Question

Why are overhead cost elements growing as a percentage of total manufacturing costs, while direct labor and direct material costs are shrinking?

Why is cost accounting less constrained than financial accounting is by formal rules imposed from outside the firm?

Since costs of joint products are quite arbitrarily arrived at, what possible use do they have in an accounting system?

Answer 1

1. Overhead cost elements are growing as a percentage of total manufacturing costs, while direct labor and direct material costs are shrinking because manufacturing overhead does includes all the indirect costs that go into creating any part of the product, or even finished product, ranging from toys to cricket bats to automobiles. The indirect costs does not include labourr and materials,as they are considered as direct costs, and are not accounted for as manufacturing overhead. Manufacture overhead increase or decrease dependeing upon the circumstances but material and labour are directly allocated on the product.

Manufacturing overhead in accounting includes:

• Depreciation on equipment used in the production of the product
• Property taxes on the production facility
• Rent on the factory building where production is on

2. Cost accounting is less constrained than financial accounting because of the following:-

• Cost- benefit principle- It is not always evident or measurable to analyse the cost and especially the benefits. While in cost accounting budgets are already prepared and the process goes accordingly.
• Materiality principle- Proper disclosures are required to ensure that the financial statements are not misleading where is in cost accounting no such formalities are there.
• Fianncial accounting shows the comparisons in profitability over the years where as cost accounting shows the exact cause of the increase or decrease in the profitability.

3.Under accounting, a joint cost is an expense brought about in a joint procedure. Joint costs may incorporate direct material, direct labor, and overhead expenses brought about during a joint creation process. A joint procedure is a creation procedure where one info yields various yields. It is a procedure where looking to make one sort of yield item consequently additionally makes different kinds of yield item.

Assign joint costs to the essential yield results of the joint procedure, not the coincidental side-effects or scrap. Apportion them utilizing a physical measure or a financial measure. The physical measure dispenses joint costs to necessary items dependent on a physical trademark, for instance, units delivered, or pounds or tons created, barrels created, or some other physical measure that is fitting for the volume of yield of the essential items. To utilize this strategy, just partition the all out creation cost by the suitable proportion of yield volume to yield the costs per unit of yield.