Quiz 2: The Nature of Costs

Business

Revenue: It is the amount of receipts generated from the sale of products or services rendered by the company to its customers. It is shown as the sales or service revenue of the company. Various accounting standards have been formed by the authorities for appropriate determination of the amount of revenue.Manufacturing Costs These are the costs that are incurred up to the stage of final output. It includes the cost of materials, labor, variable and fixed overheads that are incurred in the factory. It does not include the financing cost or selling cost or the administration costs. This is the cost of the product at the point when the product is manufactured in all respects. a.In the present case, the income statement has been given in which the barrel cost and the warehousing costs are taken as a period cost. It is required to prepare a different set of income statement considering the Prepare the income statement for three years using MS Excel as follows: img The result of above is as follows: img b.It is observed from the given income statements and the statements prepared above that when the warehousing expenses and barrel costs are taken as a period cost the income statement shows lower profits and loss in the third year but when they are taken as product cost the income statements shows the profit. It is obvious that the management would like to show the statement which shows higher profits so as to be eligible for more credit from the bank. However, whether this thing will work or not depends upon the banker's point of view. Further, the taxation effect of this change in treatments and the outflow of cash also affects the position. It is suggested that whether it is legal to keep two sets of the book. If not then the second one should not be even prepared. If it is allowed then both the statements should be made available to the bankers so that they may know the true position of the company's worth and take the decision accordingly.

Variable and Fixed Cost There are two components to the cost of a product from the point of the manufacturer. One is the fixed cost which remains fixed at any level of sales and one is the variable cost which is directly propionate to the level of sales. If the quantity increases variable cost increases and quantity decreases the variable cost also decreases. Variable costs are relevant cost and fixed cost are irrelevant costs. The sales from the cafeteria are $12,000 of which 40% is the variable cost. The fixed cost amounts to $4,700. If the vending machine is installed than the company will receive 16% of the sale and there will not be any cost. Calculate the increase in income due to the installation of vending machines using below equation as follows: img Hence the increase in income is $188. Calculate the operating income from the cafeteria using the below equation as follows: img Hence the income from the cafeteria is $2,500. Calculate the income from a vending machine using below equation as follows: img Hence the income from using the vending machine is $2,688.

Opportunity Cost: It is the income foregone which could have earned if the current task has not opted. Since an opportunity of income is forgiven it is termed as opportunity cost. A famous person once said, "no coming of money is equivalent to going of money". This refers to that the income you have forgiven is now a cost which should be recovered from the adopted task. If it is not recovered then there is ultimately loss of the amount not recovered.Sales: It refers to any activity which is undertaken by the entity for selling its products or rendering its services in the market in exchange for money. Sales can be made on two bases i.e. cash or credit basis. The amount of sales is shown in the profit and loss account of the entity as the income of such entity. a.In the present case, the cost savings for the company on annual basis relating to a contract are provided. IF the company is planning to take upon a financial year of more than one year then it is the core responsibility of the management to look around the costs which are incurred or the costs are planned to be incurred. The management should also take into the consideration of matter relating to the savings if any possible in terms of that particular cost. In simple words, the management should work on the opportunity costs that are related to the working of the company. The managerial person should have reconciled the sales figure of the company with the actual data available and also the differences in the cost should also have been verified with proper evidence. The company must have used the concept of taking the cash flows according to the discounting technique so that the actual data that pertain to costs occurrence over than a year should have been easily verified. b.(i) 1. The given item is appropriate.Reason: The person is not required to pay the cost of these wages in the future period of time.2. The given item is inappropriate.Reason: Since the company is planning to take the financial year of more than one year, therefore the supervisor as appointed by the company should continue the job for two years more.3. The given item is appropriate.Reason: The given item is appropriate but up-to some extent of the space which is available to be used on rent basis. Otherwise, the cost will become inappropriate because the managerial person is still using the said space.4. The given item is inappropriate.Reason: Since the person appointed by the company in the purchase department is on a temporary basis but the person appointed will continue the job for a longer period of time because the company has selected to take the financial year of more than one year. 5. The given item is appropriate.Reason: The given amount of savings will be used or realized by the person from the reduction in costs of the order pertaining to the purchases. 6. The given item is inappropriate.Reason: The person has taken the costs relating to the freight on the inward basis in the cost of material and the other person has included the costs relating to the delivery of the products in the selling price. 7. The given item is appropriate.Reason: The amount of difference occurring to the company in terms of costs which are included in the manufacturing costs and the purchasing of the products should be maintained and taken by the management in the analysis of the person. 8. The given item is appropriate.Reason: The person appointed as a junior engineer in the company will also be counted in the staff of the company. 9. The given item is appropriate.Reason: The inspector appointed for checking the quality of the products will also be taken as a staff member of the company. 10. The given item is appropriate.Reason: The increase in the value of the stock pertaining to the safety purposes will represent some extra burden of the cost to the person. (ii) 1. The given amount is correct. Reason: The given cost is related to the person appointed as technicians and they will not work for the said in future. 2. The given amount is incorrect. Reason: The given costs will also be incurred by M in future and the amount that will be included in the analysis of W will be computed by subtracting the extra benefits given to the staff from their salary. 3. The given amount is incorrect. Reason: The amount which relates to the space available at outside of the rented area shall be taken into consideration. The cost amount that relates to the plant will still be continued. The cost of the rental space shall be computed by multiplying 1,000 with a rate of $9.50 and the resultant amount comes out to be $9,500. 4. The given amount is incorrect. Reason: There will no benefit to the company in the savings on cost due to the appointment of the clerk in the purchasing department unless and until the appointed clerk brings some additional in the said purchasing department. 5. The given amount is correct as per the information provided in the question. 6. The given amount is incorrect. Reason: The amount of any extra cost incurred by the person or any savings made that are related to the expense of freight will not be shown in the said item. 7. The given amount is incorrect. Reason: The correct amount shall be $2,975,000. The resultant amount is being computed by multiplying 100,000 with the difference of $60 and $30.25. The amount of $30.25 is the sum total of direct material i.e. $24 and variable overhead i.e. $6.25. The amount of overheads in the nature of fixed will be occurring for the company in the long run. 8. The given amount is correct as per the information provided in the question. 9. The given amount is correct as per the information provided in the question. 10. The given amount is incorrect. Reason: Compute the correct amount with the help of MS-Excel as follows: img The result of the above calculation is as follows: img Therefore the correct amount of additional cost comes out to be $4,800. c. The person shall consider the below-mentioned information of the other party before making any decision: 1. The actual performance of the company shall be taken into consideration i.e. the financial position and stability of the accounts shall be checked in details. 2. The creditworthiness or rating should be checked.3. The person shall also check the ability of the company for meeting the deliveries on time and providing the best quality products to the customers. 4. The increment that shall be done in future at the prices of the product as manufactured by the company. 5. The level of production shall also be taken into consideration.