Part AIt is not necessary that the net profit equals the increase in bank balance because business units allow customers to use cash as a mechanism of payment. Further some drawings might have been made from the bank which doesn’t affect the net profit. The fair value accounting would have made assets to be revalued. (Fair Value Accounting, 2010) But the historical principle requires disclosing assets at the purchase price. (Historical Cost, 2010) The company is following the later and this helps to reduce fluctuations in the value each year. An asset which is used over a period of time wears down and the value reduces.
The amount by which the value falls is depreciation. (Depreciation, 2010) Organisations have a separate account as accumulated depreciation so that the amount charged as depreciation can be entered here so that when the asset becomes obsolete replacing it becomes easy. Crediting the value to the asset will be against “the historical cost principle of disclosing the asset at cost”. (Historical Cost, 2010) It will also further lead towards various fluctuations creating confusion. Since, the payment of insurance was for a personal use it cannot be considered a business transaction.
The entry for a personal payment as insurance will be recorded as drawings in the balance sheet and will reduce owners’ capital. The profit which is ascertained after all the direct expenses related to a product are charged is gross profit. Net profit is the final profit which is arrived after all the expenses have been charged. (Net Profit, 2010) Gross profit thus considers direct cost and net profit indirect cost. The most important for the firm is net profit as it is the final figure which the business has though gross profit also has a lot of relevance.
Part BCosts which are directly identified to a product is direct cost whereas cost which is identified to the process and not identified to the product is indirect cost. (Direct Cost, 2010) Since, manufacturing cost can be easily identified to the product it is direct cost. Work in progress is goods which are neither finished nor raw material but have been worked upon and further working will it will result it to be converted to finished goods.
It is to be treated as current assets. The overhead rate is calculated by dividing the total cost by the labour hours. This helps to find the cost per labour hour. Assigning cost on the basis of it helps to ascertain the cost of each product with accuracy at the same time changes in the cost can be ascertained. Manufacturing overhead is an expense which organisation incurs to manufacture goods so it has a debit balance. $56,000 shows the amount incurred to produce goods. The amount was finally charged to income statement as it is an expense and needs to be charged. Cost which doesn’t change with the output production is fixed cost.
Costs on the other hand which changes with the output production is variable cost. (Variable Cost, 2010) For example rent is fixed but salary to labour is variable. In relation to the direct and indirect cost fixed and variable cost can be accounted in both and depends on the expense incurred.