Inventory Costing Overview

Study Notes

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.

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.