Acct 2302 - Chapter 2 Notes

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Service, Merchandising, and Manufacturing Companies

minimal or no inventory
Service:

Merchandising: one type of inventory

Inventory or merchandise inventory

3 types of stages or intentory

Manufacturing:

Raw materials (RM)

1.
Materials to be used in manufacturing (direct and indirect)
a finished product for one business might be a RM for another

work in progress (WIP)

2.
partially completed goods

finished goods (FG)

3.
copmleted goods ready to sell

Chapter 2 Notes - Page 1 of 8

For external reporting, GAAP requires costs to be classified as Product or Periods costs.

Product Cost:
Cost of obtaining/making inventory

Product costs become an expense when inventory is sold

Merchandiser Product Cost:

merchandiser = cost of merchandise +freight in + customs/duties

(inventory is purchased already complete)

Manufacturer Product Cost (3 product cost categories)

Manufacturer (3 product cost categories):

▪ Direct materials (DM): tracable; "main ingrediants"

▪ Direct labor (DL): tracable; "touch labour"
indirect product cost
▪ Manufacturing overhead:
product cost not DM or DL

MOH is not easily tracable

default manufacturing company

Period Costs:

▪ not treated as inventory cost

▪ expensed as incurred

▪ also known as operating expense or selling general and administrative expenses (SG&A)

Chapter 2 Notes - Page 2 of 8

 Summary of Cost Flows (Manufacturing)

Product Costs

DM Asset Asset Exp

DL WIP FG Cost of goods

sold
MOH * Inventory Inventory

*includes indirect material and indirect labor cost

Period Costs

AKA: Selling, General, Admin straight to the income stmt

expense
or Operating Expenses

Chapter 2 Terms

1. Cost Object
anything for which managers want to know the cost

2. Direct Cost
a cost that can easily be traced to cost objects

3. Indirect Cost
a cost that is not easily traceable "shared costs"
indirect costs are allocated to cost objects

4. Allocation
assigning a cost to a cost object

Chapter 2 Notes - Page 3 of 8

5. A cost can be considered direct or indirect, depending on the cost object.

Cost object: cake made in a bakery

Direct costs: eggs, flour sugar

Indirect costs: electricity, water, rent

6. More on Product vs. Period Costs

Prime costs: DM +DL (Direct Costs)

DL + MOH
Conversion costs:

Are product or period costs "inventoriable?" What does that mean?

▪ product costs

▪ asset until the inventory is sold

▪ (asset on the balance sheet and then expensed on the income statement as cogs)

Chapter 2 Notes - Page 4 of 8

7. Other Cost Terms

Controllable Costs
relatively easy to change in the short terms

Examples: advertising; researching and development

Uncontrollable Costs
difficult to control in the short term

Examples: property tax, insurance on existing facilities

Relevant vs. Irrelevant Costs

Differential Costs:
relative; differs between alternatives

Sunk Costs:
Not relavent

happened in the past therefore cant be changed

Cost Behavior

Fixed Cost
constant in total

Variable Cost
changes in total; constant per unit

Average Cost
decreases per unit as production increases

Fixed costs are spread over more units

Marginal Cost
cost of making one more unit; incramental cost

Chapter 2 Notes - Page 5 of 8

 Chapter 2 Notes - Schedule of COGM Example

Various cost information for Anderson Manufacturing is presented down below for the month
of January):
Purchase of raw materials $ 90,000 ***You can assume in problems that
Beginning raw materials 10,000 raw materials are all direct unless
Ending raw materials 17,000 specifically told otherwise.
Depreciation- factory 42,000
RM = Raw Materials
Insurance- factory 5,000
Direct labor cost 60,000
Administrative expenses 70,000
Maintenance- factory 30,000
Sales Revenue 450,000
Utilities- factory 27,000
Supplies- factory 1,000
Selling expense (includes sales salaries) 80,000
Indirect labor (includes factory janitor) 65,000
Beginning work in process 7,000
Ending work in process 30,000
Beginning finished goods 10,000
Ending finished goods 40,000

1. Calculate the direct materials used + Raw Materials -

10000 Beg 10000 83,000 Used
90,000 90,000
+ 90,000 Pur

= 100,000

- 17,000

= 83,000 End 17,000

2. Calculate the Manufacturing Overhead (indirect manufacturing costs)

Depreciation - Factory 42,000

Insurance- Factory 5,000

Maintenance- Factory 30,000

Utilities- Factory 27,000

Supplies - Factory 1,000

Indirect Labor 65,000

170,000

Chapter 3 Notes - Page 6 of 8

3. Calculate Cost of Goods Manufactured

Beggining WIP 7000

Plus manufacturing costs incurred

DM 83,000
+
DL
+ 60,000

MOH
+ 170,000

Total manufacturing costs to account for 320,000

=

- Less ending WIP 30,000

= Cost of good manufactured 290,000

+ WIP -
290,000
Beginning 7,000 COGM
83,000
DM

DL 60,000

MOH 170,000

Ending 30,000

WIP = Work in Process (partially complete inventory)

COGM = Cost of goods manufactured

Chapter 3 Notes - Page 7 of 8

4. Calculate cost of goods sold (COGS)

10,000
Beggining FG + Finished Goods -
CDGM 290,000 10,000
+ Beg 260,000 Cogs

= COGAFS 300,000 Cogm 290,000

- Ending FG 40,000
Cogs
= 260,000 End 40,000

COGAFS = Cost of Goods Available for Sale

5. Prepare an income statement for January.

Sales 450,000

Cost of goods sold 260,000

-
190,000
= Gross Marging
Selling Expenses
- 80,000
Administrative Expenses 70,000
-
= Net Operating Income 40,000

Reminder: Selling & Admin Expenses are also known as operating expenses

Chapter 3 Notes - Page 8 of 8