Nature and Classification of Costs
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What are product costs also referred to as?

  • Manufacturing costs (correct)
  • Direct costs
  • Period costs
  • Variable costs

    • What is the matching principle in relation to product costs?

    Product costs are treated as an expense when the product is sold.

    What does prime cost consist of?

    Direct material and direct labour.

    What are period costs?

    <p>Costs that are expensed in the period they are incurred and not included in inventory valuation.</p> Signup and view all the answers

    Fixed costs change with the level of business activity.

    <p>False</p> Signup and view all the answers

    What is conversion cost?

    <p>Direct labour plus manufacturing overheads.</p> Signup and view all the answers

    Which of the following is an example of a semi-variable cost?

    <p>Utility costs with a fixed and variable component</p> Signup and view all the answers

    Match the following costs with their definitions:

    <p>Fixed costs = Remain constant in total regardless of output changes Variable costs = Change in direct proportion with output Semi-variable costs = Contain both fixed and variable costs Period costs = Expensed in the period they are incurred</p> Signup and view all the answers

    What type of materials are considered direct materials?

    <p>Materials that become an identifiable component of the finished product.</p> Signup and view all the answers

    What are the components of product costs?

    <p>Direct Materials, Direct Labour, Manufacturing Overheads</p> Signup and view all the answers

    Which of the following best describes period costs?

    <p>Costs that are expensed in the period they are incurred</p> Signup and view all the answers

    Indirect materials can be traced to specific products easily.

    <p>False</p> Signup and view all the answers

    Fixed costs vary with the level of production.

    <p>False</p> Signup and view all the answers

    What is a primary example of direct materials?

    <p>Denim used to make jeans</p> Signup and view all the answers

    What are the two categories of period costs?

    <p>Marketing costs and Administrative costs</p> Signup and view all the answers

    Costs related to factory rent and machinery repairs are classified as __________.

    <p>Manufacturing Overheads</p> Signup and view all the answers

    The total variable costs change in direct proportion with __________.

    <p>output</p> Signup and view all the answers

    Match the following costs with their characteristics:

    <p>Direct Labour = Wages of workers who directly work on the product Indirect Labour = Salaries for factory supervisors and cleaners Direct Materials = Raw materials that are identifiable in the finished product Manufacturing Overheads = Costs like rent and electricity for production facilities</p> Signup and view all the answers

    At what point are product costs transferred to the statement of comprehensive income?

    <p>When the product is sold</p> Signup and view all the answers

    Match the types of costs with their definitions:

    <p>Fixed costs = Remain constant regardless of output Variable costs = Change in direct proportion with output Semi-variable costs = Contain both fixed and variable components Step-fixed costs = Remain fixed within specified activity levels</p> Signup and view all the answers

    Which of the following is an example of indirect costs?

    <p>Factory utilities used in the production process</p> Signup and view all the answers

    Direct costs include wages for employees who oversee the production process.

    <p>False</p> Signup and view all the answers

    What type of costs are considered indirect labour?

    <p>Salaries of employees who do not work directly on the product</p> Signup and view all the answers

    Semi-variable costs only have fixed components.

    <p>False</p> Signup and view all the answers

    What is the formula for calculating prime cost?

    <p>Direct material + Direct labour</p> Signup and view all the answers

    What is the closing inventory calculated in the example?

    <p>2,000 units</p> Signup and view all the answers

    The fixed overhead allocation per unit increases during periods of abnormally high production.

    <p>False</p> Signup and view all the answers

    What is the variable costing profit after adjustments?

    <p>R95,200</p> Signup and view all the answers

    The absorption costing profit before adjustments is _____.

    <p>R84,800</p> Signup and view all the answers

    Match the following terms with their correct values:

    <p>Opening inventory difference = R20,800 Closing inventory difference = R10,400 Old overhead rate per unit = R5.20 New overhead rate per unit = R4.875</p> Signup and view all the answers

    What is the allocation rate calculated in Step 1?

    <p>R5.20 per unit</p> Signup and view all the answers

    Monthly production data should always be used for calculating overhead allocation rates.

    <p>False</p> Signup and view all the answers

    What is the formula for calculating the expenditure variance?

    <p>Actual overhead - Budgeted overhead</p> Signup and view all the answers

    The absorbed overhead is calculated by multiplying the allocation rate by the __________.

    <p>actual production</p> Signup and view all the answers

    Match the following variances with their descriptions:

    <p>Expenditure Variance = Difference between actual overhead and budgeted overhead Volume Variance = Difference between budgeted overhead and absorbed overhead Favourable Variance = Indicates costs were lower or production was higher than expected Unfavourable Variance = Indicates costs were higher or production was lower than expected</p> Signup and view all the answers

    What is included in the cost of inventories?

    <p>Both variable and fixed production costs</p> Signup and view all the answers

    Absorption costing underreports the importance of fixed costs.

    <p>False</p> Signup and view all the answers

    What is the basis for allocating variable production overheads to each unit of production?

    <p>Actual use of the production facilities</p> Signup and view all the answers

    Under IAS 2, inventories are measured at the lower of cost and ______.

    <p>net realizable value</p> Signup and view all the answers

    Match the following costs with their definitions:

    <p>Costs of purchase = Include transport and handling Costs of conversion = Include costs directly related to production Fixed production overheads = Allocated based on normal capacity Variable production overheads = Allocated based on actual use</p> Signup and view all the answers

    When are unallocated overheads recognized?

    <p>In the period they are incurred</p> Signup and view all the answers

    What is considered normal capacity in production?

    <p>The average production expected over time</p> Signup and view all the answers

    The amount of fixed overhead allocated to each unit of production increases with low production.

    <p>False</p> Signup and view all the answers

    Study Notes

    Nature and Classification of Costs

    • Product Costs are also known as manufacturing costs, production costs, or factory costs.
    • Product Costs are initially treated as assets and allocated to the inventory account on the statement of financial position.
    • Product Costs are only expensed when the product is sold (matching principle).
    • Product Costs include direct material, direct labor, and manufacturing overhead.
      • Direct Materials become an identifiable component of the finished product (e.g., denim in jeans).
      • Direct Labour represents wages for workers who directly worked on the product.
      • Manufacturing Overhead encompasses all other production-related costs.
      • Indirect Materials include materials that cannot be traced directly, such as machinery oils, small components, and materials used for all products (e.g., zips, buttons).
      • Indirect Labour includes salaries for employees who don't directly work on products but support the manufacturing process (e.g., factory cleaners, supervisors).
      • Other Manufacturing Costs include factory rent, insurance, depreciation, repairs, and electricity used for the production process.
    • Direct Costs are easily traced to a specific product.
    • Indirect Costs are not easily traced to a specific product and are treated as manufacturing overhead.
    • Prime Cost is calculated by adding direct materials and direct labor.
    • Conversion Cost is calculated by adding direct labor and manufacturing overhead.

    Period Costs

    • Period Costs are expenses in the period they are incurred and are not part of inventory valuation.
    • Period Costs fall into two categories: marketing costs and administrative costs.
      • Marketing costs (selling and distribution costs) include advertising, sales commissions, sales salaries, and shipping.
      • Administrative costs include executive compensation, general accounting, secretarial costs, and other organizational expenses.

    Cost Behaviour

    • Cost Behaviour refers to how costs change based on business activity levels.
    • Fixed Costs remain constant in total, regardless of output changes within the "relevant range."
      • The Relevant Range is the normal operating range where cost behavior is known.
    • Variable Costs change in direct proportion to output levels; however, the cost per unit remains constant.
    • Step-Fixed Costs remain fixed within specified activity levels but change by a constant amount when output levels significantly shift.
      • Example: If a machine costs R25 000 and produces 10 000 units, the cost will increase by R25 000 for every additional 10 000 units produced.
    • Semi-Variable Costs (Mixed Costs) include both fixed and variable components.
      • For analysis and decision-making, semi-variable costs must be separated into their fixed and variable portions.

    Costs

    • Product Costs: Costs directly associated with manufacturing a product. These costs are treated as an asset, included in inventory, and expensed only when the product is sold.

      • Direct Materials: Raw materials that become a traceable part of the finished product.
      • Direct Labor: Wages paid to workers directly involved in product production.
      • Manufacturing Overheads: All other production-related costs that cannot be directly traced to specific products.
      • Indirect Materials: Materials used in production but not a direct part of the product.
      • Indirect Labor: Wages paid to workers who support production indirectly (e.g., supervisors).
      • Other Manufacturing Costs: Costs like factory rent, depreciation, and utilities.

    • Prime Cost: The cost of direct materials and direct labor.

    • Conversion Cost: The cost of direct labor and manufacturing overheads.

    • Period Costs: Non-manufacturing costs not included in inventory valuation. Expensed in the period they are incurred.

      • Marketing Costs (Selling & Distribution Costs): Costs associated with selling and distributing the product.
      • Administrative Costs: Costs related to overall company management and administration.

    Cost Behaviour

    • Fixed Costs: Costs that remain constant in total regardless of changes in production volume, within a relevant range.

    • Variable Costs: Costs that change in total in direct proportion to changes in production volume, but remain constant per unit.

    • Step-Fixed (Semi-Fixed): Costs that remain fixed for specific activity levels but increase or decrease by a constant amount when production levels shift significantly.

    • Semi-Variable (Mixed): Costs that have both fixed and variable components.

    Absorption Costing

    • Inventory Valuation: All manufacturing costs (direct materials, direct labor, and fixed and variable manufacturing overhead) are included in the cost of inventory.

    • IAS 2 (Inventories): Absorption costing is the preferred method for financial reporting according to International Accounting Standards Board (IASB).

    • Costing Considerations:

      • Normal Capacity: The production level expected on average over multiple periods or seasons, used to allocate fixed manufacturing overhead.
      • Expenditure Variance: Measures the difference between actual and budgeted manufacturing overhead costs.
      • Volume Variance: Measures the difference between budgeted overhead and overhead absorbed based on actual production.

    • Closing Inventory Valuation (FIFO): The cost of closing inventory is calculated using the cost of current production, applying FIFO (First In, First Out) method.

    • Reconciliation: Absorption costing and variable costing profit can be reconciled by adjusting for the difference in inventory values.

    • Adjustments to Inventory Valuation (High Production): When production is significantly above normal capacity, the fixed overhead allocation rate is recalculated based on actual production to avoid overstating inventory values.

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    Related Documents

    Variable and Absorption Costing - Lecture Notes PDF

    Description

    This quiz explores the nature and classification of product costs, helping you understand how they are categorized and treated in financial statements. Key concepts include direct materials, direct labor, and manufacturing overhead, along with the distinction between direct and indirect costs. Dive into the principles of accounting that govern these costs.

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