SLC | S21W2 | Costs for entrepreneurs - Cost elements.

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What is the relationship between costs and financial accounting?

Cost elements are very important in order to report the nature and status of capital invested in the company as well as to evaluate the changes that happened to the capital due to operation. It is directly related to the final stage of pricing a product profitably. The cost calculation shall be simple and precise. There are two cost elements. One is the prime manufacturing cost and other is manufacturing overhead cost. Addition of these two costs gives the total cost of manufacturing.

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

Wikipedia

Variable cost is the cost of elements or materials which are directly linked with the quantity of goods produced. It is divided into two parts variable direct cost and variable indirect cost. Variable indirect cost is nothing but the variable overheads. Variable costs are incurred by the firm only when it produces goods.

In case of manufacturing of natural rubber gloves the cost of NR latex is a variable cost. Direct labour used in packing gloves is also variable cost of product.

Fixed cost is the cost of elements which are not proportional to the quantity of goods produced or services provided. In case of manufacturing latex gloves the examples of fixed cost are expenditure on plant and machinery, rent of land and building, license fee, wages and salaries of permanent staff, insurance of factory buildings etc. Fixed cost are incurred by the firm even when it doesn't produce any goods.

Fixed cost per unit decreases with higher volume of production whereas variable cost per unit is constant.

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

The Blue Diamond Gallery

Cost elements of manufacturing a latex gloves.

Raw material

NR Latex
Compounding Chemical
Auxiliary Chemicals or process chemicals

Labour

Maintenance of Plant and Machinery
Depreciation of plant and machinery

Fuels and electricity

Operation of effluent treatment plant

Manufacturing licence and quality system registration (ISO 9001)

Manufacturing expert and consultant if any.

You are asked to separate direct costs from indirect costs and non-manufacturing costs, and also calculate the total direct and indirect manufacturing costs.

Google sheet forwarded for kind perusal.

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