Chapter Two – Managerial Accounting
- Cost is used in many different ways
- To carry out the main functions: planning, motivation/directing, and control, managers need
information – which ties to COSTS
General Cost Classifications
- Focus is on manufacturing companies
Manufacturing Costs
- Three categories: direct materials, direct labour, and manufacturing overhead
- Direct Materials:
o Materials going into final product = raw materials (any materials used in the final
product and finished product of one company can become raw materials of another)
Ex. Car batteries is raw material for BMW
o Can include both direct and indirect materials
Direct materials: integral part of the finished product and is traceable
Indirect Materials: (ex. Glue used in shoes) are included in manufacturing
overhead as a result
NOT TREATED AS DIRECT MATERIALS BECAUSE COSTS OF DIRECTLY TRACING
THEM TO FINISHED PRODUCT IS > THAN BENEFITS OF DOING SO
- Direct Labour:
o Labour costs easily *physically and conveniently* traced to individual units of product
o Called touch labour – since direct labour workers typically touch product while it is being
made
Ex. Costs of assembly-line workers at a company
o Labour costs which cannot be physically traced – indirect labour and goes into mfting
overhead along with indirect mtls - - labour costs of janitors, supervisors, materials
handlers, and security guards
o Because of increased automation direct labour averages only about 10% of sales
revenue in many manufacturing industry – minor element of cost
o Still recognized as a separate cost category
- Manufacturing Overhead:
o 3 element of mfting costs, includes all costs of mfting except direct materials and
direct labour
o Includes maintenance and repair on production equipment, depreciation, insurance,
heat and light, INDRIECT MTLS and INDIRECT LABOUR
o ^^regards to this: only costs associated with operating the production facility are in the
manufacturing overhead category o Manufacturing overhead combined with direct labour is called conversion cost stems
from fact that direct labour and overhead costs are incurred to convert materials into
finished products***
o Direct labour with direct materials is called prime cost – which groups two types of
direct costs into one category
Classification of Labour Costs of Manufacturing
- Idle time can be either direct or overhead
o Direct if the time being idle relates to the production process
o Indirect if time being spent idle is waste-mon stuff
- Overtime premium
o Extra hourly wage rate paid to production workers who must work above their normal
time requirements
o A job specific reason would dictate a direct job cost whereas normal overtime cost
resulting from general conditions would dictate an overhead (indirect) charge to all jobs
completed during the peak period
o So if base rate is $20, and overtime = 1.5x, then overtime premium = $10 bucks
- Employee benefits like employment taxes, medical plans, and pension costs are specific % of
base pay
o Benefit costs for indirect labour would obviously be classified as indirect overhead
o But employee costs for direct labour are added to the base direct labour rate in
calculating a total direct labour cost including benefits***
Non-Manufacturing costs
- 2 categories: marketing/selling OR administrative
- Marketing/Selling: all costs necessary to secure customer orders and get the finished product or
service to the customer – called ‘order-getting and order-filling costs’ - advertising, sales travel,
sales commission, and cost of finished of goods
- Administrative: executive, organizational, and clerical costs associated with general
management of an orgs rather than with manufacturing, marketing, or selling - - ex. Exec
compensation, accounting, secretarial costs, etc
Product costs vs period costs
- Matching principle: based on accrual concept and states that costs incurred to generate a
particular revenue should be recognized as expenses in the same period that the revenue is
recognized
- So expense incurred to sell something is recognized at the same time that the product is sold –
this is a PRODUCT COST
Product Costs - All costs involved in acquiring or making product
- Costs for mfting co: cost of direct materials, direct labour, and mftin overhead
- Product costs attach to units of product as goods produce and remain ‘attached’ until good sold
- Taken out as COGS and cr inventory
- Also known as inventoriable costs
- Product costs aren’t necessarily treated as expenses in the period in which they’re incurred;
instead treated as expenses in which the related products are sold – so direct materials may be
incurred as a cost during one period but expensed later when completed product is sold - - thus,
product costs will be present in inventories and COGS
Period costs
- All of the costs that aren’t included in product costs – expensed on income statement in pd in
which they are incurred, using the usual rules of accrual actg
- Not included as part of cost of purchased or mfting goods
- Commissions or advertising aren’t included as part of cost of purchased or mfted goods but
instead treated as expenses on income statement in which they are incurred
- All selling and administrative expenses are considered to be period costs
- SOOO: non-manufacturing costs (both types) = period costs
Side NOTE: ASK YOURSELF FIRST: is it a manufacturing cost or not? - -helps to
classify the sort of cost we’re dealing with
Ex. Delivery can be either selling (under non-manufacturing) OR can be
product cost
Cost classification on financial statements
- F/S prepared by manufacturing and merchandising companies
- By manufacturing: more complex cause the co must account for the production of its goods as
well as marketing for them
o Merchandising co’s simply buy goods from suppliers and resell them to customers
The Balance Sheet
- Merchandising co only has one type of inventory – awaiting for resale (merchandise inventories)
- Manufacturing – three: raw, WIP, and finished goods
- Summary of cost terms*** -
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