Saturday, 23 March 2024 07:08

- Cost accounting captures, organising and reports costs

- The purpose of this is to understand the costs of a business better
- Costs are expenses of a business
- Manufacturing business make products and then sell them

The different types of costs

Cost of manufacturing a business
1. Production costs (Manufacturing costs) 2. Period costs

i. Direct material costs i. Indirect material costs i. Selling and distribution costs
- Wooden table top, steel - Glue, nails, machinery - Marketing
legs, aluminium edging lubricants, cleaning - Advertising
+ equipment. - Delivery
- Transport costs ii. Administration costs
- Storage costs - Bookkeeper
- Handling costs - Secretary
ii. Direct labour costs ii. Indirect labour costs - Receptionist
- Salaries and wages of - Factory supervisor - Internal accountant
people who are working - Quality controllers - External accountant
with their hands or - Cleaners - Rent of office
operating the machines to - Security guards
manufacture the product
iii. Other factory costs
- Rent
- Water & electricity
- Insurance
- Maintenance
- Depreciation of
machinery
- Safety and environmental
controls

1. Production costs
- Production costs = Prime costs + Factory overheads
a. Prime costs
- Prime costs = Direct material costs + Direct labour costs
i. Direct materials cost: purchasing raw materials used in the product
ii. Direct labour costs: costs for employees who are involved with making the prroduct
b. Factory overhead costs
- Factory overheads costs = Indirect material costs + Indirect labour costs + Other factory costs
i. Indirect materials costs: purchasing raw materials not used in the product
- Can the item be identified easily in the final product, if not it falls here
ii. Indirect labour costs: costs for employees who are not involved with making the product
- Does the worker make the item if not the cost falls here
iii. Other factory (Overhead) costs: costs for maintaining machinery and running factory

2. Period costs
- Period costs = Selling and Distribution Costs + Administration Costs
a. Selling and distribution costs: Costs for selling and transporting items to customers
b. Administration costs: costs to complete the administrative tasks of a business, this also includes
finance costs (e.g. borrowed money)

Cost accounting Page 1

Analysing the costs of a manufacturing business
1. Total costs
- Total costs = Production costs + Period costs
- Total costs = Prime costs + Factory overheads + Selling and Distributive costs + Administration
costs
- Total costs = Direct material costs +Direct labour costs + Indirect materials costs + Indirect
labour costs + Other Factory costs + Selling and distributive costs + Administrative costs

2. Unit costs
-

3. Fixed costs & Variable costs

- Total costs = Fixed costs + Variable costs
- Fixed Costs
○ Stays the same regardless of how much is produced
○ Fixed costs = Factory overheads + Administrative costs
- Variable costs
○ Determined by how much is produced
○ Total variable costs = Cost per item * Number of items made
○ Variable costs = Direct material costs + Direct labour costs + Selling and distribution costs

4. Break-even analysis
- Amount ( in rands) a business must sell items for and how many items must they sell to cover
production costs
- Break-even point: no profit or loss made
○ In rands: the total sales needed to cover ALL production costs
○ In units: no. of items needed to be sold to cover ALL production costs
- Sales = Production costs
- Total sales - Total production costs = R0
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Cost accounting Page 2

 Unique accounts
- Raw materials stock (Asset): Direct material purchase
- Consumable stores stock (Asset): Indirect materials purchased
- Raw material issued (Expenses): Direct materials issued to the factory. Closed off to Direct
materials cost account.
- Indirect materials (Expenses): Indirect materials issued to factory. Closed off to Factory
overheads cost.
- Any other expense account (Expenses):
○ Factory wages
○ Factory electricity
○ Factory rent
▪ Close off direct labour wages to Direct labour cost account
○ Depreciation on factory equipment.
○ Closed off to relevant cost accounts.

Accounts prepared at the end of the year

1. Five cost accounts
• expenses closed off to relevant cost accounts
- Direct (Raw) materials cost (Expense): total cost of the raw materials used to make
items. Closed off to work-in-progress account.
- Direct labour cost (Expense): cost of labour used to make items. Closed off to
work-in-progress account
- Factory overhead cost (Expense): cost of the factory overheads (Factory wages,
Factory rent, Indirect materials, Depreciation & Factory water and electricity)
needed to make the items. Closed off to work-in-progress account.
- Administration cost (Expense): total cost of all administration expenses (Salaries
and wages, Stationery, Telephone & Rent expense). Closed off to profit and loss
account.
- Selling and distribution cost (Expense): total costs of all the selling and distribution
expenses (Salaries and wages, Advertising, Bad Debts, Rent expense &
Commission on sales). Closed off to profit and loss account

2. Two asset accounts

• Show total costs incurred for the items that are in the process of being made and for
completed items.
- Work-in-progress (Asset): costs of the items that are in the process of being
made. Transferred to finished goods account.
- Finished goods stock (Asset): Sum of all the costs of the completed goods

Other common accounts

- Bank
- Creditors control
- Depreciation
- Accumulated depreciation: Equipment
• Selling and distribution
- Salaries and wages
- Advertising
- Bad debts
- Commission on sales
- Office rent expense
- Debtors control
• Administration
- Stationery
- Telephone
- Office rent expense
- Salaries and wages

Cost accounting Page 3

T-accounts
Raw materials stock
Balance Raw materials issued Depreciation on factory equipment

Bank Accumulated Depreciation Factory

on factory equipment overhead cost
Creditors control Balance

Direct material (Raw) costs

Consumable stores stock
Raw materials issued Work-in-progress stock
Balance Indirect materials costs
Bank
Direct labour costs
Creditors control Balance
Salaries and wages Work-in-progress stock

Work-in-Progress stock
Factory overhead cost
Balance Finished goods stock
Factory wages Work-in-progress
Direct materials cost
stock
Direct labour cost
Factory water and
Factory overhead cost Balance electricity
Factory rent expense
Finished goods stock Depreciation on factory
equipment
Balance Cost of sales
Indirect materials cost
Work-in-progress stock Balance

Administration costs
Raw materials issued
Office Salaries and wages Profit and loss
Raw material stock Direct materials cost
Stationery
Office rent expense
Indirect materials
Water and electricity
Consumable stores stock Factory overhead cost
Depreciation
Factory wages Telephone
Gross salaries/wages Direct labour cost
Pension fund contribution Factory overhead cost
Selling and distribution costs
Medical aid contribution Salaries and wages Profit and loss
UIF contribution Advertising
Bad debts
Factory water and electricity Fuel
Bank Factory overhead cost Depreciation
Commission on sales
Factory rent
Bank Factory overhead cost

Cost accounting Page 4

 Financial statements of a manufacturing business
Production cost Statement Note Amount
Direct material cost 1 XXX
Direct labour cost 2 XXX
Prime cost XXX
= Direct material cost + Direct labour cost
Factory overhead cost 3 XXX
Total cost of production XXX
= Prime cost + Factory overhead cost
Work-in-progress at the beginning of the year XXX
Total costs of production + Work-in-progress at the beginning of the year XXX
Less: Work-in-progress at the end of the year (XXX)
Production costs of finished goods XXX
= Total costs of production + Work-in-progress at the beginning of the
year - Work-in-progress at the end of the year

Notes to production cost statement

1. Direct (Raw) material costs Amount
Balance at the beginning of the year XXX
Purchases XXX
= Cash + Credit - Returns
Carriage on purchases XXX
Customs duties XXX
Balance at the beginning of year + Purchases + Carriage on purchases + Customs duties XXX
Less: Balance at the end of the year (XXX)
Direct (Raw) Material Costs XXX
2. Direct labour costs Amount
Direct wages XXX
UIF contribution XXX
Medical aid contribution XXX
Pension fund contribution XXX
Direct labour costs XXX
3. Factory overheads cost Amount
Factory Indirect Labour XXX
= Wages + Contributions
Factory Indirect materials XXX
= Opening stock + Purchases - Closing stock
Factory rent XXX
Depreciation on factory equipment XXX
Maintenance on factory equipment XXX
Factory Water and Electricity XXX
Other Indirect costs e.g. insurance XXX
Factory overheads costs XXX

Cost accounting Page 5

Short-format income statement Notes Amount
Sales XXX
=Sales - Returns
Less: Cost of sales (XXX)
=Opening stock (Finished goods) + work-in-progress - Closing stock (Finished goods)
Gross profit XXX
= Sales - Cost of sales
Selling and distribution costs 4 (XXX)
Administration costs 5 (XXX)
Net profit or loss XXX
= Gross profit - selling and distribution costs - Administration costs

Notes to the short format income statement

4. Selling and distribution costs Amount
Commission on sales XXX
Advertising XXX
Bad Debts XXX
Fuel XXX
Salaries XXX
Depreciation on vehicles XXX
Total selling and distribution costs XXX
5. Administration costs Amount
Office salaries and wages (including Contributions to Pension fund, Medical aid and UIF) XXX
Depreciation on Office equipment XXX
Office rent XXX
Water and electricity XXX
Stationery XXX
Telephone XXX
Total administrative costs XXX

Cost accounting Page 6