs under various categories. Direct materials – this is calculated as the total of opening inventory of raw materials, plus materials purchased, minus closing inventory of raw materials. Prime cost – the total of direct costs – in a manufacturing account it is calculated by adding direct materials used in manufacture to direct labour. Factory (manufacturing) cost – a subtotal made up of the total if prime cost (direct materials and direct labour) and manufacturing overheads. Factory cost of goods manufactured – the subtotal is the production costs of goods that have been completed and is made up of factory (manufacturing) cot adjusted for inventories of work-in-progress. Cost of goods sold – a total based on the factory cost of goods manufactured which has been adjusted for inventories of finished goods.

Chapter 3 Key terms

There are several methods of making labour payments. These include time rate (including basic rates and overtime rates), time rates with bonus systems, and piecework rates. Labour costs can be classified and coded based on the categories covered earlier in this book; these include cost and profit centres, direct and indirect costs. Labour costs can behave as fixed costs, variable costs or semi-variable costs, depending on the method of payment.

Chapter 4 Summary

Time rate – the method of remuneration when payment is on the basis of time spent at work; it can be an hourly rate or based on a longer time period. Basic rate – a time rate that is applied to the normal contracted work time, and is usually an hourly rate. Overtime rate – the rate (normally hourly) paid for time worked in excess of the normal contracted time; it is usually at a higher rate than basic rate. Piecework – a payment system when the employee is paid for the work carried out (e.g. per task or unit); this does not take any account of the time taken. Bonus system – a system used in conjunction with another payment method (for example time rate, which provides additional payment for efficient working, e.g. production that is more than a set level).

Chapter 4 Key terms

Managers at all levels require information to enable them to make decisions, plan and control the organisation. Costing information is an important part of the information that they need. Information requests may need clarification so that the needs of the user are met when supplying the information. Comparisons of actual data with budgeted figures make the actual data more useful for planning and decision making. Differences between actual and budgeted data (called ‘variances’) can be calculated in monetary and percentage terms, and significant differences can be identified and actuated upon. Reporting of variances should be made to appropriate manager. This is normally the person who has responsibility for the costs.

Chapter 5 Summary

Budget – a financial planning document that is prepared in advance, and can be used to help monitor and control costs. Variances – the difference between the actual data and the budgeted data. Adverse variances – these are ‘bad news’ ·         In a performance report when the actual income is lower than budget ·         In a performance report when the actual cost is higher than budget Favourable variances – these are ‘good news’ ·         In a performance report when the actual cost is cost is lower than the budget ·         In a performance report when the actual income is higher than budget Significant variance – a variance that is brought to the manager’s attention for further investigation due to either its high monetary value or the high percentage of the variance from the budget data.

Chapter 5 key terms

Basic Costing - Chapter 3

Basic Costing - Chapter 4

Basic Costing - Chapter 4

Basic Costing - Chapter 5

Basic Costing - Chapter 5