Ch 2

Thursday, October 11, 2012 7:59 PM

1. Product Cost (Inventory) a. All costs related to the manufacturing function in a company b. Based on purpose c. Direct or Indirect i. Based on traceability ii. Direct 1. DM, DL Direct costs of a cost object (p 28) Related to the particular cost object and can be traced to it in an economically feasible (cost effective) way Direct manufacturing labor costs (p 37) Include the compensation of all manufacturing labor that can be traced to the cost object (work in process and then finished goods) but cannot be traced to that cost object in an economically feasible way Ie -- wages and fringe benefits paid to assembly line workers and machine operators who convert direct materials purchased to finished goods Direct material costs (p 37) The acquisition costs of all materials that eventually become part of the cost object (work in process and then finished goods) and can be traced to the cost object in an economically feasible way Ie -- freight-in charges, sales taxes, custom duties Direct materials inventory (p 37) Direct materials in stock and awaiting use in the manufacturing process iii.Indirect 1. MOH Indirect costs of a cost object (p 28) Related to the particular cost object but cannot be traced to it in an economically feasible (cost effective) way Needs to be allocated --> costs drivers Indirect manufacturing costs (p 37) AKA MOH & FOH All manufacturing costs that are related to the cost object (work in process and then finished goods) but cannot be traced to that cost object in an economically feasible way Ie-- supplies, indirect materials such as lubricants, indirect manufacturing labor such as plant maintenance and cleaning labor, plant rent/insurance/property taxes/depreciation, and the compensation of plant managers

d. Fixed or Variable i. Fixed 1. Remains unchanged in total for a given time period, despite wide changes in the related level of total activity or volume 2. Costs are defined as variable or fixed with respect to a specific activity and for a given time period 3. FC = total fixed costs / number of units produced Ex: fixed supervision cost for BMW = annual total fixed supervision costs for BMW X5 assembly line X5 assembly line Number of X5's produced ii.Variable ii. Changes in total in proportion to changes in the related level of total activity or volume iii. Costs are defined as variable or fixed with respect to a specific activity and for a given time period iii. VC = number of units produced x variable cost per component iv. Ex: VC of steering wheels = number of BMW X5's produced x variable cost per steering wheel e. For external reporting purposes f. Inventory of a product is regarded as an asset when they are incurred/before the products are sold. Assigned to inventory when incurred g. 3 elements of a product cost i. DM ii. DL iii. MOH 2. Period Cost a. Based on purpose b. Everything excluding COGS i. For manufacturing companies, all non-manufacturing costs c. For external reporting purposes d. Expensed in same period incurred 3. Prime and Conversion Costs a. Prime Cost i. All direct manufacturing costs ii. PC = DM costs + DL costs b. Conversion Cost i. All manufacturing costs other than DM ii. CC = DL costs + MOH costs

Manufacturer Calculations
Direct Materials Used Beginning raw materials inventory + purchases of raw materials + freight in materials available for use - ending raw materials inventory direct materials used Total Manufacturing Costs Incurred direct materials used + direct manufacturing labor + manufacturing overhead costs total manufacturing costs Cost of Goods Manufactured beginning work in progress inventory + total manufacturing costs total manufacturing costs to account for - ending work in progress inventory cost of goods manufactured Cost of Goods Sold beginning finished goods inventory + cost of goods manufactured cost of goods available for sale - ending finished goods inventory cost of goods sold Income Statement Schedule of COG manufactured

Merchandiser Calculations
Schedule of Cost of Goods Purchased purchases + freight-in total purchases - purchase returns and allowances - purchase discounts cost of goods purchased Schedule of Cost of Goods Sold Beginning inventory (units x cost) + cost of goods purchased cost of goods available for sale - ending inventory cost of goods sold

Manufacturer & Merchandiser Calculations

Gross Margin revenues - COGS gross margin Operating Income/loss gross margin - operating (period) costs (see below) operating income/loss Operating (Period) Costs general & administrative expenses + marketing, distribution, & customer service costs + miscellaneous costs + utilities operating (period) costs

Income statement