Inventory Costing Overview

Inventory Costing

• Work in Process Inventory (WIP): Represents work still in progress, raw materials put into production, and the application of overhead costs.
• Finished Goods Inventory: Completed items that have been transferred from WIP.
• Direct vs. Indirect Costs: Direct costs are easily traced to a cost object, while indirect costs are not. Controllability and variability are not definitive characteristics for distinctions between direct and indirect costs.
• Cost Object: An item or activity to which costs are assigned.
• Manufacturing Companies: Have work in process, direct materials, and finished goods inventory accounts.
• Merchandising Companies: Only have finished goods inventory.
• Job Order Costing: Uses the job as the cost accumulation focus—each job is unique.
• Process Costing: Used for many batches that are similar, averaging costs across multiple units.
• Cost Drivers: The basis for overhead allocation in job order costing.
• Overhead Allocation: Can be based on various factors in different costing methods, like direct labor hours.

Manufacturing Overhead Costs

• Typical Manufacturing Overhead Costs: Indirect materials (lubricants), labor in support departments (supervisor salries).
• Job Order Costing limitations Cannot use an average cost per finished unit for all jobs.
• Administrative vs. Factory Overhead: Indirect materials and factory supplies are considered factory overhead, not administrative expenses.
• Factory Foreman Salary: Classified as factory overhead.
• Finished Products vs. Materials: Lumber can be both a finished product and a material.
• Types of Companies: Google is a service company and not a merchandising company.
• Cost Classifications: Marketing, selling, and administrative costs are not conversion costs in a manufacturing company. A conversion costs include all direct manufacturing costs.