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Ccountancy Review Workshop Indhu ALA
Ccountancy Review Workshop Indhu ALA
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
Is the cost of fringe benefits for the assembly line
workers generally considered direct labor?
Usually yes, the costs can be traced
KEY ISSUES IN DETERMINING DIRECT
LABOR
When an assembly line worker works overtime, he/she is
paid a regular wage plus an overtime premium. Would
most companies treat his/her regular wage as a direct
labor cost?
Yes, the amount of time an employee works can be
traced to the products.
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 Macy’s 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
RAW MATERIALS INVENTORY
Beg. Bal. - RM Materials used in Production (DM)
Materials Purchased
End. Bal. - RM
End. Bal. - FG
THE INVENTORY EQUATION
Total Cost
Fixed costs
The Slope is the
variable cost per
unit
Number of units