Week 2 notes Objectives 1. Recall the segments of a value chain and its importance in product costing and managerial control. 2. Discuss the differences between variable costing and absorption costing 3. Prepare an income statement using absorption costing and variable costing and reconcile differences in profit. 4. Explain how variable costing and the contribution format of reporting is useful in segmented reporting and evaluating the performance of managers. Elements of product cost Tangible asset 1. Raw materials 2. Direct labour 3. Overhead costs Intangible asset 1. No raw materials 2. Direct labour 3. Overhead costs Costs across the value chain What is a value chain? 1. a set of linked processes or activities that begins with acquiring resources and ends with providing and supporting products or services that customers value (L-S, et al) 2. 'a sequence of business functions in which customer usefulness is added to products or services' (Cost Accounting by Horngren, Datar & Rajan) 3. Start very beginning of the business - then go through different stages of the organisation 4. If something is not adding value, how can we remove that stage 5. Lower cost production, cheaper for customer Various cost classifications can be used within the upstream, downstream and manufacturing areas to assign cost to products in order to help manage resources and create value Support services · Human resources Finance Legal . Information systems Telecommunications · Manufacturing costs are incurred within the factory area, whereas upstream and downstream costs are sometimes called non-manufacturing costs · Under conventional product costing, only manufacturing costs are included in product costs Research ark development Manufacturing Design Supply production Customer Marketing Distribution service Value of goods and services Upstream Primary processes Downstream A sunk cost, sometimes called a retrospective cost, refers to an investment already incurred that can't be recovered.
Manufacturing Costs Direct Material 1. Material that is physically incorporated into the finished products; and 2. Can be traced to products conveniently Direct Labour 1. The cost of wages and labour on-costs of staff who work directly on manufacturing a product 2. However, contractual arrangements sometimes mean that such labour is a committed cost Manufacturing overhead 1. All manufacturing costs other than direct material and direct labour (indirect manufacturing costs or factory burden) 2. Includes the cost of indirect material and indirect labour, depreciation and insurance on factory equipment, utilities and the costs of manufacturing support departments 3. Includes cost of overtime premium and idle time Manufacturing costs -- > Product costs 1. Product cost o Timber o Paint o Glue o Wages - assembly and supervisors o Cleaning wages o Depreciation - factory and equipment 2. Prime costs - major cost associated with producing a product o The total of direct material and direct labour costs 3. Conversion costs - cost of converting material into a product The total of direct labour and manufacturing overhead costs (indirect costs) · Overhead costs: indirect labour, depreciation, overtime, indirect materials 4. Managers need estimates of product costs for different purposes tt>