SLC | S21W2 | Costs for entrepreneurs - Cost elements.

What is the relationship between costs and financial accounting?

Costs and financial accounting both are related with each other and how these are related to each other,here is a comprehensive detailed explanation;

Cost classification

Financial accounting includes classification of cost into multiple categories or types which are direct material, direct labor, overhead or period costs etc.

Cost measurement

Financial accounting needs measurement of costs for determining in a precise way about cost of goods which are sold, expenses which are operating and other matrics of finance.

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Cost allocation

Financial accounting includes permitting costs for different kind of products,departments and projects for the purpose of the determination of profitability and performance.

Cost reporting

Financial accounting needs for reporting cost in financial statements like in form of income statement or balance sheets.

Cost analysis

Financial accounting also include analyzation of cost for identifying areas in which there is a need of improving, there is a need of optimising resources of allocation and for making informed decisions related to business.

Financial accounting involves analyzing costs to identify areas for improvement, optimize resource allocation, and make informed business decisions.

Types of costs in financial accounting

• When I talk about direct coasts then these are attributable with specific or particular product or particular project in a direct way.
• When I talk about indirect cost then these are attributable with particular project or product in indirect way.
• When I talk about fix cost then these remain fixed with no change or irrespective of sales volume.
• When I talk about variable costs then these are variable with sales volume.
• When I talk about opportunities costs then these are those who take profit from choosing one alternative over another.

Establish the difference between fixed costs and variable costs, providing examples of each

There are a lot of differences between fixed cost and variable cost along with the examples of both of them I am going to describe below;

Fixed costs

Costs which remain fixed even if there's any alternations in production of products or volume of sales of products.

Characteristics

• Fixed cost are constant.
• Fixed cost have no direct relation with sale volume.
• Fixed cost are long term commitment in most of the cases.

Examples

• Rent or other payments
• Salaries and daily wages costs.
• Property taxes

Variable costs

Variable cost are those cost that have alternations if there are any changes in production or volume of sales or products.

Characteristics

• Variable costs are not constant.
• These have direct relationship with volumes of sales of products.
• Important for short term commitments.

Examples

• Raw materials and supplies.
• Direct labor costs e.g production staff.
• Utilities like electricity, water, gas etc.

In a real or fictional case, identify the cost elements in manufacturing a product or providing a service

Suppose that there's a fictional case of a brand or company whose brand is "GreenCycle," and is manufacturing bicycles which are friendly with ecosystem.

Product is Eco-Friendly bicycle

Cost elements

Fixed costs

• Rent of factory is $10,000/month
• Depreciation of equipment is $5,000/month
• Insurance of premiums is $2,000/month
• Salaries of administrative staff is almost $15,000/month
• Research and developmental expenses are around $8,000/month.

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Variable costs

• Raw Materials like aluminum, steel, etc are $150/unit
• Labor Costs include production staff which is $100/unit
• Energy and utilities are around $20/unit
• Packaging materials are $15/unit
• Shipping and transportation are $30/unit

Semi-Variable Costs

• Costs for maintenance and repair are $500/month (plus $10/unit)
• Costs for quality control inspections are $1,000/month (plus $5/unit)

Direct Costs

• Raw Materials
• Labor Costs
• Energy and Utilities

Indirect Costs

• Factory Rent
• Depreciation of equipment
• Salaries of administrative staff.

Cost types and calculation as a whole

Direct costs

(relates with production)

Cost Category	Amount
Direct Raw Material	cost of $130
Direct Labor	cost of $100
Manufacturing Supplies	cost of $210
Total Direct Costs	cost of $440

Indirect Manufacturing Costs

(not directly relates with production, but necessary for manufacturing purposes)

Cost Category	Amount
Depreciation of plant and machinery	cost of $25
Plant manager	cost of $65
Taxes and plant insurance	cost of $70
Building maintenance	cost of $50
Public services	cost of $35
Maintaining of distribution equipments	cost of $65
Total Indirect manufacturing costs	cost of $310

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Non-Manufacturing costs

(no relationship with production)

Cost Category	Amount
Delivery costs	costs are $70
Sales Commissions	costs are $65
Sales and administrative expenses	costs are $80
Advertisement	costs are $20
Total Non-Manufacturing Costs	costs are $235

Total direct and indirect manufacturing costs

  • Total Direct Manufacturing Costs: $440

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         • Total Indirect Manufacturing Costs: $310

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            • Total Manufacturing Costs: $750

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