Managerial accounting on product costing

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CHAPTER 3
Product Costing:
Manufacturing
Processes, Cost
Terminology, and
Cost Flows
© 2009 Cengage Learning

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Manufacturing, Merchandising
and Service Organizations
Manufacturing: Take raw materials and
produce new products from them.
Merchandising: Retail and wholesale
merchandising companies sell products
that someone else has manufactured.
Service: Provide a service such as
airlines, hospitals, repair shops, law firms,
CPA firms.

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The Production Process
Manufacturing companies
purchase raw materials from
other companies and transform
them into a finished product by
adding labor and other costs,
such as utilities, depreciation or
supplies.

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The Production Process
Inventories in a Traditional Environment
•Raw Materials
•Work-in-Process (WIP)
•Finished Goods
Inventories serve as buffers in case of
unexpected demand for products or
unexpected problems in production.

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The Production Process
Lean production and manufacturing in a JIT
environment
•Lean production
•Is focused on eliminating waste and managing
inventory
•Materials are purchased and products are made
“just in time” to meet customer demand
•Process begins with customer order and
products are “pulled” through the process

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The Production Process
Lean production and JIT
are more than inventory
management tools.
Key Concept

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Product Costs in a Manufacturing
Company
Manufacturing Costs
Costs incurred in the
factory or plant
Nonmanufacturing Costs
Costs that are incurred outside
the plant or factory and
typically categorized as selling
and administrative costs.

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Manufacturing or
Nonmanufacturing?
The key is to think about where in the
process the cost occurs.
If the cost occurs in the factory while
the product is being produced, it is a
manufacturing cost.
If the cost occurs after the product is
produced or outside the
manufacturing area, then it is a
nonmanufacturing cost.

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Direct Materials and Direct
Labor
Direct Materials
Can be directly and conveniently traced to a
particular product and become an integral
part of the finished product
Direct Labor
The labor cost of all production employees
who work directly on the product being
made or service being provided

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Manufacturing
Overhead
•Indirect Material
•Screws and solder
•Indirect Labor
•Janitors, maintenance workers,
supervisors
•Depreciation
•Factory equipment and building
•Repairs and Maintenance
•Rent
•Insurance
•Utilities

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Life-Cycle Costs and the Value
Chain
Research &
Development
Experiment
materials
Staff
Product
Development
Design specs
Staff
Production
Direct
materials
Direct labor
Manufacturing
overhead

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Life-Cycle Costs and the Value
Chain (continued)
Marketing
Advertising
and
promotions
Staff
Distribution
Shipping
costs
Trucks
Drivers
Customer
Service
Call center
personnel
Phone and
computer
equipment

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Cost Flows in a Manufacturing
Company
Direct Materials
+ Direct Labor
+ Manufacturing Overhead
The Cost to Produce the Product
Costs flow in the same way that products
flow through a production facility.
Key Concept

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Cost Flows in a Manufacturing
Company
When the product is sold, the
product costs become:
Cost of Goods Sold

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Cost Flows in a Manufacturing
Company
Raw Materials
Beginning Inventory
+ Purchases
= Cost of Raw Materials Available for
Use
- Ending Inventory
= Raw Materials Used
To Work in
Process

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Cost Flows in a Manufacturing
Company
Work in Process
Beginning Inventory
+ Raw Materials Used
+ Direct Labor
+ Manufacturing Overhead
- Ending Inventory
= Cost of Goods Manufactured
To
Finished
Goods
From Raw
Material
Inventory

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Cost Flows in a Manufacturing
Company
Finished Goods
Beginning Inventory
+ Cost of Goods Manufactured
= Goods Available for Sale
- Ending Inventory
= Cost of Goods Sold
From WIP

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Cost Flows in a Manufacturing
Company
Raw Materials
In Out
Work in Process
In Out
Beginning
Inventory
Purchases
Raw
Materials
Used
Ending
Inventory
Beginning
Inventory
Raw Materials
Used
Direct Labor
Manufacturing
Overhead
Ending
Inventory
Cost of Goods
Manufactured

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Cost Flows in a Manufacturing
Company
Work in Process
In Out
Cost of Goods
Manufactured
Finished Goods
In Out
Cost of Goods Sold
In Out
Beginning
Inventory
CGM
Ending
Inventory
Cost of
Goods
Sold
Cost of
Goods
Sold

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Cost Flows in a Manufacturing
Company, JIT Environment
Direct materials, direct labor and
overhead costs can essentially
be accumulated directly in a
cost of goods sold account

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Merchandising Companies and
the Cost of Products
Beginning Inventory
+ Cost of Goods Purchased
= Cost of Goods Available for Sale
- Ending Inventory
= Cost of Goods Sold
Cost of Goods Sold

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Service Companies and the
Cost of Services
Service Firms
Small amount of direct material
Large amounts of direct labor
Large amounts of overhead
Use Work In Process accounts to accumulate
and track costs for projects not yet complete
at the end of a period

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Product Costs and Period
Costs
Product Costs
Inventoriable costs
Direct materials, direct
labor, overhead costs
Stay with product until the
product is sold
Included in one of three
inventory accounts
Period Costs
Nonmanufacturing costs
Expensed in the period
incurred
Included in selling and
administrative costs

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The Path to the Income
Statement
Direct Materials
Direct Labor
Factory Overhead
Balance Sheet
Inventories
Income
Statement
Period Costs
As products are produced
As products are sold
Every period

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Product Costs and Period Costs
Product costs attach to the product
and are expensed only when the
product is sold, whereas period
costs are expensed in the period in
which they are incurred.
Key Concept