AFM 102: Winter 2017

Week 2 Chapter 2: Cost Terms, Concepts, and Classifications

General Cost Classifications
Manufacturing Costs

Direct Materials
Raw Materials
Materials that go into the final product
1) Direct Materials
Those materials that become an integral part of a finished product and can
be conveniently traced to it
2) Indirect Materials
Small items of material that may become an integral part of a finished
product but whose costs of tracing exceed the benefits
Direct Labour
1) Direct Labour
Those factory labour costs that can be traced easily to individual units of
product
2) Indirect Labour
Labour costs of janitors, supervisors, materials handlers, and other factory
workers that cannot be conveniently traced directly to particular products
Manufacturing Overhead
All costs associated with manufacturing except direct materials and direct labour
Examples: Indirect materials, indirect labour, maintenance and repairs on
production equipment, heat and light, property taxes, depreciation, and
insurance on manufacturing facilities
Conversion Cost = Direct Labour Cost + Manufacturing Overhead Cost
Prime Cost = Direct Materials Cost + Direct Labour Cost
Manufacturing Labour Costs
Overtime Premiums
Extra hourly wage rate paid to workers who must work more than their normal
time requirements
Non-Manufacturing Costs
AFM 102: Winter 2017

Marketing (Selling) Costs

All costs necessary to secure customer orders and get the finished product or
service to the customer
Order-getting costsadvertising, sales travel, and sales salaries or
commissions
Order-filling costspacking, shipping, and the costs of finished goods
warehouses
Administrative Costs
All executive, organizational, and clerical costs associated with the general
management of an organization rather than with manufacturing, marketing, or
selling
Examples: Executive compensation, accounting, human resources, public
relation costs

Product Costs vs. Period Costs

Product (Inventoriable) Costs
Costs that are involved in the purchase or manufacture of goods
Direct materials, direct labour, and manufacturing overhead
Period Costs
Expensed on the income statement in the period in which they are incurred or
accrued
Selling, marketing and administrative expenses

Cost Classifications on Financial Statements

The Balance Sheet
Raw (Direct) Materials Inventory
Materials used to make a product that have not yet been placed into production
Work in Process Inventory
Inventory consisting of units of product that are only partially complete and will
require further work before they are ready for sale to a customer
Finished Goods Inventory
AFM 102: Winter 2017

Inventory consisting of units of product that have been completed but have not
yet been sold to customers
AFM 102: Winter 2017

The Income Statement

Cost of Goods Manufactured

Direct materials, direct labour, and manufacturing overhead used for the
products finished

Schedule of Cost of Goods Manufactured

Schedule showing the direct materials, direct labour, and manufacturing overhead
costs incurred for a period and assigned to work in process and completed goods
Total Manufacturing Costs
Costs that represent the direct materials, direct labour, and manufacturing
overhead used to perform the production work for finished or unfinished products
for the period
AFM 102: Winter 2017

Inventoriable Costs
Can end up on the balance sheet as assets if goods are either partially
completed or unsold at the end of a period
Statement of Cash Flows

Cost Classifications for Predicting Cost Behaviour