Direct vs. Indirect Costs & Cost Accounting

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Questions and Answers

Differentiate between direct costs and indirect costs, providing one example of each. How do these costs relate to the calculation of Prime Cost?

Direct costs are directly attributable to a product (e.g., raw materials), while indirect costs (overheads) are not (e.g., factory rent). Prime Cost includes only direct costs.

Explain the relationship between Prime Cost, Factory Overheads, and Factory Cost. How does adding Work in Progress (WIP) into the calculation refine this relationship and what variant of factory cost does it determine?

Factory Overheads are added to Prime Cost to get Gross Factory Cost. Adjusting for Work in Progress (WIP) refines Gross Factory Cost to Net Factory Cost.

Describe the components that comprise 'Cost of Production' and 'Total Cost'. Explain which overheads are included in each, and why the distinction is important for business decision-making.

Cost of Production includes Factory Cost and Office Overheads. Total Cost includes Cost of Production plus Selling & Distribution Overheads. The distinction is important for pricing and profitability analysis.

Explain how the values of opening and closing stock impact the calculation of the Direct Material Cost. Provide a scenario where the Direct Material Cost is greater than the Purchases value.

Opening stock is added and closing stock is subtracted from purchases. If opening stock is significantly higher than closing stock it leads to Direct Material Cost being higher than purchases. Signup and view all the answers

How is depreciation on plant and machinery treated in cost accounting, and why is the scrap value deducted when calculating depreciation expense? Explain how this net deprecation affects the Gross Factory Cost computation.

Depreciation is a factory overhead; scrap value is deducted to reflect the asset's net cost. Net depreciation is then included in Gross Factory Cost. Signup and view all the answers

Describe the difference between Gross Factory Cost and Net Factory Cost. Why is it essential to adjust for Work-in-Progress (WIP) when deriving the Net Factory Cost?

Gross Factory Cost doesn't account for Work-in-Progress (WIP), while Net Factory Cost does. Adjusting for WIP provides a more accurate reflection of the cost of goods partially completed during the period. Signup and view all the answers

How are Office Overheads included in the preparation of a cost sheet, and what impact do they have on the Factory Cost? Give examples of costs included in office overheads.

Office Overheads are added to the Factory Cost to arrive at the Cost of Production. Examples include office expenses, legal expenses, and general manager's salary. Signup and view all the answers

Explain how to derive the 'Cost of Goods Sold' (COGS) from the 'Cost of Production'. Also, explain the effects that Opening and Closing stock of finished goods has on the calculation of COGS.

COGS is calculated by adjusting Cost of Production for finished goods inventory. Opening stock of finished goods is added and closing stock is subtracted. Signup and view all the answers

How is the 'Total Cost' calculated after determining the 'Cost of Goods Sold'? What main category of expenses is added to COGS to arrive at the Total Cost?

Selling & Distribution expenses are added to the Cost of Goods Sold to arrive at the Total Cost. Signup and view all the answers

Explain the formula to calculate profit when sales and total cost are known. Also, elaborate on the equation that links Sales, Total Cost, and Profit, and describe how it can be used to determine the selling price for a desired profit margin?

Profit = Sales - Total Cost. Sales = Total Cost + Profit. This formula can be rearranged to determine a selling price based on desired profit. Signup and view all the answers

Flashcards

Prime Cost

The sum of all direct costs, including direct material cost, direct wage cost, and direct expenses.

Direct Costs

Costs directly associated with production. Examples include direct material costs, direct wages, and direct expenses such as carriage inward.

Overheads

Indirect costs that cannot be directly traced to a specific product, divided into factory, office, and selling & distribution overheads.

Factory Overheads

Costs incurred to run the factory, added to prime cost to get factory cost. Includes indirect labor and factory expenses.