Chapter 2 Cost terms, Concepts and Classifications.docx

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Accounting & Financial Management
AFM 102
Tom Vance

02 – Cost Terms, Concepts, andClassifications Chapter 2: Cost Terms, Concepts, & Classifications General Cost Classifications Manufacturing Costs  direct materials  materials that become an vital part of a finished good and can be conveniently traced to it  raw materials: any materials that go into the final product  indirect materials (small items of materials like glue) are raw materials, but treated as overhead costs  direct labour  factory labour costs that can be traced easily to individual units of production  touch labour (direct labour workers typically touch the product)  indirect labour (cannot be physically traced to the creation of products) are treated as overhead costs  manufacturing overhead  all costs associated with manufacturing except direct materials and direct labour  indirect materials: indirect labour, maintenance on production equipment, insurance on manufacturing facilities, heat & light, etc  only costs associated with operating the factory are included  conversion cost: direct labour + overhead cost  prime cost: direct materials + direct labour cost Labour Costs  indirect labour cost: labour costs of factory workers who cannot be conveniently traced directly to particular products  idle time cost  charged to overhead if the costs were general to production  charged to direct labour if the costs were from a specific job  overtime premium: the extra hourly wage rate paid to workers who must work above their normal requirements  employer benefits costs  for indirect labour: indirect overhead  for direct labour: added to the base direct labour rate to specifically follow the direct labour costs on which they are based Non-Manufacturing Costs  marketing/selling costs  all costs needed to secure customer orders and get the finished product/service to the customer  order-getting: advertising, sales travel, sales salaries  order-filling: shipping, sales commissions, cost of finished goods warehouses  administrative costs  all executive, organizational, and clerical costs associated with the general management of an organization rather than with manufacturing, marketing, or selling  executive compensation, general accounting, public relations ProductVs. PeriodCosts Product Costs  all costs that are involved in the purchase or manufacture of goods (direct material, direct labour, and overhead costs)  inventoriable costs  initially, product costs are assigned to an inventory account on the balance sheet page 1 of 5 02 – Cost Terms, Concepts, andClassifications  when the goods are sold, the costs are related from inventory as expenses (cost of goods sold)  no necessarily treated as expenses in the period in which they are incurred  treated as expenses in which the related products are sold Period Costs  taken directly to the income statement as expenses in the period in which they are incurred/accrued (selling and administrative expenses)  all costs that are not included in product costs  non-manufacturing costs Summary Direct marketing or materials prime cost Non- selling costs manufacturing Manufacturing Direct labour costs Costs administrative conversion costs Manufacutring cost overhead Cost Classificationon Financial Statements The Balance Sheet  three classes of inventory  raw materials (RM) : the materials that are used to make a product  work in progress (WIP) : units of product that are only partially complete and will require further work before they are ready for sale to a customer  finished goods (FG) : units of product that have been completed but have not yet been sold total inventory accounts: work in progress finished goods total inventory accounts. The Income Statement  basic equation for inventory accounts  beginning balance + additions to inventory = ending balance + withdrawals from inventory  cost of goods manufactured: manufacturing costs associated with the goods that were finished during the period cost of goods sold:
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