Chapter 3 and 4 Accounting Module

3 Pages

Management and Organizational Studies
Course Code
Management and Organizational Studies 1023A/B
Maria Ferraro

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MOS- Cost Flows and Cost Terminology PRODUCTIONAND PERIOD COSTS • income statement must separate product costs from period costs product costs- associated with getting products or services ready for sale • • these costs relate directly to primary business functions, include salaries, depreciation, utility costs, equipment maintenance and supply • always appear above the line for gross margin • gross margin- revenues less product costs • period costs- do not directly relate to readying products or services for sale, include rent, advertising, customer services • period costs, which are all costs that are not product costs, always appear below the line for gross margin COST FLOWS IN SERVICE ORGANIZATIONS • service firms- offer products that are not tangible or storable • service firms make their facilities available to others for a fee • financial accounting statements provide limited information about opportunity costs • use non-financial data to estimate the controllable costs and benefits of a decision option • financial accounting income statement combines controllable costs with non-controllable costs and fixed costs with variable costs COST FLOWS IN MERCHANDISING ORGANIZATIONS • merchandising firms- buy goods from suppliers and resell substantially the same products to customers maintain an inventory of goods that they buy and sell • • use this inventory to make goods available in the quantities and varieties, as well as on the delivery schedules, demanded by customers INVENTORY EQUATION • merchandising firms need to distinguish the cost of goods purchases form the cost of goods sold • merchandiser buys and stores some items cost of this merchandise flows through the inventory account, becoming part of cost of goods sold, only when the firm sells the items • cost of beginning inventory+ cost of goods purchased during the period - cost of ending inventory = COGS for the period • retail firms often buy several batches of an items at different times and different prices, therefore have several layers of inventory • at time of sale, it becomes necessary to determine which batch or layer the items belong to, in order to use the corresponding prices to calculate the cost of sales • achieve this by making inventory cost flow assumptions such as first-in-first out (FIFO) or weighted average INCOME STATEMENT • except for the inventory account the cost flows in merchandising firms resemble the flows for service firms • two main cost categories are the costs incurred to obtain and prepare the goods for sale (product costs) and the costs associated with sales and administration (period costs) • cost of purchasing goods form suppliers includes amounts paid to suppliers and the cost of transportation and the cost of preparing goods for sale COST FLOWS IN MANUFACTURING ORGANIZATIONS • manufacturing firms- use labour and equipment to transform inputs such as raw materials and components into outputs (final product) have inventories of raw materials and components, partly finished items and finished goods • COST TERMINOLOGY • product costs- typical inputs in a manufacturing firm includes materials i.e. steel, leather, canvas and labour, the physical work required to covert materials to a finished product • represent variable manufacturing costs, as expenditures on these items vary proportionally
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