Accounting Notes

CHAPTER 2

Cost classification

Classification by nature

Materials

Anything that is tangible ex: machinery, building, materials for units.

Labour

Accounting staff, HR staff

Other expenses

Not anything we can physically touch and are not tangible and do not relate to salaries.

Electricity, rent, insurance, royalty etc

Traceability

Direct costs

Can easily be traced back to the products we produce

Costs for raw materials

Sum of direct costs = prime cost

Royalties are direct costs

Indirect costs

Cannot directly be traced back to the production of an object

Electricity, insurance

Sum of indirect costs = overhead costs

Production/non-production

Production costs

are costs a company must incur to produce a unit or provide a service

Non-production costs

Costs that are not necessary for the production of a product

We do not need to incur these costs when producing a product

Distribution costs, selling costs, finance costs, admin costs

By behaviour

Cost Terminology

Direct Materials (DM)

Direct Labour (DL)

Manufacturing overhead (MOH)

Selling

Administrative

Direct Materials – everything that goes directly into the product.

Direct Labour – every person who directly contributes to the production of a product. Cost of wages when the person is performing the task, for ex, the cost of a cook is the wage when the cook is cooking the dish. Amount paid is called direct wages.

Manufacturing overhead – all the indirect costs of producing a product.

Indirect labour – the time that a worker spends doing everything else other than his work and for which you still have to pay him regardless of whether you have customers or not.

Supervisors – need to be paid even though they do not directly contribute to the making of the...