Question

1. Identify and give examples of each three basic manufacturing cost categories. 2.During April, $52,000 in raw materials were requisitioned from a storeroom for use in production. These raw materials included $50,000 of direct and $2,000 of indirect materials. Which accounts and amounts s/b debited or credited to record the issuance of materials to the production Dept? 3. Describe the accounting for applying overhead cost to jobs using a predetermined overhead rate. 4. Distinguish between product costs and period costs and give examples of each.

Answer 1

1)3 basic manufacturing cost categories

• Direct Material - eg: raw material for production
• Direct labour - eg: factory Labours wages
• Overhead - eg: rent of office

2) Issue of direct material - Work in progress account should be debited for $50000 and direct material account should be credited for $50000

Issue of Indirect materials - Expenses account should be debited for $2000 and Indirect materials account should be credited for $2000

3) It is easy to identify and allocate direct cost to each job. But it is difficult to allocate overheads. If overheads not allocated properly, then we can not identify the correct cost of each job. Inorder to allocate the overhead we use pre determined rates. These pre determined rates are calculated by dividing the expected total overhead cost with expected level of activity. It gives the overhead for a single unit of output. This rate is used to allocate the overhead cost for each job

4) Product cost are the cost directly related to the production process. It includes direct Material, direct labour, fixed and variable factory cost.

Period cost are those cost, incurrence of which does not influenced by the production process. These are fixed costs like rent of office, salary, administration expenses etc.