Manufacturing Costs and Inventory Types

Inventory Types

• Raw Materials Inventory (RM): Materials used to create a product
• Work-in-Progress Inventory (WIP): Goods in the manufacturing process but not complete
• Finished Goods Inventory (FG): Completed goods not yet sold

Costs

• Direct Cost: Cost easily and efficiently traced to a cost object (e.g., flour for a pizza)
• Indirect Cost: Cost not easily or efficiently traced to a cost object (e.g., electricity to bake a pizza)

Manufacturing Costs

• Direct Materials Cost (DM): Raw material costs in production (e.g., cheese)
• Direct Labor Cost (DL): Labor costs in production (e.g., worker salaries)
• Manufacturing Overhead Cost (MOH): Indirect product costs (e.g., salt in pizza, cleaning staff salaries, factory costs, rent, utilities, and insurance)

Prime Costs

• Direct materials and direct labor combined

Conversion Costs

• Direct labor and manufacturing overhead combined

Period Costs

• Non-manufacturing costs (e.g., selling expenses, interest expense, income tax expenses, administrative expenses)

Product Costs

• Manufacturing costs (e.g., direct materials, direct labor, manufacturing overhead)

Equivalent Units of Production (EUP)

• Measures the amount of materials added or work done on partially completed units during a period
• Expressed in terms of fully complete units of output

Production Cost Report

• Calculates physical and cost flows of products in four steps:
  • Summarize physical unit flow
  • Compute output in equivalent units of production (EUP)
  • Compute cost per equivalent unit of production
  • Assign costs to completed and in-progress units

Process Costing

• Figuring out the cost of producing something

Budget Components

• Master Budget Components - Merchandising Company
  • Sales budget
  • Inventory, Purchases, and Cost of Goods Sold budget
  • Selling and Administrative expense budget
  • Operating budget
  • Capital expenditures budget
  • Cash budget
  • Budgeted income statement
  • Budgeted balance sheet
  • Financial budget

Standard Cost System

• Accounting system using standards for product costs (direct materials, direct labor, manufacturing overhead)
• Each input has a cost standard and an efficiency standard

Static Budget

• Prepared for one level of sales volume (based on expected number of units)

Flexible Budget

• Prepared for various sales volume levels within a relevant range
• Useful for what-if analysis

Variances

• Difference between actual and budgeted amounts
  • Favorable (F): When actual costs are less than budgeted costs or revenues are greater than budgeted revenues.
  • Unfavorable (U): When actual costs are more than budgeted costs or revenues are less than budgeted revenues.

Cost Variance

• Measures how well the business keeps unit costs of materials and labor within standards (comparing actual to standard costs).
  • Calculate: (Actual Cost - Standard Cost) * Actual Quantity

Efficiency Variance

• Measures how efficiently the business uses its resources. (comparing actual to standard quantities).
  • Calculate: (Actual Quantity - Standard Quantity) * Standard Cost

Operating Cash Flows (OCF)

• Includes marginal revenues and marginal costs during the investment period

Terminal Cash Flow

• Includes the sale of a fixed asset at the end of an investment project

Types of Cash Flows

• Sunk Costs: Past outlays that cannot be recovered
• Opportunity Costs: Cash flows forgone from using an asset for another alternative