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An overview of cost classification according to business functions, manufacturing and non-manufacturing costs, the income statement, and cost of goods sold for both manufacturing and merchandising companies. It explains the concept of cost, product costs versus period costs, and inventory flows.
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Cost classification according to business functions Manufacturing and non manufacturing costs The Income Statement The Schedule of cost of goods manufactured The begining and ending work in process The equivalent units of production
To identify the major business functions that add value a company’s products or services.
These activities are generic. Each activity includes specific activities that vary by industry.
Inbound logistics
Operations Outbound logistics
Marketing (^) Service
Administration, Procurement Reseach and Development
Convert raw materials into a product. The company sells the producto either to other companies or to users. Manufacturing includes restaurants and other “service type” companies, as well as automobile or clothes prodution.
Buy finished productos and resell the products to customers. Valuing inventories is easier in a merch. Company
Example: A radio installed in an automobile
Example: Wages paid to automobile assembly workers
Materials used to support the production process. Is not worth to trace the work of insignificant materials to end product (solder, glue…) Examples: lubricants and cleaning supplies used in the automobile assembly plant.
Indirect Materials
Wages paid to employees who are not directly involved in production work. Examples: maintenance workers, janitors and security guards.
Indirect Labor
Costs related to the manufacturing facility. Examples: property taxes, utilities, depreciation, insurance, repairs.
Costs Related to the Manufacturin g Facility
Direct Material
Direct Labor
Manufacturing Overhead
Prime Cost
Conversion Cost
Product costs Period costs
To understand this difference we must go to the matching principle. Based on the accrual concept, it states that costs incurred to generate a particular revenue should be recognized as expensed in the same period that the revenue is recognized.
As products will be sold, then the costs should be recognised as expense only when the sale takes place.
Inventory Cost of Good Sold
Balance Sheet
Income Statement
Sale
Expense
Income Statement
