Cost Terms, Concepts & Classifications PDF

Cost terms, concepts & classification s Part 1 of 2 Here’s what the chapter talks about The three basic manufacturing cost categories. The difference between product costs and period costs. How to prepare a schedule of cost of goods manufactured. How to prepare an income statement, including t...

Cost terms, concepts & classification s Part 1 of 2 Here’s what the chapter talks about The three basic manufacturing cost categories. The difference between product costs and period costs. How to prepare a schedule of cost of goods manufactured. How to prepare an income statement, including the COGS The differences between variable and fixed costs. The differences between direct and indirect costs. An overview of the cost classifications used in making decisions. We will focus on manufacturing firms Manufacturing fims make the products that they sell. Their operations are the most complex. Costs are crucially important to all enterprises Manufacturin g firms divide their manufacturin g costs into three categories. Category 1: Direct Materials Materials that go into the final product are called raw material. Raw materials could be both direct and indirect. Direct materials are those materials that become an integral part of the product and that can be physically and conveniently traced directly to it. Indirect Materials Indirect materials either: cannot be directly traced to the product, or it is not worth the expense or effort to trace the costs to the end product. Indirect materials are included as part of manufacturing overhead. Category 2: Direct Labour Direct labour consists of labour costs that can be easily traced to individual units of product. Indirect Labour Labour costs that: cannot be physically traced to the individual products, or that can be traced only at significant cost, are called indirect labour Indirect labour is treated as part of manufacturing overhead. Category 3: Manufacturing Overhead Includes all costs of manufacturing other than direct material and direct labour. Examples: Indirect Materials Indirect Labour Factory utilities costs Factory insurance costs Manufacturing cost combinations Prime costs: the total of direct material and direct labour costs Manufacturing cost combinations Conversion costs: the total of direct labour costs and manufacturi ng overhead costs Non-manufacturing costs Marketing or selling costs Costs necessary to get the order and deliver the product. Non-manufacturing costs Administrati ve Costs All executive, organizationa l, and clerical costs. Costs may be classified in other ways as well Product Costs versus Period Costs Costs may be classified in other ways as well Product Costs: Direct materials, direct labour, & manufacturing overhead costs. Period Costs All selling costs & administrative costs. For a service company: All costs are period costs For a merchandising company: Costs are classified as product costs & period costs For a manufacturing company: Costs are classified as product costs & period costs, just as it is for merchandising firms. However, cost of goods sold is computed using cost of goods manufactured instead of purchases. Cost of Goods Manufactured The manufacturing costs associated with goods that were finished during the period. The COGM Schedule calculates the cost of raw material, direct labour and manufacturing overhead used in production during the period. Cost of Goods Manufactured Schedule