1. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 11 th Edition Chapter 2

2. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Costs Terms, Concepts and Classifications Chapter Two

3. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Cost Classifications and Their Uses

4. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin General Cost Classification Manufacturing Costs Direct Materials. Direct Labor. Manufacturing Overhead Non-manufacturing Costs Marketing or Selling Cost. Administrative Cost

5. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin The Product Direct Materials Direct Labor Manufacturing Overhead Manufacturing Costs

6. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Direct Materials Raw materials that become an integral part of the product and that can be conveniently traced directly to it. Example: A radio installed in an automobile

7. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Direct Labor Those labor costs that can be easily traced to individual units of product. Example: Wages paid to automobile assembly workers

8. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Manufacturing costs that cannot be traced directly to specific units produced. Manufacturing Overhead Examples: Indirect labor and indirect materials Wages paid to employees who are not directly involved in production work. Examples: maintenance workers, janitors and security guards. Materials used to support the production process. Examples: lubricants and cleaning supplies used in the automobile assembly plant.

9. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Classifications of Costs Direct Material Direct Labor Manufacturing Overhead Prime Cost Conversion Cost Manufacturing costs are often classified as follows:

10. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Non-manufacturing Costs Marketing or Selling Cost Costs necessary to get the order and deliver the product. Administrative Cost All executive, organizational, and clerical costs.

11. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Product Costs Versus Period Costs Product costs include direct materials, direct labor, and manufacturing overhead. Period costs include all marketing or selling costs and administrative costs. Inventory Cost of Good Sold Balance Sheet Income Statement Sale Expense Income Statement For purposes of preparing financial statements, managers classify costs as product costs or period costs

12. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Quick Check Which of the following costs would be considered a period rather than a product cost in a manufacturing company? A. Manufacturing equipment depreciation. B. Property taxes on corporate headquarters. C. Direct materials costs. D. Electrical costs to light the production facility. E. Sales commissions.

13. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Quick Check Which of the following costs would be considered a period rather than a product cost in a manufacturing company? A. Manufacturing equipment depreciation. B. Property taxes on corporate headquarters. C. Direct materials costs. D. Electrical costs to light the production facility. E. Sales commissions.

14. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Comparing Merchandising and Manufacturing Activities Merchandisers...  Buy finished goods.  Sell finished goods. Manufacturers...  Buy raw materials.  Produce and sell finished goods. MegaLoMart

15. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Balance Sheet Merchandiser Current assets  Cash  Receivables  Prepaid Expenses  Merchandise Inventory Manufacturer Current Assets u Cash u Receivables u Prepaid Expenses u Inventories Raw Materials Work in Process Finished Goods

16. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Balance Sheet Merchandiser Current assets  Cash  Receivables  Prepaid Expenses  Merchandise Inventory Manufacturer Current Assets u Cash u Receivables u Prepaid Expenses u Inventories Raw Materials Work in Process Finished Goods Partially complete products – some material, labor, or overhead has been added. Completed products awaiting sale. Materials waiting to be processed.

17. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin The Income Statement Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.

18. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Inventory Flows Beginning balance $$ Beginning balance $$ Additions $$$ + Available $$$$$ = Ending balance $$ Ending balance $$ = Withdrawals $$$ _ Available $$$$$

19. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Quick Check If your inventory balance at the beginning of the month was $1,000, you bought $100 during the month, and sold $300 during the month, what would be the balance at the end of the month? A. $1,000. B. $ 800. C. $1,200. D. $ 200.

20. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Quick Check If your inventory balance at the beginning of the month was $1,000, you bought $100 during the month, and sold $300 during the month, what would be the balance at the end of the month? A. $1,000. B. $ 800. C. $1,200. D. $ 200. $1,000 + $100 = $1,100 $1,100 - $300 = $800

21. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Quick Check 1.Manufacturing overhead is an indirect cost with respect to units of product ( ) 2.Rent on a factory building used in the production process would be classified as a period cost and as a fixed cost ( ) 3.Period costs are found only in manufacturing companies, not in merchandising companies ( ) 4.Depreciation on equipment a company uses in its selling and administrative activities would be classified as a product cost ( )

22. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Quick Check 1.Indirect labor is a part of: a.Prime cost. b.Conversion cost. c.Period cost. d.Nonmanufacturing cost 2.The cost of lubricants used to grease a production machine in a manufacturing company is an example of a( ): a.period cost. b.direct material cost. c.indirect material cost. d.none of the above.

23. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3.Direct labor cost is a part of: Conversion cost Prime cost a.No No b.No Yes c.Yes Yes d.Yes No