When inventory is sold, it is important that it is given a value that reflects the 'cost of sale' of the product, so that a profit can be calculated and reported in the income statement.When finished goods are transferred to the warehouse, this is where they remain until they are sold to customers or held as inventory.This is because when finished products are transferred to the warehouse as finished goods, they are transferred at a value that reflects the direct manufacturing costs that were involved in producing them, i.e.Non-production costs must be analysed separately. It is important that the total production cost of a product is clearly identified as being such.
#4 ELEMENTS II SPECIAL EDITION LEVEL 10 SOLUTION PLUS#
The total production cost is the marginal production cost (total direct costs) plus any fixed production overheads.A cost card (or unit cost card) lists out all of the costsinvolved in making one unit of a product.ĬOST CARD – statement of the total cost of one unit of a product Once costs have been analysed as being production or non-productioncosts, management may wish to collect the costs together on a costcard. Finance costs – the costs that are incurred in order to finance an organisation, for example, loan interest.ĭistinguishing between production and non-production costs.Distribution costs – the costs involved in distributing an organisation's finished products, such as the cost of running the warehouse or delivery costs.Selling costs – costs associated with taking orders from customers who wish to buy an organisation's products (sales department costs) and also marketing costs.Administrative costs – the costs involved in running the general administration departments of an organisation, for example, the accounts department.Production costs are the costs which are incurred when rawmaterials are converted into finished goods and part-finished goods(work in progress).
This includes all bought-in services, for example, rent, telephone, sub-contractors and costs such as the depreciation of equipment.Ĭlassification by function – production costs
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