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MGAB03H3 (55)
Lecture 4

Week 4 - 5 chapter notes

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Financial Accounting
Liang Chen

Chapter 5 Job Costing Notes Product Costs and Cost Flows N product costs are costs involved in making or purchasing a product, and they are called manufacturing, or inventoriable, costs N period costs are the operating costs that are not part of making or purchasing a product, such as sales and admin expenses N service companies provide services or intangible products and thus do not incur product costs and do not have inventory N merchandising companies purchase merchandise for resale as part of business operations; they incur merchandising costs, and they may have leftover inventory, if all merchandise purchased during the period was not sold by end of accounting period N manufacturing companies purchase raw materials and components and process them and make them into finished goods N therefore, manufacturing companies may have leftover inventories in the raw materials account, the work-in-process (partially finished products) account, and the finished goods account at the end of an accounting period N managers in merchandising companies need to prepare the schedule of COGS as a part of preparing the income statement N managers in manufacturing companies need to prepare not only schedule of COGS but also schedule of COG manufactured N what goes into making a product consists of 3 main components: (1) direct materials that become part of a product (cost object), (2) direct labour that includes the wages paid to the operator or assembly workers, and (3) manufacturing overhead, which includes all indirect expenses that go into making the product, such as utilities, machine amortization, plant insurance, maintenance and repair, indirect materials, indirect labour, etc. N direct materials and direct labour combined are referred to as prime cost; direct labour and manufacturing overhead combined are referred to as conversion cost, reflecting the fact that these two costs covert materials into finished goods Product Cost Flows Measuring and Monitoring Product Costs N managers necessarily measure past costs when producing financial statements and other reports of an organizations profits N outsiders, such as shareholders, use profitability to assess management performance and to make investment and other decisions N managers also use past cost information to monitor operations, develop estimated costs for bids, and sometimes make long-term decisions such as whether to introduce a new productfor all these decisions it is important to distinguish costs Assigning Product Costs to Individual Goods or Services N product costs direct and indirect production costs that are assigned to the cost of inventory on the balance sheet and then expensed as part of costs of goods sold when units are sold Process Costing N when goods or services are uniform and are mass produced, tracing costs to individual units is inefficient, if not impossible N process costing method for allocating direct and overhead costs to continuous-flow processing lines; it is approach used for mass-produced products; direct and indirect costs are traced and allocated to production departments, and then allocated to units Job Costing N when goods or services are customized, many costs are easily traced to individual products N job costing process of assigning costs to custom products or services N direct materials and direct labour are traced to individual jobs, and production overhead is allocated Job Costing in Manufacturing Assigning Direct Costs N accounting records are used to trace the costs of direct materials and direct labour to each job N source documents manual or electronic records created to capture and provide information about transactions or events; examples include employee time records and raw material requisitions N the cost and activity information gathered from source documents is used to record costs in a subsidiary ledger for each new job N job cost record manual or electronic record that contains all of the costs traced and allocated to a specific job
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