Manufacturing Costs Managerial Accounting Prepared by Diane Tanner University of North Florida Chapter 29

2 Manufacturing vs. Merchandising Operations Buy products Sell products Buy materials Use labor and other economic resources to produce products Sell products Merchandising Companies Manufacturing Companies

3 Manufacturing vs. Merchandising Inventories Balance Sheet Current Assets Inventories….$4,000 Merchandising Companies Manufacturing Companies Balance Sheet Current Assets Raw Materials……..$4,000 Work in Process…....1,000 Finished Goods…….1,200 3 separate inventories Income Statement Sales……………………………$34,000 Less cost of goods sold……...21,000 Both Merchandising & Manufacturing Companies

Manufacturing or Non-manufacturing? 4 Think about where in the operational process the cost occurs. The Key If the cost occurs in the factory while being produced If the cost occurs in the factory while being produced If the cost occurs after the product is produced or outside the factory If the cost occurs after the product is produced or outside the factory Product Costs Period Costs Expensed when the product is sold Expensed in a period unrelated to sales

5 Product Costs for Manufacturers Traced to products Easily identified with specific products Direct Materials Traced to products Easily identified with specific products Direct Labor Allocated to products Not easily identified with specific products Manufacturing Overhead Only product costs (not period costs) are labeled as direct or indirect.

6 Direct Material Costs  Material costs that can be traced to products or services provided  Includes all materials costs directly related to getting the materials ready to use (ultimately to get the product ready to sell)  Invoice cost to buy materials  Less cash discount  Plus sales taxes  Plus freight-in Parallels accounting for merchandise inventory

7 Direct Labor  Labor costs that can be directly traced to products or services provided  Includes all direct labor needed to get the product ready to sell  Assumed to be hourly wages  Fringe benefits should be included as part of the hourly rate

8 INDIRECT manufacturing (product) costs that cannot be traced directly to specific units produced, but are costs of production Manufacturing Overhead Indirect materials Indirect labor Factory-related costs Factory supplies Oil, lubricants, blades Glue, staples Janitor labor Production supervisor labor Dedicated cost accountant labor Factory and equipment depreciation Factory insurance Factory rent and utilities Other factory costs

9 Product Cost Examples The Product Direct Materials Examples: Lid, bottle, label, water Directly traceable Direct Labor Examples: Wages and fringes for assembly and packaging Manufacturing Overhead Examples: Factory supervisor and factory janitor salaries (indirect labor), indirect materials (supplies), factory rent/ insurance/depreciation/ utilities

Period Costs 10  Known as ‘Operating Expenses’  Not associated with the production of goods  Examples:  Selling, advertising, marketing costs, delivery costs  General and administrative ‘corporate’ costs  Corporate rent, insurance, utilities, depreciation  R&D costs, product development costs, accounting and payroll department costs, President Delaney’s salary

11 The End