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Flashcards in Cost Measurement - Manufacturing Costs Deck (14):

Three Factors of Production - Manufacturing cost split

1) Direct Material
2) Diret Labor
3) Manufacturing Overhead


Prime Costs

Direct material costs plus direct labor costs


Conversion Costs

Direct labor costs plus overhead costs

& necessary to convert products into finished product


Two fundamental cost classifications exist in within a manufacturing organization

1) product costs - Associated with production of specific revenues (cog). Generally teach to physical product units that are expensed in period the goods are sold. Known as inventorial costs or manufacturing costs

2) period costs - Cannot be matched with specific revenues and are expensed in period incurred - Selling and Administrative costs


Direct Material (manuf)

Cost of signifiant raw materials and components directly incorporated in finished product


Direct Labor (manuf)

Wages and salaries paid for work that directly converts raw materials into a finished product.


Factory Overhead (manuf)

Cost of indirect labor and other manufacturing costs other than direct material and direct labor; are not easily traceable to finished product (electricity to run factor, depreciation of factory and equip)

1) Can be variable or fixed
2) In highly automated manufacturing environments, direct labor costs are frequently so insignificant that they are added to factory overhead costs


Direct costs and indirect costs

Classification looks at behavior of the cost in regards to how it is traced to product

Direct costs - Costs that can be traded to specific units of production; direct materials incorporated into product and direct labor is comprised of solar cost of workers who make product

Indirect costs - (manufacturing overhead) - Necessary costs that cannot be easily associated with specific units


Prime costs and conversion costs

Overlapping cost classifications. Prime costs are direct labor and direct materials, conversion costs are direct labor and manufacturing overhead.

Direct labor is included as a prime cost and as a conversion cost. This overlap in classifications is likely to be tested on the exam.


Value-added costs and Nonvalue-added costs

1) Value-added costs - Product costs that enhance value of product in eyes of consumer. Most direct costs are value-added costs.

2)Nonvalue-added costs - Costs that could be eliminated without deterioration of product quality, performance, or perceived value to consumer. Most, not all, overhead costs are nonvalue-added costs


Other Manufacturing Costs

1) Marginal Cost or Revenue - Additional cost or revenue result from one more unit of output
2)Accounting cost - explicit costs "accounted for" typically as evidenced by an entry in a fundamental book or accounting record
3) Average fixed cost - decreases as volume increases
4) Average variable cost - increases as volume increases
5) committed cost - cannot be avoided in current account time period
6) discretionary cost - may or may not be included in the budget and can be considered avoidable as determined by a decision maker with authority to do so


Overhead allocation

Direct materials and direct labor are tried to WIP, but overhead must be allocated to WIP. Since it is not traceable to specific unit, an estimated overhead amount is applied to production based on predetermined rate. Actual overhead accumulated separately; at end of period to are compared and adjustment entry made

A) Predetermined overhead application rate - First step in applying overhead to WIP is to calculate rate that will be used to apply overhead to production. Based on estimated overhead amount / estimated allocation base amount (machine hours).

Estimated total overhead costs/ estimated activity volume
^ results in overhead allocation rate - established prior to beginning of period

***Estimated amounts based on currently attainable capacity are always used for this formula— not historical, ideal, or theoretical amounts.

B) Applied overhead - Amount of estimated overhead charged to production; calculated by multiplying predetermined overhead rate by actual number of units used in production;

Applied overhead is included in cost of WIP with this entry:
CR: Factory Overhead Applied

C) Actual overhead -
DR: Factory Overhead Control Utilities Expense
CR: Accounts Payable

D) Closing out overhead accounts - At end of period, control account and applied account are closed out

a. Immaterial differences between the two amounts are usually allocated to Cost of Goods Sold;
b. If the difference is material, it should be prorated to Work-in-Process, Finished Goods, and Cost of Goods Sold based on their respective ending balances.


Summary of Overhead Application

3 steps to allocation:

1) Beginning of year - calculate predetermined overhead allocation rate (POR)

2) During year - allocate overhead by multiplying POR by actual units of allocation base

3) End of year - dispose of over/under applied overhead by taking difference and applying to COG


Additional Point

Make sure that you know which type of overhead to use in these calculations and when to use them. There are three different types—estimated, applied, and actual

The terms "budgeted" and "estimated" mean the same thing. Also, the terms "allocated" and "applied" mean the same thing

Product cost "go where product goes" if in inventory they are asset

Factory Overhead Applied represents the total amount of overhead applied to production using the predetermined overhead rate.

Factory Overhead Control (note: NOT Factory Overhead Control Expense) represents the total of actual overhead costs during the period.

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