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Chapter 2

Management and Organizational Studies 3370A/B Chapter Notes - Chapter 2: Finished Good, Income Statement, European Cooperation In Science And Technology

Management and Organizational Studies
Course Code
MOS 3370A/B
Barry Hawn

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Chapter 2 Cost Terms, Concepts, and Classifications
Manufacturing Costs
Most manufacturing companies divide manufacturing costs into three broad categories:
direct materials, direct labour, and manufacturing overhead
Direct Materials
o The materials that go into the final product are called raw materials
o E.g. wood pulp, iron beam, car batteries
o Raw materials include both direct and indirect materials
o Direct materials those materials that become an integral part of a finished
product and can be conveniently traced to it
o Indirect materials small items of material that may become an integral part of
a finished product but whose costs of tracing exceed the benefits
E.g. glue used in a pair of running shoes
Direct Labour
o Direct labour those factory labour costs that can be traced easily to individual
units of product
o Indirect labour labour costs that cannot be physically traced to the creation of
products (e.g. janitors, supervisors, materials handlers, security)
Manufacturing Overhead
o Manufacturing overhead all costs associated with manufacturing except direct
materials and direct labour
o E.g. indirect materials, indirect labour, maintenance, repairs of production
equipment, heat or lighting, depreciation of factory, property taxes, rent,
Conversion cost direct labour cost plus manufacturing overhead cost
o Conversion cost is taking the material and “converting” it into a product
Prime cost direct materials cost plus direct labour cost
Classification of Manufacturing Labour Costs
Overtime premiums the extra hourly wage rate paid to workers who must work more
than their normal time requirements
Non-Manufacturing Costs
These costs are generally divided into two categories: (1) marketing or selling costs and
(2) administrative costs
Marketing or selling costs all costs necessary to secure customer orders and get the
finished product or service to the customer
o Also called “order getting and order filling costs”
o Order getting costs are advertising, sales travel, and sales salaries or commissions
o Order filling costs are packing, shopping, and the costs of finished goods
Administrative costs all executive, organizational, and clerical costs associated with
the general management of an organization rather than with manufacturing, marketing, or
o E.g. executive compensation, accounting, human resource, public relations
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Product Costs
Product cost all costs that are involved in the purchase or manufacture of goods
These consist of direct materials, direct labour, and manufacturing overhead
These costs are expensed when you actually sell the product
Also called inventoriable costs
o This is because these costs go directly into inventory accounts as they are incurred
rather than going to expense accounts
o Meaning products sit in inventory until sold
Product costs are initially assigned to an inventory account on the balance sheet
When the goods are sold, the costs are released from inventory as expenses
o Called cost of goods sold (COGS)
Period Costs
Period costs all costs that are expensed on the income statement in the period in which
they are incurred or accrued
E.g. selling/marketing and administrative expenses
Non-manufacturing costs are period costs
Balance Sheet
The key difference between a balance sheet of a merchandising company versus a
manufacturing company is inventory accounts
o Merchandising companies have one inventory account goods purchased from
suppliers that are awaiting resale to customers
o Manufacturing companies have three inventory accounts raw (direct) materials,
direct labour, and manufacturing overhead
Raw Materials Inventory materials used to make product that have not yet been placed
in production
Work in Progress Inventory inventory consisting of units of product that are only
partially complete and will require further work before they are ready for sale to a
Finished Goods Inventory inventory consisting of units of product that have been
completed but have not yet been sold to customers
Types of Inventories
Manufacturing company
o Direct materials inventory
o Work in progress inventory
o Finished goods inventory
Merchandising company
o Finished goods inventory
Income Statement
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