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Question 1 Classification by nature This requires that the costs of a manufacturing entity be classified on three major types, that include, materials, labour and expenses Material cost –refers to the costs incurred in the production of a particular product or to provision of a service. Labour cost- refers to the total expenditure incurred by an entity on its employees for their services Expenses- resources incurred by a firm to generate its income The major categories include i)                    Changes in cost of work –in – process and finished goods ii)                  Cost of raw materials used iii)                Depreciation and amortization of plant machinery and equipment iv)                Employee benefits v)                  Other expenses that include all items that meet expenses definition but not classified by the specified  above vi)                Finance costs which are incurred in obtaining funds used by management to operate the entity in form of interests and dividends. Question 2 Colonial Tap Company Cost of Goods Manufactured For the month ended Direct Material     Opening inventory –   Purchase of direct materials 300000   Less Closing inventory 30000   Direct Materials used   270000 Direct Manufacturing labour   250000 Manufacturing overhead     Premises (80%) 64000   Electricity (100%) 12000   Equipment (95%) 23750   Manager’s salary (50%) 40000   Production supervisor’s salary 35000   Manufacturing overhead   174750 Manufacturing cost incurred   694750 Opening work -in progress   0 Total manufacturing cost to account for 694750 Closing work -in –progress   138950 Cost of goods manufactured   555800             Colonial Tap Company Cost of Goods Sold For the month ended Opening inventory finished goods 0 Cost of goods manufactured   555800 Cost of goods available for sale 555800 Closing inventory finished goods 0 Cost of goods sold   555800   Question 3 Colonial Tap Company Absorption based Income statement For the month ended Sales   980000 Less cost of goods sold   555800 Gross profit   424200       Operating expense     Premises (20%) 16000   Equipment (5%) 1250   Truck lease 10000   Manager’s salary (50%) 40000   Sales staff 110000   Advertising 18000   Council rates 5000       200250 Operating profits   223950 `   Question 4 Difference between the two incomes statements   Presented by CTC Company ( Based on nature) Revised income statement (based on function)     1.               An entity aggregates expenses and revenues based on the nature of items in the entity 1.           An entity  aggregating revenues and expenses based on nature but must a minimum show the cost of goods sold 2.               Costs incurred in the production of are aggregated but not reallocated among the cost centers for which they were incurred 2.              Costs incurred in the production of finished goods are reallocated to functions for which they were incurred. 3)               Presentation of items (minimum items) 3)            Presentation of items (minimum items) i)        Changes in cost of work –in – process and finished goods   i) Cost of sales ii)       Cost of raw materials used ii) Distribution costs iii)     Depreciation and amortization of plant machinery and equipment   iii) Administration expenses iv)     Employee benefits (staff costs) iv) Other expenses v)      Other expenses v) Finance cost vi)     Finance costs   4)      Cost Classification 4)           Cost classification Material cost- costs incurred in the production of a good or service   Product cost -costs incurred to produce the final goods Labour cost – costs incurred on employees for their services   Period cost- incurred by the entity for operation during a specified time Expenses- costs incurred to generate revenues