Topic 4: Cost Flows

Question 1

How do service businesses, merchandising businesses, and manufacturing businesses differ in what shows up on the balance sheet?

Answer 1

-Service businesses don’t carry inventory on the balance sheet.
-Merchandising businesses carry merchandise inventory on the balance sheet. That is the unsold items.
-Manufacturing businesses have raw materials, work in process, and finished goods.
-Work in progress occurs when we already began producing the products by using direct materials, direct labour, and manufacturing overhead(could be variable costs or fixed costs).

Question 2

How do service businesses, merchandising businesses, and manufacturing businesses differ in what shows up on the income statement?

Answer 2

-Service companies carry no product costs, they only have operating expenses (period costs).
-Merchandising companies have product costs, which are represented as cost of goods sold, and operating expenses (period costs.)
-Manufacturing companies have product costs which are cost of goods manufacturing, and cost of goods sold. They also have operating expenses (period costs).

Question 3

How do you find ending inventory?

Answer 3

Ending inventory=Beginning Inventory+Total Direct Materials Purchased-Direct Materials Used

Question 4

Within raw materials, which components equal one another?

Answer 4

Total Direct Materials Purchased+Beginning Inventory=Direct Materials Used+Ending Inventory

Question 5

Within work in process, which components equal one another?

Answer 5

Current Manufacturing Costs(includes DM used, DL, and Manufacturing Overhead)+Beginning Inventory=Cost of Goods Manufactured+Ending Inventory

Question 6

Within finished goods, what components equal one another

Answer 6

Cost of Goods Manufactured+Beginning Inventory (Finished Goods)=Cost of Goods Sold+Ending Inventory (Finished Goods)

Question 7

What is the difference between prime costs and conversion costs?

Answer 7

-Prime costs are the direct costs that are directly traceable to the product being manufactured. Prime costs=Direct Materials+Direct Labour.
-Conversion costs are the costs needed to convert raw materials into finished goods. Conversion Costs=Direct Labour+Manufacturing Overhead.
-Manufacturing overhead includes indirect costs related to production such as factory rent, utilities, equipment depreciation, indirect materials, and indirect labour.

Question 8

Which items included on the income statement or balance sheet are considered manufacturing costs, prime costs, and conversion costs.

Answer 8

-Manufacturing (Product or Inventoriable) Costs can include direct materials, direct labour, or manufacturing overhead.
-Direct materials and direct labour are prime costs.
-Direct labour and manufacturing overhead are conversion costs.

Question 9

Which items are included on the income statement as operating expenses?

Answer 9

Non-manufacturing (period) costs are included on the income statement as operating (period) costs