SLC | S21W2 | Costs for Entrepreneurs - Cost Elements

AssalamuAlaikum & Greetings Everyone!

I am glad to see that the 2nd week of the season has started, thanks teacher @yolvijrm for this wonderful lecture on Cost Elements.

Q.1 - What is the relationship between costs and financial accounting?

It is quite crucial and basic because both financial accounting and costing are vital in reporting the affairs of any business and its financial performance. The difference between financial accounting and expenses is that; Financial accounting is concerned with the presentation of the financial condition, accountability, performance and earnings capacity of business while expenses refer to costs accompanying day to day business operations.

What are the costs?

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Expenses are costs of doing business, or capital that is utilised in operational and income generating activities. These are of different types of cost like material cost, labour cost and over-head expenses etc. Every expense incurred in business should be recorded they are part of the organization’s financial statement. It is important for every business to be conversant with expenses and ensure that there is documentation of the same as part of the total business financial planning.

Financial Accounting

The primary purpose of financial accounting is to deal with certain uncertain conditions about a firm. The preparation of Companies and Groups statements of revenue, expenditure, income and expenditure accounts, balance sheet and cash flow statements fall herein. These involves the process of recording, classification, storing and presenting the financial records of a business in an easy and convenient to analyze form.

Cost and Managerial Accounting

Costing and financial accounting are clearly related since costing records are part of financial accounting. Any time a business has to pay out money for something, this cost is documented and put on the profit and loss statement. In addition, expense reporting reveal how much the business have used and on what.

By theoretical concept of financial accounting, expenses must be appropriately captured to ascertain the right position of the business. Secondly, identifying and recording expenses assists business in budgeting and control of expenses.

Importance of types of expenses to be dealt in financial accounting
In financial accounting, costs are divided into two basic categories:

1. Direct Costs – These are costs that directly point to business operations including the costs of raw materials, or employees’ wages in a production process.
2. Overhead Costs – Those costs that are not directly associated with the cost of products or services being produced by the business but which are required for the operation of the business include power and accommodation expenses.

These are recorded individually, so each kind of cost can be evaluated, and the effect they have on the business’s financial standing is discerned.

The role of analysis in cost and financial accounting

Financial accounting can enhance the possible evaluation of the company’s financial state with the help of expense sheets. Cost analysis will show where it is possible to cut on costs and where it is best to minimize on costs. This in turn assist in enhancing the financial position of the business.

Also, cost analysis is useful to investors, banks or any financial institution in evaluation of the financial state and efficiency of the business.

Financial Accounting:	Cost accounting:
Informing the total economic state and productivity of the business.	Documentation of spending that is made on the physical running of the business.
preparation of financial statement which include profit and loss account, balance sheet and cash flow statement.	Help in keeping the expenses down as well as in preparing the necessary budgets for any strategic business area.
Preparation of statement to financiers on the performance of the business in terms of finance to enable a direction on finance to be made.	In terms of the delivery of care, costs could be catalogued as direct or indirect.
Recording all of the financial transaction that occur.	In terms of the delivery of care, costs could be catalogued as direct or indirect.
The evaluation of the business performance through costs.
Preparation of financial statement in line with the generally acceptance accounting practices.	The use of financial accounting in recording and reporting of all the expenses in intension of the company.

Q.2 - Establish the difference between fixed costs and variable costs, providing examples of each.

Fixed Cost and Variable Cost

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Costs are very essential for any business to understand. Costs can be divided into two main categories: profit and loss account where the major distinguished between is the fixed costs and the variable costs. It is useful to understand these two types of costs in functioning the business and realizing the profit as well.

Fixed Cost

These are costs that cannot be altered by the level of production or business sales volume in the given cycle. That is,regardless of whether the business is producing or selling more or less these costs are hard to change. For instance, the monthly rent of an office is the same irrespective of profitability of the business or productivity in production line. Also, included in the fixed costs is the employees’ wages, insurance costs and general upkeep of machines among others.

Examples:

1. Monthly office rent
2. Salaries of employees
3. Maintenance of machinery
4. Business Insurance

Fixed casts are in that sense that they are fixed for a particular period to enable the business to perform its planning.

Variable Cost

Overhead costs or variable costs are those costs that vary with activity or volume of production or sales. That is, variable cost increases or decreases proportional to an increase or a decrease in the production level. These costs are directly associated with production for example cost of the materials used in production or power consumption costs. When the amount of production of a business increases, the use of raw materials also increases and subsequently the variable cost does.

Examples:

1. Cost of raw materials
2. Use of electricity or gas
3. Packing costs
4. Transport costs

The variable costs are thoroughly related to the production and the sales of the business and change with the income of the business income.

Computation of fixed and variable costs of Characters

In fact, the only characteristic that can easily differentiate between fixed cost and variable cost is the fact that the former do not change with the output of the business in question while the latter do. These are the cost associated with setting the business and the cost that is for when the product is being produced. As such, these costs should not be alien to the management due to their basis in cost planning and control for business organisations.
In this manner, the business expenses can be apportioned correctly and the profit can be assessed to the optimum.

Q.3 - In a real or fictional case, identify the cost elements in manufacturing a product or providing a service.

It is only during the pricing of a specific product or during the time that a vague sketch of the plan to be employed in offering a particular service is being made where a lot of costs are identified. These costs can be divided into four main categories:

1. Material Costs

These costs are expected estimating from the cost that inccur when acquiring raw materials used in the production of the product. For instance if you are in the business of furniture production then wood, nails, glue, and other raw materials such as are going to be called material cost. They include; The direct or indirect materials such as; The material used to produce the particular product and any other small item that may be needed for the manufacturing process.

2. Labor Expenses

These costs concern the payment made to employees who participate in the development of the product or delivery of a certain service. Such are wages to manufacturing employees; a machinist or worker of a particular service. Overhead cost for example contains direct and indirect employees; these are employees on the process of making the product directly and those who aid them in preparing their tools.

3. This includes; Spending on machinery and other apparatus If such a plan is to be developed then expenditure on machinery and other tools.

Besides, it has the cost of machinery tools and other which are used in the manufacturing of the product also. Such costs may include the facto coat of the machines, the cost of maintaining the machines, costs of powering the machines, that is, electrifying the machines, and costs of repairing the machines once they have mechanically faulty. These are the expenses like the expense of purchasing the machines, expenses incurred in maintaining the machines, the expenses in powering the machines and the expenses incurred in affixing the machines once they have developed a technical hitches. That is, such costs are usually described as indirect research costs or administrative costs as well.

4. Other Expenses

They are cost which are considered in relation to the performance of the production or service unlike in the actual use of the product or service in making of another product. Concerning the expenses these are electricity, water, rent and other administrative expenses. In addition, there is the cost that goes to marketing expenses, transportation and other over head which is necessary for making sure that the product or the service reaches the customer.

These are all accumulated beneath a single product cost as the expenses of making the product. Therefore, total costing renders a total picture of cost that offering a better outlook of perception to a manufacturing firm.

Q.4 - The company Steemians manufactures a single product. During a given period, the following costs were incurred:

Direct, indirect, and non-productive costs in producing a product or service

The tables below describe direct cost****, indirect cost and non-production cost separately for manufacturing a product or service.

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Direct Cost

Concept	Price
Raw Material	100
Labor Cost	150
Packing Material	30
Equipment Used in Production	60
Transportation Cost	50

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Indirect Cost

Concept	Price
Electricity, Gas, and Water	50
Cost of Rent or Space	80
Repair and Maintenance of Machines	40
Administrative Expenses	70
Advertising and Marketing	60

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Non-Production Cost

Concept	Price
Sales Team Salaries	90
Delivery and Shipping Cost	40
Customer Service Costs	30
Guarantee and Warranty Services	20
Training and Development Expenses	50

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Details of Direct Costs

1. Raw Materials (100): These are materials that go directly into the production of products.
2. Labor Cost (150): Wages of laborers working in production.
3. Packaging Materials (30): Materials used to protect and ship products.
4. Production Equipment (60M): Machines and tools used in production.
5. Transportation (50): Cost of transporting raw materials and finished products.

Indirect Cost Description

1. Electricity, Gas, and Water (50): Energy and water costs used in production.
2. RENT OR SPACE COST (80): Rent of the factory or office where the production is taking place.
3. REPAIR AND MAINTENANCE OF MACHINES (40): Repair and maintain machines to keep them in working condition.
4. Administrative Expenses (70): Managers and other staff expenses.
5. Advertising and Marketing (60): Costs of introducing products to the market.

Details of Non-Production Costs

Sales Team Salaries ( 90 ): These are that goes for employ's salary.
Delivery and Shipping Cost (40 ): Dilevery and shipping charges.
Customer Service Costs ( 30 ): Some of them goes for customer service.
Guarantee and Warranty Services (20 ): For guarantee services.
Training and Development Expenses ( 50 ): This for training service.

Total Cost

Direct Cost: 390
Indirect Cost: 300
Non-production Cost: 230
Total Cost = 39 0+ 300+230= 920

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I invite @sisos, @goodybest and @jyoti-thelight tp participate in this wonderful homework task.

Thank You