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Questions and Answers
The cost of fire insurance for a manufacturing plant is generally considered to be product costs.
The cost of fire insurance for a manufacturing plant is generally considered to be product costs.
True
In a manufacturing firm, depreciation is always considered a product cost for external financial reporting purposes.
In a manufacturing firm, depreciation is always considered a product cost for external financial reporting purposes.
False
In external financial reports, factory utilities costs may be included in an asset account on the balance sheet at the end period.
In external financial reports, factory utilities costs may be included in an asset account on the balance sheet at the end period.
True
Advertising costs are considered product costs for external financial reports since they are incurred in order to promote specific products.
Advertising costs are considered product costs for external financial reports since they are incurred in order to promote specific products.
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Property taxes and insurance premiums paid on a factory building are examples of manufacturing overhead.
Property taxes and insurance premiums paid on a factory building are examples of manufacturing overhead.
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Manufacturing overhead combined with direct materials is known as conversion cost.
Manufacturing overhead combined with direct materials is known as conversion cost.
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If the ending inventory of finished goods is understated, net income will be overstated.
If the ending inventory of finished goods is understated, net income will be overstated.
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In a manufacturing company, goods available for sale equals the sum of the cost of goods manufactured and the beginning finished goods inventory.
In a manufacturing company, goods available for sale equals the sum of the cost of goods manufactured and the beginning finished goods inventory.
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Transportation costs incurred by a manufacturing company to ship its product to its customers would be classified as Period Costs.
Transportation costs incurred by a manufacturing company to ship its product to its customers would be classified as Period Costs.
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The wages of factory maintenance personnel are classified as Indirect Labor.
The wages of factory maintenance personnel are classified as Indirect Labor.
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Manufacturing overhead consists of all manufacturing costs, EXCEPT direct materials and direct labour.
Manufacturing overhead consists of all manufacturing costs, EXCEPT direct materials and direct labour.
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Idle time for direct labor should be included as part of manufacturing overhead.
Idle time for direct labor should be included as part of manufacturing overhead.
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If the cost of goods sold is greater than the cost of goods manufactured, finished goods inventory has decreased during the period.
If the cost of goods sold is greater than the cost of goods manufactured, finished goods inventory has decreased during the period.
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If 10,500 units are manufactured next month, total variable costs will remain unchanged.
If 10,500 units are manufactured next month, total variable costs will remain unchanged.
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Variable cost remains constant on a per unit basis as the number of units produced increases.
Variable cost remains constant on a per unit basis as the number of units produced increases.
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Total cost per unit will decrease if more units are manufactured without a change in fixed costs.
Total cost per unit will decrease if more units are manufactured without a change in fixed costs.
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If the cost of goods manufactured is greater than the cost of goods sold, then finished goods inventory has increased during the period.
If the cost of goods manufactured is greater than the cost of goods sold, then finished goods inventory has increased during the period.
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Expressing fixed costs on a per unit basis is always the best approach for decision making.
Expressing fixed costs on a per unit basis is always the best approach for decision making.
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The benefit forgone by selecting one alternative instead of another best defines an opportunity cost.
The benefit forgone by selecting one alternative instead of another best defines an opportunity cost.
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Sunk costs are often important in decision making and included in conventional accounting records.
Sunk costs are often important in decision making and included in conventional accounting records.
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The cost of goods manufactured for Green Company in August was $132,000.
The cost of goods manufactured for Green Company in August was $132,000.
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A prepaid insurance premium that covers three years is analyzed as a fixed cost.
A prepaid insurance premium that covers three years is analyzed as a fixed cost.
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Fixed costs will change inversely with changes in activity.
Fixed costs will change inversely with changes in activity.
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Indirect costs are often omitted from conventional accounting records for decision making.
Indirect costs are often omitted from conventional accounting records for decision making.
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Product cost can be $6,160 and period cost can be $540 in the first year of coverage.
Product cost can be $6,160 and period cost can be $540 in the first year of coverage.
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The beginning work in process inventory is $55.
The beginning work in process inventory is $55.
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The total for direct labour must be $36,000 given the manufacturing overhead and raw materials inventory.
The total for direct labour must be $36,000 given the manufacturing overhead and raw materials inventory.
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Direct materials amount to $38,000 and represent the beginning work in process inventory.
Direct materials amount to $38,000 and represent the beginning work in process inventory.
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The cost of goods manufactured of Reardon Company is $40,500.
The cost of goods manufactured of Reardon Company is $40,500.
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The period cost for the first year can be $0.
The period cost for the first year can be $0.
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The ending work in process inventory is $11,000, which is equal to the beginning work in process inventory.
The ending work in process inventory is $11,000, which is equal to the beginning work in process inventory.
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The finished goods inventory increase of $1,500 affects the overall cost of goods manufactured.
The finished goods inventory increase of $1,500 affects the overall cost of goods manufactured.
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Study Notes
Product Costs
- Fire insurance for a manufacturing plant is a product cost.
- Depreciation for a manufacturing firm is considered a product cost for external financial reporting.
- Factory utilities costs are not included in an asset account on the balance sheet, they are reported as an expense.
- Advertising costs are period costs and NOT product costs, as they are incurred to promote the business, not the product.
- Property taxes and insurance premiums paid for a factory building are manufacturing overhead costs.
- Manufacturing overhead combined with direct labor is called conversion costs.
- If the ending inventory of finished goods is understated, net income will be overstated.
- In a manufacturing company, goods available for sale equals the sum of the cost of goods manufactured and the beginning finished goods inventory.
Cost Classifications
- Variable costs are costs whose per unit costs vary as the activity level rises and falls.
- Fixed costs vary inversely with the level of activity on a per unit basis.
- Rent is a product cost, but not a prime cost.
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Period costs are costs that are not related to the production of goods, such as:
- Salaries of administrative personnel.
- General accounting office costs.
- Sales commissions.
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Product costs are associated with the creation of a product and are included in inventory. Examples of product costs include:
- Costs of a warehouse used to store finished goods.
- Costs of sand spread on the factory floor to absorb oil from manufacturing machines.
- Transportation costs incurred by a manufacturing company to ship its product to its customers are period costs.
- The wages of factory maintenance personnel are indirect labor and manufacturing overhead.
Manufacturing Overhead
- Manufacturing overhead costs are used to create a product but cannot be directly traced to the product.
- Overhead includes examples like:
- Indirect materials
- Indirect labor
- Manufacturing equipment depreciation.
- Idle time for direct labor.
- Taxes on a factory building.
Cost of Goods Manufactured
- Cost of Goods Manufactured (COGM) is the total cost of goods completed during the period.
- If COGM is greater than the cost of goods sold, the finished goods inventory has increased during the period.
- Total manufacturing costs are greater than the cost of goods manufactured only if beginning Work-in-Process Inventory exceeds ending work-in-process inventory.
Variable Cost Behavior
- Total variable cost changes in direct proportion to changes in activity level.
- Variable costs per unit remain constant as activity changes.
Fixed Cost Behavior
- Total fixed cost remains constant within the relevant range.
- Fixed costs per unit change inversely with changes in activity.
- Accountants often use the concept of the relevant range when assuming the behavior of fixed costs.
Opportunity Cost
- Opportunity cost is the potential benefit lost by choosing one alternative over another. This is often an important cost to consider in decision making.
Sunk Cost
- Sunk costs cannot be changed by current or future decisions.
Calculating Cost of Goods Manufactured
- The formula for calculating Cost of Goods Manufactured (COGM) is:
- Beginning Work in Process Inventory + Direct Materials Used + Direct Labor + Manufacturing Overhead = Cost of Goods Manufactured - Ending Work in Process Inventory = Cost of Goods Manufactured
- Example 25 Calculation:*
- Direct Materials : $27,000.00
- Direct Labor: $34,000.00
- Indirect Labor: $10,000.00
- Indirect Materials: $15,000.00
- Taxes on Manufacturing Facility: $2,000.00
- Rent Factory: $17,000.00
- Total Manufacturing Costs: $105,000.00
- Beginning Work in Process: $16,000.00
- Ending Work in Process: $9,000.00
- COGM: $105,000 + $16,000 - $9,000 = $112,000.00
Period Costs
- When a company prepays insurance for multiple years, the portion of the premium that applies to manufacturing operations is considered a product cost. The portion that applies to selling and administrative activities is a period cost.
- Example 26 Calculations:*
- Three-Year Premium: $2,700.00
- Manufacturing portion: $2,700 x 80% = $2,160.00
- Selling and Administrative portion: $2,700 x 20% = $540.00
Beginning Work in Process
- To find the beginning work in process inventory, follow the formula:
- Beginning Work in Process + Direct Materials + Direct Labor + Manufacturing Overhead - Ending Work in Process = Cost of Goods Manufactured
- Example 27 Calculations:*
- Cost of Goods Manufactured: $80.00
- Direct Materials: $15.00
- Direct Labor: $20.00
- Manufacturing Overhead: $30.00
- Ending Work in Process: $10.00
- Beginning Work in Process: $80.00 - $15.00 - $20.00 - $30.00 + $10.00 = $25.00
Direct Labor Calculation
- The formula to calculate Direct Labor is:
- Total Manufacturing Costs - Raw Materials Used - Manufacturing Overhead = Direct Labor
- Example 28 Calculations:*
- Total Manufacturing Costs: $106,000.00
- Raw Materials Used: $43,000.00 - $8,000.00 + $6,000.00 = $41,000.00
- Manufacturing Overhead: $27,000.00
- Direct Labor: $106,000 - $41,000 - $27,000 = $38,000.00
Beginning Work in Process Inventory
- To calculate the beginning work in process inventory, use the formula
- Beginning Work in Process + Direct Materials Used + Direct Labor + Manufacturing Overhead - Ending Work in Process = Cost of Goods Manufactured.
- Example 29 Calculations*
- Direct Materials: $38,000.00
- Direct Labor: $24,000.00
- Manufacturing Overhead: $17,000.00
- Ending Work in Process Inventory: $11,000.00
- Beginning Work in Process Inventory: $38,000 + $24,000 + $17,000 - $11,000 = $68,000
Cost of Goods Manufactured
-
To calculate the cost of goods manufactured, use the formula:
- Beginning Work in Process + Direct Materials Used + Direct Labor + Overhead = Cost of Goods Manufactured
-
Example 30 Calculations*
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Direct Labor: $17,000
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Overhead: $8,500
-
Raw Materials Used: $15,000 - $2,000 = $13,000
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Beginning Work in Process: $3,000
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Ending Work in Process: -$3,000
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COGM: $13,000 + $17,000 + $8,500 + $3,000 - $3,000 = $41,500
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Description
Test your knowledge on product costs and cost classifications for manufacturing firms. This quiz covers key concepts such as variable costs, manufacturing overhead, and product versus period costs. Enhance your understanding of how these costs impact financial reporting.
