Cost and Management Accounting Elements of costs

18 Jan Cost and Management Accounting Elements of costs

https://www.bookstime.com/ labor – cost of labor expended directly upon the materials to transform them into finished goods. Direct labor refers to salaries and wages of employees who work to convert the raw materials to finished goods. The sum of all amounts transferred from work in process to finished goods represents the cost of goods manufactured for the period.

5.Types of Product Costing Systems Process Costing Job-order Costing Many different products are produced each period. A fixed cost is a cost that does not vary with the level of production or sales. The costs of materials necessary to manufacture a product that are not easily traced to the product or that are not worth tracing to the product.

Elements of Non-Manufacturing Costs

The difference between direct labor and indirect labor is that direct labor ______. The type and quantity of each type of direct material needed to complete a unit of product is listed on the ______. Table 1.2 “Manufacturing Costs at Custom Furniture Company” provides several examples of manufacturing costs at Custom Furniture Company by category. The costs of workers who are involved in the production process but whose time cannot easily be traced to the product. Labor performed by workers who convert materials into a finished product and whose time is easily traced to the product.

• The sum of direct materials cost, direct labor cost and manufacturing overhead cost is known as manufacturing cost.
• Here is an example of the entry to charge direct and indirect labor from the salaries and wages payable account and place the amount in work in process inventory.
• Manufacturing costs other than direct materials and direct labor are categorized as manufacturing overhead cost .
• A company must pay overhead on an ongoing basis, regardless of how much or how little the company is selling.
• Below is the income statement of the U.S. automobile manufacturer, Tesla Inc. .
• The sum of all amounts transferred from work in process to finished goods represents the cost of goods manufactured for the period.

Ideally, the allocation base should be a cost driver , that is, it causes overhead to be incurred. Selling expenses are costs incurred to obtain customer orders and get the finished product in the customers’ possession. Advertising, market research, sales salaries and commissions, and delivery and storage of finished goods are selling costs. The costs of delivery and storage of finished goods are selling costs because they are incurred after production has been completed. Therefore, the costs of storing materials are part of manufacturing overhead, whereas the costs of storing finished goods are a part of selling costs. Remember that retailers, wholesalers, manufacturers, and service organizations all have selling costs.

Non-manufacturing costs:

The following manufacturing items are for a construction company working on several custom homes. Identify whether each item should be categorized as direct materials, direct labor, or manufacturing overhead. Product costs are costs necessary to manufacture a product, while period costs are non-manufacturing costs that are expensed within an accounting period. Examples of marketing and selling costs include advertising costs, order taking costs and salaries of sales persons etc. Examples of administrative costs include salaries of executives, accounting costs, and general administration costs etc. Sometimes it is difficult to discern between manufacturing and non-manufacturing costs.

A direct costs are costs that can be directly linked or traced to the production of a particular item. Below is the income statement of the U.S. automobile manufacturer, Tesla Inc. . The period represents Q2 of 2019, according to the company’s 10-Q report. When companies have returns, they must calculate net sales, which is revenue minus sales returns and allowances.

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Direct materials are the raw materials that are integrated into the product. Direct costs that can be linked to the production of a particular product can relate to the purchase of materials, commissions, fuel and other items needed for the production.

• As we indicated earlier, nonmanufacturing costs are also called period costs; that is because they are expensed on the income statement in the time period in which they are incurred.
• Indirect labor is the cost of production employees who are involved in the manufacturing process, but do not work on a specific product.
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• All costs related to the production of goods; also called manufacturing costs.
• When we apply overhead on the basis of a predetermined overhead rate, there is always the chance that the amount of overhead applied will be different from the amount of overhead actually incurred during the period.
• Manufacturing costs form part of cost of goods sold and are carried as part of inventory in the balance sheet till the inventory is sold out.

Instead, Nonmanufacturing Overhead Costs costs are simply reported as expenses on the income statement at the time they are incurred. Manufacturing overhead includes the indirect materials and indirect labor mentioned previously. Other manufacturing overhead items are factory building rent, maintenance and depreciation for production equipment, factory utilities, and quality control testing. Although selling costs and general and administrative costs are considered nonmanufacturing costs, managers often want to assign some of these costs to products for decision-making purposes. For example, sales commissions and shipping costs for a specific product could be assigned to the product. However, as we noted earlier, managerial accounting information is tailored to meet the needs of the users and need not follow U.S.