Module 5 Flashcards
(25 cards)
For manufacturing facilities, we split the costs in two:
1) Manufacturing costs - materials, labours, and other costs related to producing the product
2) Non-manufacturing costs - selling costs and general health and admin costs
Provide examples of manufacturing costs and non-manufacturing costs:
1) Manufacturing costs:
- Raw potatoes, salt, packaging materials, electricity to operate the machinery, the labour to run the machinery
2) Non-manufacturing costs:
- the cost to ship the chips, sales person’s commissions, sales person commissions, the cost of HR and Accounting departments
Most manufacturing operations separate manufacturing costs into three costs:
1) Direct material
2) Direct labour
3) Manufacturing overhead
What is direct material:
is any material that forms a critical component of the finished product
- May be raw or processed and, depending on the company, may even be the finished product of another company
- must be easily traceable to the finished product
What is direct labour and indirect labour?
> any labour that can be directly attributed and easily traced to the finished product
- Labour that comes into physical contact with the product such as assembly line workers or pickers in a warehouse
- labour that does not come into direct contact with the finished product, i.e. supervisors or custodians, are indirect labour costs
What is manufacturing overhead?
> includes all manufacturing costs not considered as either direct material or direct labour
indirect material
indirect labour
insurance for the factory
utility costs for the factory
What are selling and administrative costs?
> non-manufacturing costs are incurred to market and sell the product as well as operate the administrative part of the company
- research and development
- advertising
- accounting salaries
- human resources dept
> appear as completely seperate items on financial statements
When do you expense costs that manufacture our product? How do we manage it?
> until we actually sell the product
> we store all the costs in inventory (balance sheet) and use a calculation called cost of goods sold to get them back on the income statement
Costs of goods sold is:
> the value of the goods sold during the period. It is deducted from the revenue generated from the sale of those goods to arrive at gross profit
> beginning inventory + cost of goods manufactured - ending inventory = cost of goods sold
How are goods that have been produced (or in the process) but are not yet sold sit on the balance sheet?
> sit as inventory (an asset) on the balance sheet
A true manufacturing company may have three inventory accounts for each finished product it produces:
1) Raw material - unprocessed or process material that is used at the very beginning of the production process, it is critical and easily traceable to the manufacturing of the finished product.
2) Work in process - raw material that is partially completed and still requires additional processing or Work before it is ready for sale to customer.
3) Finished goods - goods that I’ve gone through the complete production process and are ready for sale.
Types of cost and when expensed for manufacturing costs:
1) Direct Material
2) Direct Labour
3) Manufacturing overhead
- expensed when goods are sole
Types of cost and when expensed for non - manufacturing costs:
> selling costs
general and admin
- expensed in the period in which they are incurred.
Cost that is incurred to manufacture a product that will eventually be sold should be recognized as an expense only when:
> the product is eventually sold and the revenue is recognized.
What happens to cost incurred to manufactured product if they are not expensive and the period that they are incurred?
> called product costs and are treated as part of the inventory balance sheet
when the product is sold, these costs will be expensed to the income statement through the costs of goods sold.
Understanding cost behaviour means:
> understanding how cost changes in relation to production activity levels
When are costs fixed and variable as a rule?
> As a rule, direct materials and direct labour are always variable.
> Manufacturing overhead can either be fixed Robert able, depending on the nature of the cost.
What are fixed costs?
> fixed costs remain the same, regardless of the level of production.
What are variable costs?
> variable cost change will change as the level of production changes.
Can costs be a mixture of fixed or varaible?
> Yes, example electricity can be fixed (based cost) but can increase with sales and more production
While fixed costs stay the same regardless of the level of production, when do they decrease?
> they will decrease on a per unit basis as production level increases.
> remain the same when they remain within the capacity of the cost
As production levels change, variable expenses will change:
> in the same direction:
i.e. increase production levels, increase variable expenses.
Are variable costs constant?
> are constant on a per unit basis.
What are four reasons that firms allocate cost:
1) To provide info for decision making
2) To reduce frivolous use of common resources
3) to encourage eval of internally providing services
4) to calculate “full cost” of products for financial and managerial reporting
