Topic 11. Management and Cost Accounting: Basic Concept. Learning Objectives. Purpose of management accounting Identifying various factory costs. Differences between product costs and period costs. Differences between direct costs and indirect costs.
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Management and Cost Accounting:
Decision can be classified into:
example: decision on company’s policy, structure and long term planning.
example: decision on investment activities.
c. operation decision
example: decision on daily operation and normal activities of the company.
1. Raw material cost
3. Factory overhead
1. Product costs
2. Period costs
cost of raw material = RM 6.00 per chair
cost of direct labour = RM10.00 per chair
Prime cost = RM16.00 per chair
For example, direct labour for the month of January 2007 to produce 50 unit of wooden chairs is 10,000 hours and the rate of direct labour per hour is RM5.
Direct labour cost = 10,000 hrs x RM5/hrs = RM50,000
Factory overhead cost for the month of January 2007 is RM75,000.
Overhead absorption rate = Factory overhead costs
Direct labour costs
If the direct labour cost per unit of wooden chair is RM10, then the factory overhead cost per unit of wooden chair = RM10 x 150%
Assume that Northridge Company manufactures and sells pre-hung metal doors. Recently, it has decided to start selling pre-hung wood doors as well. An old warehouse that the company presently owns will be used to manufacture the new product. To manufacture and sell there pre-hung wood doors, Northridge identifies the following costs:
These manufacturing and selling costs can be assigned to the various categories shown as follows:
Assume that Northridge Company produces 10,000 pre-hung wood doors the first year. The total manufacturing costs are:
The manufacturing cost per unit (cost to produce one pre-hung wood door) is RM30.90.
Product costs = Raw Materials + Direct Labours + Factory Overheads
= Cost of Production = RM309,000.
Period costs = 30,000 + (4 x 10,000) + (12 x 10,000) = RM190,000.
Factory Overhead = 25,000 + 6,000 + 28,000 + 70,000 = RM129,000.
Prime costs = Direct materials + Direct Labour
= (10 x 10,000) + (8 x 10,000) = RM180,000.
Conversion costs = Direct Labours + Factory Overhead
= 80,000 + 129,000 = RM209,000.
Giant Company specializes in manufacturing different models of racing bicycles. A new model, the Jaguar, has been well accepted. As a result, the company has established a separate manufacturing facility to produce these bicycles. The company produce 1,000 bicycles per month. Giant’s monthly manufacturing cost and other expenses data related to these bicycles are as follows:
Product costs = Raw Materials + Direct Labour + Factory Overhead
= (Direct materials + Misc. materials) + Direct Labour +
= (80 x 1,000) + (30 x 1,000) + [(1.20 x 1,000) + 2,000
+ 750 + 1,000 + (2,400 / 12) + 3,000 + 1,500]
= 80,000 + 30,000 + 9,650 = RM119,650.
Period costs = 800 + 650 + (30,000 / 12) + (10 x 1,000) = RM13,950.
Factory overhead = RM9,650.
Prime Costs = Direct Materials + Direct Labour
= 80,000 + 30,000 = RM110,000.
Conversion costs = Direct Labour + Factory Overhead
= 30,000 + 9,650 = RM39,650.