Cost Terms and Classifications in Manufacturing

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Questions and Answers

What are the three basic manufacturing cost categories?

  • Direct Materials, Direct Labour, Manufacturing Overhead (correct)
  • Direct Materials, Administrative Costs, Indirect Labour
  • Direct Materials, Direct Labour, Marketing Costs
  • Marketing Costs, Administrative Costs, Factory Utilities Costs

Which type of costs consists of labour costs directly traceable to individual units of product?

  • Administrative Costs
  • Factory Overhead Costs
  • Direct Labour (correct)
  • Indirect Labour

What term describes the total of direct material and direct labour costs?

  • Indirect Costs
  • Conversion Costs
  • Prime Costs (correct)
  • Manufacturing Overhead

Which of the following costs is included as part of manufacturing overhead?

<p>Indirect Labour (D)</p> Signup and view all the answers

What do conversion costs comprise?

<p>Direct Labour and Manufacturing Overhead (D)</p> Signup and view all the answers

Which costs are considered non-manufacturing costs?

<p>Selling Costs and Administrative Costs (A)</p> Signup and view all the answers

Which category includes costs necessary to get the order and deliver the product?

<p>Selling Costs (A)</p> Signup and view all the answers

What distinguishes direct materials from indirect materials?

<p>Direct materials can be traced directly to the product. (D)</p> Signup and view all the answers

Which of the following is NOT a category of manufacturing costs?

<p>Operating Overhead (D)</p> Signup and view all the answers

Indirect materials are included in manufacturing overhead because they cannot be traced directly to a product.

<p>True (A)</p> Signup and view all the answers

What term is used to describe the total of direct labour costs and manufacturing overhead costs?

<p>Conversion costs</p> Signup and view all the answers

Manufacturing firms classify their costs into direct materials, direct labour, and __________.

<p>manufacturing overhead</p> Signup and view all the answers

Match the following terms with their definitions:

<p>Direct Materials = Materials that become an integral part of the product Indirect Labour = Labour costs that cannot be easily traced to individual products Prime Costs = Total of direct material and direct labour costs Administrative Costs = Executive, organizational, and clerical costs</p> Signup and view all the answers

Which of the following describes non-manufacturing costs?

<p>Costs necessary to get the order and deliver the product (D)</p> Signup and view all the answers

Direct labour costs are those that cannot be physically traced to individual units of product.

<p>False (B)</p> Signup and view all the answers

What comprises the total of direct material and direct labour costs?

<p>Prime costs</p> Signup and view all the answers

Flashcards

Direct Materials

Raw materials that become part of the final product, traceable to it.

Indirect Materials

Raw materials not directly traceable to the product.

Direct Labour

Labour costs directly linked to making a product.

Indirect Labour

Labour costs not easily traced to a specific product.

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Manufacturing Overhead

All manufacturing costs except direct materials and direct labor.

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Prime Costs

Direct materials cost plus direct labor cost.

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Conversion Costs

Direct labor costs plus manufacturing overhead costs.

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Non-manufacturing Costs

Costs like marketing and administrative costs, not directly involved in manufacturing.

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Product Costs

Costs directly associated with the production of goods. They include direct materials, direct labor, and manufacturing overhead.

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What are manufacturing costs?

Costs incurred in the process of making the product, such as direct materials, direct labor, and manufacturing overhead.

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What is a schedule of cost of goods manufactured?

A statement summarizing the costs of direct materials, direct labor, and manufacturing overhead used to produce goods during a specific period.

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What are variable costs?

Costs that change in direct proportion to the level of activity. As production increases, variable costs increase.

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What are fixed costs?

Costs that remain constant regardless of the level of activity. Rent, salaries, and insurance are fixed costs.

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What are direct costs?

Costs that can be directly traced to a specific cost object, like a product or a project.

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What are indirect costs?

Costs that cannot be directly traced to a specific cost object, like a product. They are allocated to different cost objects.

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Study Notes

Cost Terms, Concepts & Classifications

  • Manufacturing firms categorize costs into three main categories: direct materials, direct labor and manufacturing overhead.
  • Direct materials are integral parts of the final product and can be traced directly to it. Raw materials can be either direct or indirect.
  • Indirect materials cannot be directly traced to the product, or it's not worth the expense to do so. Indirect materials are part of manufacturing overhead.
  • Direct labor consists of labor costs directly traceable to individual product units.
  • Indirect labor is labor not directly traceable to individual products and is considered part of manufacturing overhead.
  • Manufacturing overhead includes all manufacturing costs not direct material or direct labor. Examples are indirect materials, indirect labor, factory utilities, and factory insurance.
  • Prime costs are the sum of direct material and direct labor costs.
  • Conversion costs are the sum of direct labor and manufacturing overhead costs.
  • Non-manufacturing costs can be marketing or selling costs (necessary to get an order and deliver the product) or administrative costs (executive, organizational, and clerical costs).
  • Product costs are direct materials, direct labor, and manufacturing overhead costs.
  • Period costs are all selling and administrative costs.
  • For a service company, all costs are period costs.
  • For a merchandising company, costs are classified as product and period costs. Costs of goods sold are calculated using cost of goods manufactured rather than purchases.
  • The cost of goods manufactured (COGM) schedule calculates the cost of raw materials, direct labor and manufacturing overhead used during a period.

Cost of Goods Manufactured

  • The manufacturing costs for finished goods during a period are calculated.
  • The COGM Schedule calculates the cost of raw material, direct labor, and manufacturing overhead.
  • Beginning work-in-process cost is added.
  • Ending work-in-process cost is subtracted.
  • Formula: Cost of Goods Manufactured = Direct Materials Cost + Direct Labour Cost + Manufacturing Overhead Cost + Beginning Work-in-Process Cost - Ending Work-in-Process Cost

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