Textbook Notes (369,154)
Canada (162,425)
BUS 254 (50)
Chapter 2

Bus 254 chapter 2 notes.doc

4 Pages
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Department
Business Administration
Course Code
BUS 254
Professor
Arsineh Garabedian

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Manufacturing Costs Direct Material • Raw materials = Any material that go into the final product o A finished good can become the raw material of another product • Direct Material = materials that become an integral part of the finished product o Can be physically and conveniently traced to it o The ones that we can’t traced back (like glue or solder) are considered indirect material Direct Labour • Factory labour costs that can be traced easily to individual units of product o Indirect labour = cannot be traced easily to individuals  Include cost of janitors, supervisors, security guards, etc.  Essential for production but not part of it • Benefits (pensions) for direct labour are added in the direct labour costs Manufacturing Overhead • All costs associated with manufacturing except direct materials and labour o Indirect labour and material, maintainence and repairs, heat and light, property tax, depreciation, and insurance • HAS TO BE ASSOCIATED WITH PRODUCTION (operating the factory) • Conversion Cost = Manufacturing overhead + direct labour cost • Prime Cost = Direct labour + Direct material cost ** Idle time could be part of direct labour or manufacturing overhead depending on how manager allocates it ** ** Same with overtime premiums (usually half of pay X time) ** Non-Manufacturing Costs • Marketing or Selling Costs = all costs necessary to secure customer orders and get finished product or service to customers o Eg: Advertising, sales travel, salaries, commission, shipping, warehouse costs • Administrative Costs = all executive, organizational, and clerical costs (general management) o Eg: Executive compensation, general accounting, adminstration of company Matching Principle = Cost incurred to generate revenue should be expensed in same period as revenue generated Costs that are used to prepare external financial statments: • Product Cost (inventorial cost) = all costs that are involved in acquiring or making a product (Direct material, direct labour, and overhead) o The products created stay in inventory along with their costs until they are sold o NOT TREATED AS EXPENSE UNTIL THEY ARE SOLD • Period Cost = Costs that are directly taken to the income statement as expense (Selling and administrative costs) On the balance sheet: • Manufacturing companies have 3 categories of inventory: raw material, work in process, and finished goods; while merchandising companies only have 1 On the Income Statement: • For merchandising companies: o Cost of goods sold = Beginning inventory + purchases – ending inventory • For Manufacturing Companies: o Cost of goods sold = Beginning finished goods inventory + Cost of goods manufactured – ending finished goods inventory Cost of Goods Manufactured = manufacturing costs associated with the goods that were finished during the period Schedule of Cost of Goods Manufactured • Includes direct material, direct labour, and overhead o For direct materials we have beginning + purchases = raw material available for use, then – ending = raw material used in production  Raw material used in production + direct labour + overhead adds up to the Total Manufacturing Costs (not same as Cost of goods manufactured) o Add in beginning work in process inventory – ending work in process inventory = Cost of goods manufactured Product Costs – FLOW • Raw material purchased  raw material inventory • Once raw material is used in production  direct material, labour, and overhead added to work in process inventory • Once finished  cost of goods manufactured transferred to finished goods inventory • Once goods are sold  cost transfers to cost of goods sold Costs used to predict cost behaviour responding to change in activity: • Cost behaviour = way in which a cost reacts to changes in business activity level • Variable Cost = Cost that varies, in to
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