1. GOALS BUSINESS MATH© Thomson/South-WesternLesson 11.1Slide 1 11.1Manufacturing Costs Calculate prime cost and total manufacturing costs Distribute factory expenses to units

2. BUSINESS MATH© Thomson/South-WesternLesson 11.1Slide 2 Manufacturing Costs Manufacturers make the products they sell. They must keep records of their factory costs so that they can control those costs and set selling prices that will produce a net income instead of a net loss.

3. BUSINESS MATH© Thomson/South-WesternLesson 11.1Slide 3 Factory Costs Three kinds of factory costs Raw materials Direct labor costs Factory overhead

4. BUSINESS MATH© Thomson/South-WesternLesson 11.1Slide 4 Raw Materials Costs Raw materials costs are the costs of materials which are used in manufacturing and which become part of the finished product.

5. BUSINESS MATH© Thomson/South-WesternLesson 11.1Slide 5 Direct Labor Costs Direct labor costs are the wages of all the workers who work directly on the products as they move through the factory.

6. BUSINESS MATH© Thomson/South-WesternLesson 11.1Slide 6 Factory Overhead Factory overhead includes the expenses that cannot be directly tied to producing a product. For example, it includes salaries and wages of the factory managers, supervisors, inspectors, and other workers who do not work directly on the manufactured products. It also includes building rent, depreciation of equipment, heat, power, insurance, and factory supplies.

7. BUSINESS MATH© Thomson/South-WesternLesson 11.1Slide 7 Prime Cost and Total Cost of Manufacturing The costs of raw materials and direct labor are called the prime cost of manufacturing a product. The prime cost plus factory overhead are the total manufacturing cost of a product. Prime Cost = Raw Materials + Direct Labor Total Manufacturing Cost = Prime Cost + Factory Overhead

8. BUSINESS MATH© Thomson/South-WesternLesson 11.1Slide 8 Distribute Factory Overhead to Units A manufacturer needs to know the costs of running each of its divisions, departments, or other units. So, factory expenses, or overhead, are often distributed or charged to each unit.

9. BUSINESS MATH© Thomson/South-WesternLesson 11.1Slide 9 Examples of Distributing Factory Overhead The way they are distributed varies with the company and the kind of expense. Rent may be distributed in proportion to the floor space used by the units. Taxes and insurance on equipment may be distributed based on the value of the equipment in each unit. Cleaning expenses may be distributed on the basis of floor space. Management salaries may be distributed based on the number of factory workers in a unit.

10. BUSINESS MATH© Thomson/South-WesternLesson 11.1Slide 10

11. BUSINESS MATH© Thomson/South-WesternLesson 11.1Slide 11

12. BUSINESS MATH© Thomson/South-WesternLesson 11.1Slide 12