Raw materials transport costs Essay Example | Topics and Well Written Essays - 1000 words

Raw materials transport costs - Essay Example 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 shoul d not be included in the valuation of inventory.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