Finance
Basics: Production
Ventures (B)
by
Laurus Nobilis
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What
are Production Ventures? What are fixed assets?
What is Depreciation?
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Posted
Apr 2009 |
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<<<
Previously on Finance Basics: Write
Offs
PRODUCTION
VENTURES
A company may decide to move from a purely commercial
venture (buying and selling) to a production venture, by
adding a manufacturing function to its business.
FIXED
ASSETS
The
purchase of an equipment asset, such as a machine,
enters the balance sheet as a gross fixed asset.
Fixed
assets are items that are owned for relatively long
periods of time and which are used in running the
business.
The
value of the fixed asset appears as a cash outflow on
the cash flow statement only when the company actually
pays for the purchase.
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DEPRECIATION
Depreciation
spreads the cost of a machine over its useful
lifetime.
The
amount of depreciation is determined by the
expected life of the machine and the method used
for depreciating it.
Depreciation
is not a cash outflow, but is a cost which will
affect the profit & loss statement.
On
the balance sheet
Gross fixed assets
- Accumulated
depreciation
=
Net fixed assets (also known as book value )
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PRODUCTION
COSTING
The
production costing account calculates the cost of all
items going into the production of goods.
•
the variable costs depend on the quantity of
goods produced.
•
the fixed costs do not change according to the
quantity produced (depreciation is a fixed cost).
When
a larger quantity of goods is produced, the same fixed
costs are spread among a larger number of units and
thus, the cost per unit goes down.
DAY
EIGHT
After
yesterday's bad experience with supplies, JS decides not
to remain dependent upon Fast Food Chain to supply the
sandwiches, but
to become self-sufficient.
So
he speaks to vendor about buying the equipment for
personal use. Vendor
of food equipment, actually his cousin, is selling to JS for $150 and will
also give generous credit terms. In fact, he allows him
to owe him the full amount as a long-term credit with no
specified payment date and no interest charged!
JS
decides to depreciate the equipment over 15 days. The
variable costs of producing the sandwiches in-house
include paying a younger brother to do the preparation
of sandwiches, and
the material costs of the bread, ham and cheese.
The
day's sales are calling so JS gets his younger brother
to make five boxes of sandwiches...
KEY TIPS
•
Fixed assets appear on the balance sheet at their
gross value minus accumulated depreciation.
They
only affect the cash flow statement during the period in
which the purchase is actually paid.
•
Depreciation represents the reduction in value of
a fixed asset during each period of its use.
It
is a cost and not a cash outflow.
•
Production costs are made up of variable costs and fixed
costs.
The
quantity produced affects the unit cost of the goods and
therefore the profit made on them when sold.
>>>
Next on Finance Basics: Accounting
for Inventory
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