Question

Summarize and give short examples of the following questions

Prime cost

Conversación cost

Direct labor

Raw materials

Manufacturing overhead non-manufacturing cost administrative cost

Product cost

Period cost cost behavior relevant range

Tradicional format of income statement

Gross margin

Contribution format of income statement

Answer 1

1. Prime Cost : It is the combination of a manufactured products cost of direct materials and direct labour.It is the part of the cost of a commodity that changes according to the amount of it that is produced such like material , labour etc.It is calculated by adding the cost of raw materials to the cost of labour directly associated with the production process. Only costs of raw materials and direct labour are used in theprime cost formula. Eg : The prime cost for creating a atble would include raw materials such as wood , paint etc which costs $250. to it it would take three hours to finish the product to sale and costs $50per hour. i.e, $250 (raw material + direct labour)$150 ( 3 * $50)= $400 (prime cost) .

2. Conversion Costs : A conversion cost means is the amount incurred during the transformation of raw materials inventory into finished goods. This concept is used in cost accounting to get the ending inventory ehich is then reported in financial statements. It can also be used to determine the incremental cost creating a product, which could be useful for price setting purpose. CONVERSION COST = DIRECT LABOUR + MANUFACTURING OVERHEAD . The costs which can be considered as conversion costs are : direct labour and related benefits and payroll taxes , equipment depreciation , equipment maintenance , factory rent , factory supplies , factory insurance , machining , inspection , product utilities , production supervisison etc. Eg: XYZ company incures a total of $10000 during march in direct labour and related costs, as well as $20000 in factory overhead costs. XYZ produced 15000 units in a month . therefore the conversion costs per unit for thr month was $2 per uit ($30000 / 15000units).

3. Direct Labour : Direct labour are the labour involved in production rather than administration, maintenance , and other supportive services. They are the production or services labour that is assigned to a specific product, cost center , or work order such as machine operators, painters, assembly line operator , lawyers, consultanats , etc. Direct labour is considered to be a direct cost, which means that it directly varies with revenue or some other measure of activity.

4. Raw Materials : A raw material is also called as feedstock or unprocessed material which are used to make the finished goods. These are the substances used in the primary production or manufacturing of goods. Raw materials are one of the factors of production along with labour and capital. Raw materials are added to work-in-progress inventory, when the items are completed they are added to finidhed goods inventory. In balance sheet cost of raw material on hand as of thr balance sheet date appers as a current asset. Raw materials may also be included in single inventory line like work-in-progress , finished goods inventory . Raw matreials maybe divided into two categories : direct and indirect. Direct like wood for chair and indirect is like oils , rags , bulbs for lighting etc.

5. Product Costs : It is generally refers the financial costs incurred in the creation of a particular product . Product costs equal the sum of your direct material cost, direct labour costs and manufacturing overhead costs, by adding all these gives the costs that were incurred during the period . The cost of product per unit is done by dividing the above all meantioned with the toatal number of units. Product costs appears in the financial statement since they are included in manufacturing overheads. Product cost can be recored as an inventory asset if the product has not yet been sold. It is charged to the cost of goods sold as soon as the product is sold and appears as an expense on the income statement.