Part ANet profit won’t be the same amount as the increase in cash at bank because some of the customer might have paid in cash. This might have resulted in some profits accruing to cash. The value of the asset has not been revised as the company is following a conservatism principle and recording assets on historical prices. (Conservatism Principle, 2010) This also prevents the business from the fluctuation in the prices of assets and helps to ensure the value of the assets are not over estimated. Depreciation is “the reduction in the value of assets due to wear and tear”.
(Kennon, 2010) A separate account is created so that the organisation use funds from this account when the assets need to be replaced thereby not affecting the normal business cycle. (Kennon, 2010) The amount hasn’t been credited to the asset account as it would reduce the value of the asset on the balance sheet and disclosing the original amount helps to understand the true value of the asset on the purchase date. The payment of insurance has not been recorded as it is a personal payment and business is a distinct entity from the individual.
The payment will be recorded as drawings in the business financials. Gross profit is the profit after charging direct expense for the production of goods where as net profit is the final figure after all expenses has been charged. Both the figures have high relevance but net profit has a higher relevance as it discloses the actual profit the business earns. Part BDirect cost are “cost which are directly attributable to the product and can be identified to be incurred while manufacturing a goods”.
(Fixed Cost, 2010) Indirect cost are those “which cannot be attributed directly to a product”. (Fixed Cost, 2010) Manufacturing overhead is considered as a direct cost as the cost should be attributed to the manufacturing process and the products itself. Work in progress is that inventory which hasn’t being fully processed to be sold in the market but is in the process of being completed. Work is progress is treated as current assets and falls under the assets side. The predetermined rate of direct labour hour for the manufacturing overhead is calculated by dividing the total cost by the labour hours used.
This helps in allocation of the manufacturing overheads on this basis which helps to calculate per unit cost of a product. The debit balance of manufacturing overhead shows that $56,000 was used to produce finished products from raw materials. The ending balance of the manufacturing overhead account is charged to profit and loss statement as it is an expense which the business has incurred to produce the good. Fixed costs are “cost that remains fixed irrespective of the number of goods produced”.
(Cram, 2010) Variable costs are “cost those changes as quantity changes increases if more goods are produced”. (Cram, 2010) Fixed and variable cost can be direct and indirect and is a further breakdown of cost. A. Schedule of Cost of Goods manufactured for the year ended 30th June 2008