MGM222H5 Lecture Notes - Lecture 2: Finished Good, Income Statement
MGM222-LEC
Manufacturing costs
- Consists of activities to convert raw materials into finished goods
Manufacturing costs- direct materials
- Raw materials and parts used in manufacturing
- Physically and directly associated with the finished products
Manufacturing costs- direct labor
- Work of factory employees that can be physically and directly associated wih converting
raw materials into finished goods
- Ex)
o Bottlers at Coca-Cola
o Bakers at Sara lee
Manufacturing costs- manufacturing overhead
- Are indirectly associated with manufacturing of finished goods
- Examples:
o Indirect materials
▪ Dot become physically part of finished goods
▪ Not traceable in terms of costs
o Indirect labor
▪ Managers who are managing the facilities
▪ Supervisors/ cleaners/ security guards
o Amortization on manufacturing factories/ facilities
Manufacturing overhead-indirect materials
- Raw materials that cannot be easily associated with the finished product
o Lubricants
o Cleaning supplies
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o Polishing compounds
Indirect labor
Prime costs and conversion costs
- Prime
o The sum of all direct materials costs and direct labor costs
o All direct manufacturing costs
o DM + DL
- Conversion
o The sum of all direct labor and manufacturing overhead costs
o All are the costs of converting raw materials into a final product
o Converting raw materials to finished goods
o DL + MOH
Review question
- Elements of manufacturing overhead
o Sales manager’s salary (NO)
o Plant manager’s salary
o Factory repairman’s wages
o Product inspector’s salary
Cost behavior analysis
- Variable
o Vary in total directly and proportionately with changes in the activity level
- Fixed
o Remains the same
o As Q increases, unit cost declines and vice versa
- Mixed
o Fixed + variable
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Document Summary
Consists of activities to convert raw materials into finished goods. Raw materials and parts used in manufacturing. Physically and directly associated with the finished products. Work of factory employees that can be physically and directly associated wih converting raw materials into finished goods. Ex: bottlers at coca-cola, bakers at sara lee. Are indirectly associated with manufacturing of finished goods. Indirect materials: dot become physically part of finished goods, not traceable in terms of costs. Indirect labor: managers who are managing the facilities, supervisors/ cleaners/ security guards, amortization on manufacturing factories/ facilities. Raw materials that cannot be easily associated with the finished product: lubricants, cleaning supplies, polishing compounds. Prime: the sum of all direct materials costs and direct labor costs, all direct manufacturing costs, dm + dl. Conversion: the sum of all direct labor and manufacturing overhead costs, all are the costs of converting raw materials into a final product, converting raw materials to finished goods, dl + moh.
