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Lecture 2

SMG AC 222 Lecture 2: AC Notes Chapter 2

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Boston University
SMG AC 222
Greg Sabin

Chapter 2 1. How a Car is Built **Rewatch** a. Made ships during WW1, then Fords cars, and bombers during WWII b. Where Ford invented vertical integration i. Completing multiple levels c. 2,500 parts going into the car d. Building materials lists all the parts in a product and organizes them in a hierarchical order i. Generally, all raw materials: parts used to make final product e. Direct vs. Indirect labor what makes sense for the business defines classification i. If the individual touches the product, they are likely direct labor 1. Direct materials leave with the car 2. Exception is if it is immeasurable (phosphates with Mustang: bought in bulk) ii. Indirect if they are required to support production (even if they touch it) iii. SGA (selling general a) f. Raw materials (can differ) i. A raw material is considered something used to make a final product 1. Steel may be a raw material to someone making stamps, the stamps then become the next departments raw material whose finished product is a car 2. Any inventory you have received but not yet ready to sell ii. WIP (work in progress) is the inbetween. Once something has been touched, it is no longer raw material, it is a work in progress 1. WIP time table is generally 24 hours (for video) 2. It is dependent on the unitperspective you are analyzing. WIP may change if you are a line worker or a CEO 2. Cost a. Cost: A consumption of a resource i. A cost only becomes an expense once it has been used to generate revenues (i.e. once product is sold) ii. Matching principle means you must record costs and expenses in the same accounting period. b. Manufacturing costs are added to WIP in the current period i. Direct Costs 1. Direct costs can be easily traces to the cost object (product) 2. Part of the product, people working directly on the product 3. Traceability is the main factor of direct costs (labor, materials, etc.) 4. Direct materials 5. Direct labor
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