Vang Company Cost Accounting

...

1.1.2. Element of costs

1.1.2.1. Material cost

In manufacturing, when a company makes a product; firstly, the company purchases raw materials to make the product. Material is the most important factor to produce a product because all most a haft of the total cost of production is covered by raw material required for the manufacture of any product. Electricity, fuel and other material costs are also needed for production.

-

Direct materials cost

The material can be measured and charged directly to the cost of the product in the manufacturing process. Direct material is a direct cost and the cost of the raw materials and components use to create a product.

-

Indirect materials cost

It is ancillary material which is required for production. These materials cannot be traced into the finished product. Indirect material used in offices of Vang Company such as printing and stationery material.

1.1.2.2. Labour cost

Labour cost is essential factor of production because a human resources that participates in the process of production. Labour uses own physical or mental effort on the production of an item. Besides, labor costs are the wages, taxes and extra benefits such as health insurance that a company must pay for employees during each accounting period. Importantly, labour costs are closely related to labor productivity. In the service industries, labour costs are often the biggest expense for a business in those sectors. And labour costs can be divided into two categories like direct and indirect labour costs (Ehow, 2014).

-

Direct labour cost

The people who make or do the core work in process production of the business, is called as direct labour. It includes such as direct remuneration, wages or bonuses of operator, workers, skilled labour or payments for days not worked or benefits in kind.

-

Indirect labour cost

Indirect labour forms part of the manufacturing overheads. It is the cost of people who do not takes direct part in production but they help indirectly in production process. Examples of indirect labour cost are wages paid to foremen, supervisors, store-keepers, time-keepers, salaries of office executives and the commission payable to sales representatives. Indirect labour cost such as salaries of clerks, secretaries and accountants, general manager and labour insurance expenses in Vang Company

1.1.2.3. Expense

All the economic costs incurred and the bills that have been paid to run business. This includes such as rent paid, wages, petrol, bank charges, accounting fees, telephone. Included in the group of expense accounts are accounts that relates to the cost of procurement or establishing stock or inventory for sale. Therefore, to maximize profits, businesses must try to reduce expenses because expenses play an important indicator of a business's operations

-

Direct expense

Direct expenses are any types of expenses that are specifically directly related to cost of the product and the principal activity of the business.

-

Indirect expense

Indirect expenses are those expenses which are incurred after the manufacturing of goods. That means these expenses are not charged directly to production but without these expenses, production cannot be completed. Examples of indirect expenses generally include insurance, utilities, and general home repairs. Since these are expenses you would pay for the entire production process. Indirect expenses of Vang Company such as office rent, lighting, heating and air-conditioning, depreciation, repairs and maintenance of office machines, legal charges, bank charges, audit fees

1.1.3Overheads

Overhead is including indirect material, indirect labour and indirect expenses incurred by a business. Overheads may be subdivided into the following groups:

1.1.3.1. Administration Overheads

These overheads are all the expenses incurred in connection with the management functions of planning, directing and controlling the operations of an organization but it is not related to direct cost.

1.1.3.2. Selling Overheads

It is the cost of creating sales and retaining customers. The purpose of these overheads is that the expenses are incurred for promoting the marketing of the products; create and stimulate demand of customers and of securing orders. It can include costs for all marketing, advertising, promotions, public relations and salespeople (Sam Ashe-Edmunds, 1989)

Vang Company always spend a lot of money in this type cost because it helps Vang Company receive large number of orders from the company, group or some local government agencies. Besides, the owner want to expand the operations and to come up with their own product line of printed t-shirts so investing marketing is very important. Through that, they would attract new customers and gain higher profits.

1.1.3.3. Distribution Overheads

Production distribution is also very important task in an organization. Distribution overheads usually begin when the factory costs end. It is the cost of delivery or distribution products from the factory to warehouse and from warehouse to customers (Zack Rosenberg, 2009).

Distribution overhead of Vang Company is transport of finished goods, delivery vans and warehouse rent. According to case study, the long-term goal of Vang Company is going into exports thereby the company needs to invest on distribution overheads to gain higher effectiveness in product distribution process.

1.1.4. Cost Behaviour

1.1.4.1. Fixed Costs

Fixed cost is the cost which will remains constant within a given period of time whether there is increase or decrease in size of production. But it does not mean fixed cost remains fixed forever. It also changes after the specific level of production. Some typical examples are rent, insurance, taxes