a toy manufacturer produces hand crafted rocking horses during one week six rocking 643425

A toy manufacturer produces hand crafted rocking horses. During one week six rocking horses are completed. The direct materials costs of wood and leather materials amount to £180 per completed horse. The indirect materials cost of glue and paint amount to £20 per completed horse. The direct labour cost for craft working is £150 per completed horse. The indirect labour cost of handling within the production department is £50 per completed horse. Advertising amounted to £1,200 per week. Five completed rocking horses are sold for £1,000 each. There were none in inventory (stock) at the start of the week. The statements of costs would be:

The calculation of profit would be:

In each of these examples the product cost of completed services and of goods sold is matched against sales revenue of the week. The product cost of work in progress and of unsold goods is carried in the valuation of inventory (stock) to be matched against sales revenue of a future week. The period costs are all matched against sales revenue of the week.

In a service organisation, all costs incurred up to the point of completion of the service are regarded as product costs. Any costs incurred beyond the act of service, such as advertising the service or collecting cash from customers, would be a period cost. In a manufacturing organisation, all manufacturing costs are regarded as product costs. This will include the direct and indirect costs of manufacturing. I will explain the methods of calculating the indirect manufacturing costs for each product item. Costs incurred beyond the completion of manufacture, such as the costs of administration and selling, are period costs. The valuation of unsold inventory (stock) is based on the product cost.