Raw materials transport costs - Essay Example

Raw materials transport costs: Carriage inwards are the costs that are incurred as a result of transporting raw materials into a firm, these costs should be added to the value of goods purchased, and this means that the cost of raw materials should include the value of the goods purchased plus the transportation costs incurred by the firm in transporting these raw materials. Carriage outward is the cost of transportation of final or finished goods to the customer; these costs are treated as expenses and therefore are recorded in the profit and loss account as an expense. Therefore from the above discussion on the cost of transportation which are carriage inward and outward it is evident that carriage inward which is the cost incurred in transporting raw materials into the firm should be included in the valuation of inventory and therefore require that they are added to the cost of raw materials, carriage outward which is the transportation of goods to the customer should be treated as an expense and therefore should not be included in the valuation of inventory. Work in progress: Work in progress is a term used to goods that are not yet finished goods, their value is included in the valuation of inventory, overhead costs are those costs that cannot be directly traced to a particular products example rent and security costs, these costs are assigned to the product using an appropriate method whereby their cost is assigned to cost objects. Work in progress is calculated by adding up the direct materials costs, direct labor costs and the overhead costs, the overhead costs are assigned to the unit of production using an appropriate method, example the overhead costs at Lehman ltd are assigned to products using machine hours. Overhead costs should be included in the valuation of inventory, the costs of produced goods should include direct materials, direct labor costs and overhead costs, in this case the following overheads are included: Factory rent, rates and insurance 50,000 sales office expenses 240,000 factory security 30,000 factory heat, light and power 450,000 sales commissions and selling costs 120,000 depreciation of machinery 230,000 depreciation of sales force vehicles 70,000 total 1,190,000 The overhead costs are assigned to products on the basis of machine hours and in this case it is evident that there were 10000 machine hours, however 500 machine hours are included in work in progress, therefore for the finished goods have utilized 9500 machine hours. For the finished goods the following overhead cost should be assign to each product: 1,190,000/9500 = 125.26 Therefore each finished good should be assigned 125.26 per machine hour it consumes. For the work in progress they have consumed 500 machine hours, should be assigned the overhead cost depending on a percentage set, example the company may decide that for the work in progress the overhead costs will be assigned at 50%, if this is the case the work in progress overhead cost will be 62.63 per machine hour. Finished goods: The table below summarizes the cost incurred by these goods and some costs that the goods may incurred, the following table summarizes the gross profit that will be gained as a result of modification and sale of these products. Stock Line A () B() C() selling price 50000 20000 22000 Costs incurred to date 40000 10000 15000 modification costs 10000 4000 4000 marketing costs 5000 4000 5000 cost of production 55000 18000 24000 gross profit -5000 2000 -2000 We calculate the cost of production by adding up all the cost that the goods have incurred and those that are to be icnured, to get gross profit we subtract cost of production from the selling price which in this case stands for the revenue that is to be gained, the gross profit for product A and C is negative while product B has a positive gross profit. Therefore product B will gain a profit and therefore it is best to modify and sell the product, for the other product the firm may tend to recover the costs incurred so far by selling the products at a loss. Work in progress on construction contract: We are provided with the following information: Contract 1 () Contract 2 () Costs incurred to date 7000000 4500000 estimated further costs to complete 1000000 2300000 progress billings received to date 6500000 3200000 total value of contract 9000000 6000000 estimated stage of completion 80% 70% The above information regarding the contract shows that there are those costs that have already been incurred and some amount that have already been paid. There are those amounts that are to be recorded in the income statement and those that are to included in the balance sheet, the following is a discussion on how these information will be recorded: The amount that is not yet paid will be recorded in the balance sheet, this will be recorded as debtors because this is an amount that is to be received in the future, therefore the amount to be recorded for contract 1 will be 9000000 - 6500000 = 2500000, for contract two the debtors amount will be 6,000,000 - 3,200,000 = 2,800,000. The amount received will be recorded on the income statement as revenue and therefore for contract 1 the amount of revenue will be recorded as 6,500,000 and for contract 2 the revenue will be recorded as 3,200,000. The costs incurred so far will be recorded as expenses in the income statement, this means that expenses for contract 1 will be 7,000,000 and for contract 2 expenses will be 4,500,000. We however need to determine how we record the amount of expenses expected to be incurred in future, this amount will be recorded as creditors in the balance sheet because these are costs that will be incurred in future. We also determine the profits to be earned from the contract, this will be the determined by subtracting the total costs from total value of the contract, the following table summarises the calculation of profit to be earned from the contract Contract 1 () Contract 2 () revenue total value of contract 9000000 6000000 minus total expenses Costs incurred to date 7000000 4500000 estimated further costs to complete 1000000 2300000 total expenses 8000000 6800000 profits expected 1000000 -800000 After completion contract 1 will earn 1,000,000 in profit and contract 2 will earn a 800000 loss, profit earned so far will be determined by the level of completion, for contract 1 therefore profit earned is 800000 while for contract 2 the loss so far is 560,000 Land and building: Assets are recorded in the balance sheet, this means that the value of the building will be the value that the land was purchased, in case where there is a rise in the price of property in the area then if the firm sells the assets then the profit gained will be recorded as profit after disposal of building, however the land and building should be recorded as an asset in the balance sheet. Reference: Jan Williams and Joseph Carcello (2006) Financial Accounting, McGraw Hill publishers, New York Read More