Question

I probably need an expert or someone very good at teaching to answer this.

For cost flows and cost terminology from managerial accounting i need help understanding definitions and concepts and what accounts are included for:

conversion costs, cost of purchasing goods from suppliers, direct vs indirect costs, variable overhead, fixed overhead, common costs, manufacturing overhead, cost drivers, cost of goods manufactured, cost pool, cost objects, work in process.

I need to know how this relates to the equations of :

BI + adds = EI + usage

And formulas

Rm inventory = BI + purchases = EI + RM

WIP inventory = BI + DM DL OH = EI + COGM

FG inv = BI + COGM = EI + COGS

Answer 1

Conversion costs are those costs which are incurred to bring to convert the raw materials into the finished goods form or providing final services. Examples are direct & indirect labour, power, fuel, factory rent, equipment hire charges, cost of product specific design, other expenses which are directly related with production of goods or provision of services.etc.

Cost of Purchasing Goods from suppliers is the net of all discounts paid amount to the suppliers for purchasing raw materials for manufacture or for provisioning services.

Direct vs Indirect Costs: Direct Cost are those costs which finally form part of the finished goods. Direct costs include Direct Material, Direct Labour and Direct Expenses, which are specifically incurred for a particular cost object. Indirect Cost are those costs which do not normally form part of the finished product. For example, supplies used for maintaining machines and buildings, indirect labour like maintenance workers, indirect expenses like factory rent, insurance of plant and machinery, power, light, etc.

Variable Overheads:These overheads tend to vary with the volume of production. Any increase in the production results in an increase in the variable overheads and vice-versa.

Fixed Overhead: These are the overheads which are incurred for the specific period, and which, within certain production and turnover limits, tend to be unaffected by fluctuations in the level of production. They do not tend to increase or decrease with the changes in output.

Common cost: Common costs are costs which are not traceble to any activity of production. For example, general management staff salary, general management building rent, etc.

Manufacturing Overhead: It includes indirect costs like, consumable stores and spares, depreciation of plant and machinery, lease rent of production assets, repair and maintenance of plant and machinery, indirect employee costs connected with production activity, drawing and designing department cost, etc.

Cost Driver: A cost driver is a factor or variable which affects level of cost. Generally it is a activity which is responsible for cost incurrence. It may be an event, task or unit of work, etc.

Cost of Goods Manufactured: It is the total of prime cost and factory related cost and overheads.

Cost Objects: It is anything for which a separate measurement of cost is required. It may be a product, a service, a project, a customer, a brand category, an activity, a department or a programme, etc.

Work in process: Work in process is that stage of production in which raw materials are being into processing for conversion into final goods.

BI + Adds = EI + usage or BI+Adds-Usage=EI

This means the beginning inventory at start of period plus materials purchased during the year minus materials issued for production.

RM Inventory = BI + purchases = EI + RM (Its the same as above)

WIP Inventory =BI +DM+DL+OH =EI +COGM, means beginning inventory of semi processed goods plus new materials added plus cost incurred to convert materials into finished goods minus total cost of manufacturing of finished goods= ending inventory of semi-finished goods

FG Inv = BI + COGM =EI+COGS means beginning inventory of finished goods plus cost of manufacturing of finished goods plus indirect overheads minus cost of goods sold = ending cost of finished goods unsold