Materials and Labour (Copy)

Fixed Costs:
- Costs that do not change with the level of production.
- Example: Rent, insurance.
- Formula:
```
Total Fixed Costs = Constant (does not change with production level)
```
Variable Costs:
- Costs that change directly in proportion to the level of production.
- Example: Raw materials, direct labor.
- Formula:
```
Total Variable Costs = Variable Cost per Unit * Number of Units Produced
```
Semi-Variable Costs:
- Costs that have both fixed and variable components.
- Example: Utility bills with fixed and usage-based components.
- Formula:
```
Semi-Variable Cost = Fixed Portion + (Variable Portion * Activity Level)
```
Stepped Costs:
- Costs that increase in fixed increments as the level of activity reaches certain thresholds.
- Example: Salaries of additional staff at higher production levels.
- Formula:
```
Stepped Cost = Fixed Costs for Production Level + Additional Fixed Costs for Increased Activity
```

Direct Costs:
- Costs that can be directly traced to a specific product or service.
- Examples: Direct materials, direct labor.
Indirect Costs:
- Costs that cannot be directly traced to a specific product or service and are spread across multiple products.
- Examples: Rent, utilities, indirect labor (e.g., supervisors).

FIFO (First In, First Out):
- Assumes the first units purchased are the first to be sold.
- Formula:
```
FIFO: The cost of goods sold is based on the oldest inventory first.
```
AVCO (Weighted Average Cost):
- Assigns an average cost to all units available for sale.
- Formula:
```
AVCO = Total Cost of Goods Available for Sale / Total Units Available for Sale
```
Perpetual vs. Periodic Systems:
- Perpetual System: Continuously updates inventory records after each transaction.
- Periodic System: Updates inventory at regular intervals (e.g., monthly or annually).

JIT:
- A strategy where inventory is ordered and received only when needed for production, reducing inventory holding costs.
- Benefits:
  - Lower storage costs.
  - Reduced risk of obsolete inventory.
  - More efficient resource usage.
- Drawbacks:
  - Supply chain disruptions can cause delays.
  - Requires precise demand forecasting.

Material Costs:

Direct Materials:

Debit: Work-in-Progress (Asset)   [Cost of Direct Materials]
Credit: Materials Inventory (Asset)   [Cost of Direct Materials]

Indirect Materials:

Debit: Manufacturing Overhead (Expense)   [Cost of Indirect Materials]
Credit: Materials Inventory (Asset)   [Cost of Indirect Materials]

Labour Costs:

Direct Labour:

Debit: Work-in-Progress (Asset)   [Cost of Direct Labour]
Credit: Wages Payable (Liability)   [Cost of Direct Labour]

Indirect Labour:

Debit: Manufacturing Overhead (Expense)   [Cost of Indirect Labour]
Credit: Wages Payable (Liability)   [Cost of Indirect Labour]

Activity-Based Costing (ABC):
- Allocates overhead costs based on the activities that drive the costs.
- Example: If a company uses machine hours as a cost driver, allocate machine-related overhead costs based on the machine hours used.
Absorption Costing:
- Allocates overhead costs to products based on predetermined rates (e.g., per unit, per labor hour).

Fixed Costs Example:
- Rent = $2,000 (fixed, does not change with production).
- Formula:
```
Fixed Costs = $2,000
```
Variable Costs Example:
- Raw Materials: $5 per unit.
- If 1,000 units are produced:
```
Total Variable Costs = 5 * 1,000 = $5,000
```
FIFO Inventory Valuation Example:
- First purchase: 100 units at $10
- Second purchase: 150 units at $12
- Sales: 200 units
- Under FIFO:
```
COGS = (100 * 10) + (100 * 12) = 1,000 + 1,200 = $2,200
Ending Inventory = 50 units at $12 = $600
```
AVCO Inventory Valuation Example:
- First purchase: 100 units at $10
- Second purchase: 150 units at $12
- Total cost: (100 * 10) + (150 * 12) = 1,000 + 1,800 = $2,800
- Total units: 100 + 150 = 250 units
- Average Cost per Unit:
```
AVCO = 2,800 / 250 = $11.20 per unit
```

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