Classification of costs for stock valuation and profit measurement
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Classification of costs for stock valuation and profit measurement
Matching concept requires that costs are matched with revenue for the purpose of calculating profits.
Closing stocks must be deducted from production costs.
In an organisation with a range of jobs, it is necessary to charge the costs for each individual job.
WIP and finished goods stock valuations are determined by the total of individual job costs.
The total of the costs attached to the incomplete jobs in the finished goods store represents the finished goods stock valuation.
Period Costs – costs which are not included in stock valuation. They are treated as an expense in the period, in which they occurred.
Product costs – costs which are allocated to the product and included in the stock valuation. Product costs are matched against sales and classified as expense in the period when the goods are sold.
For stock valuation, only manufacturing costs should be classified as product costs and non-manufacturing costs should be classified as period costs.
Classification by direct and indirect costs
Direct costs – costs which can be specifically traced to or identified with a particular product. Total of direct costs is called prime cost.
Indirect costs/overheads – costs which cannot be identified with a particular product and which are incurred for the benefit of all products.
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