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Chapter 1.A
Chapter 1.A
REVIEW WORKSHOP
SINDHU BALA
OVERVIEW OF COST CATEGORIES
FOR A MANUFACTURING FIRM
All costs incurred by the firm must be accounted for in
its financial statements
MANUFACTURING COSTS
Direct Labor (DL)
Direct Materials (DM)
Overhead (OH)
Indirect Materials
Indirect Labor
Other
NON-MANUFACTURING COSTS
Marketing or Selling Costs
Administrative Costs
MANUFACTURING COSTS
1. Direct Materials (DM)
Materials that are consumed in the manufacturing
process and physically incorporated in the finished
product
Materials whose cost is sufficiently large to justify the
record keeping expenses necessary to trace the costs to
individual products
MANUFACTURING COSTS
2. Direct Labor (DL)
Labor time that is physically traceable to the
products being manufactured
Labor time whose cost is sufficiently large to
justify the record keeping expenses necessary to
trace the costs to individual products
Example:
Direct labor for manufacturing Honda Accords
Line workers, robot operators, painters, assembly
workers
Any labor probably not included in direct labor?
Factory janitors, factory supervisors, factory
secretaries
KEY ISSUES IN DETERMINING
DIRECT LABOR
Is idle time generally considered as direct labor? Why
or why not?
Usually not. It is not usually due to one product,
hence it is not traceable
What are the typical fringe benefits an assembly line
worker receives?
Health insurance, pension plan, disability insurance
Period Costs costs that are not product costs and that
are associated with the period in which they are incurred
Period costs such as selling and administrative costs are
expensed (i.e. deducted from revenue in calculating net
income) in the period they are incurred
PRODUCT COSTS VERSUS PERIOD
COSTS
Product costs include Period costs are not
direct materials, direct included in product
labor, and costs. They are
manufacturing expensed on the
overhead. income statement.
Cost of
Inventory Goods Sold
Expense
Sale
Sunk Costs Costs that have been incurred and that are not
affected by any current/future action
What would be considered sunk cost if Macys decides to expand
its fragrance department and shrink its accessories
department?
Depreciation on the building, cost of the building
COST FLOWS IN A
MANUFACTURING COMPANY
3. Inputs such as labor and capital equipment are
also incurred to make the product. The costs of
all the inputs used in the manufacturing
facilities are recorded in WORK IN PROCESS
INVENTORY
4. As products are finished, they are moved to
finished goods warehouse and their costs are
recorded in FINISHED GOODS (FG)
INVENTORY
COST FLOWS IN A
MANUFACTURING COMPANY
THE INVENTORY EQUATION
QUICK CHECK
If your inventory balance at the beginning of the
month was $1,000, you bought $100 during the
month, and sold $300 during the month, what
would be the balance at the end of the month?
A. $1,000.
$1,000 + $100 = $1,100
B. $ 800.
C. $1,200. $1,100 - $300 = $800
D. $ 200.
QUICK CHECK
Beginning raw materials inventory was
$32,000. During the month, $276,000 of raw
material was purchased. A count at the end
of the month revealed that $28,000 of raw
material was still present. What is the cost of
direct material used?
A. $276,000
B. $272,000
C. $280,000
D. $ 2,000
QUICK CHECK
Beginning work in process was $125,000.
Manufacturing costs incurred for the month
were $835,000. There were $200,000 of
partially finished goods remaining in work in
process inventory at the end of the month.
What was the cost of goods manufactured
during the month?
A. $1,160,000
B. $ 910,000
C. $ 760,000
D. Cannot be determined.
VARIABLE AND FIXED
COSTS
Activity a quantitative measure of a firms output of goods or
services
Number of Chrysler vans
Pairs of Nike shoes
Tons of cement produced
Variable Costs costs that change proportionately (in total) with
the activity level within a relevant range of activity
Fixed Costs costs that do not change in total as activity level
changes within a relevant range of activity
Example: Publishing a magazine
Variable costs Fixed Costs
Cost of paper Rent on building
Cost of ink Salaries to reporters
Sales Commissions Depreciation on printing
equipment
Cost of lubricants for machine
Cost of operating press
TOTAL VARIABLE AND FIXED COSTS
Total Cost
Fixed costs
The Slope is the
variable cost per
unit
Number of units