Chapter 2 The Production Process and Product (Service) Costing

Topics to be Discussed Manufacturing, Merchandising and Service Organizations The Production Process Product Costs in a Manufacturing Company Nonmanufacturing Costs

Manufacturing, Merchandising and Service Organizations Manufacturing: Take raw materials and produce new products from them. Merchandising: Retail and wholesale merchandising companies sell products that someone else has manufactured. Service: Provide a service such as airlines, hospitals, repair shops, law firms, CPA firms.

The Production Process OBJECTIVES: Describe a manufacturing company in a traditional environment Describe manufacturing in a JIT environment

The Production Process Manufacturing companies purchase raw materials from other companies and transform them into a finished product by adding labor and other costs such as utilities, depreciation or supplies.

The Production Process Pause and Reflect Should grocery stores that sell products manufactured by other companies but also have their own bakeries be classified as manufacturing or merchandising companies? Brokerage firms sell information to clients. Is information a product or a service?

The Production Process Inventories in a Traditional Environment Raw Materials Finished Goods Work-in-Progress (WIP) Inventories serve as buffers in case of unexpected demand for products or unexpected problems in production.

The Production Process Pause and Reflect Can you think of other reasons that it may be desirable to have buffers of inventory on hand?

The Production Process Manufacturing in a JIT Environment Materials are purchased and products are made “just in time” to meet customer demand. Process begins with customer order and products are “pulled” through the process.

Product Costs in a Manufacturing Company Manufacturing Costs: Costs incurred in the factory or plant

Product Costs in a Manufacturing Company Direct Labor Manufacturing Overhead Direct Materials

Materials that can be directly and conveniently traced to a particular product and becomes an integral part of the finished product. Computer Chips

Direct Labor The labor cost of all production employees who work directly on the product being made or service being provided. Assembly-line Workers

Manufacturing Overhead Indirect Material (screws and solder) Indirect Labor (janitors, maintenance workers, supervisors) Depreciation of Factory Equipment and Building Repairs and Maintenance Rent Insurance Utilities

Nonmanufacturing Costs Costs that are incurred outside the plant or factory and typically categorized as selling and administrative costs.

Manufacturing or Nonmanufacturing? The key is to think about where in the process the cost occurs. If the cost occurs in the factory while the product is being produced, it is a manufacturing cost. If the cost occurs before or after the product is produced or outside the manufacturing area, then it is a nonmanufacturing cost.

Manufacturing or Nonmanufacturing? Pause and Reflect A manufacturing firm buys computers that are used to control the production process and to process accounting information for management. Are the costs of the computers (depreciation) classified as manufacturing or nonmanufacturing costs?

More Topics to be Discussed Life-Cycle Costs and the Value Chain Cost Flows in a Manufacturing Company- Traditional Environment with Inventory The Cost of Goods Sold Model for a Traditional Manufacturing Company Cost Flows in a Manufacturing Company- JIT Environment

Life-Cycle Costs and the Value Chain Research & Development Experimental materials Staff Product Development Design Specs Staff Production Direct Materials Direct Labor Manufacturing Overhead

Life-Cycle Costs and the Value Chain Marketing Advertising and promotions Staff Distribution Vendors Trucks Drivers Customer Service Call Center personnel Phone and computer equipment

Cost Flows in a Manufacturing Company Direct Materials + Direct Labor + Manufacturing Overhead The Cost to Produce the Product

Cost Flows in a Manufacturing Company When it is sold, it is called the Cost of Goods Sold.

Cost Flows in a Manufacturing Company Raw Materials Beginning Inventory + Purchases = Cost of Raw Materials Available for Use - Ending Inventory = Raw Materials Used Work in Process

Cost Flows in a Manufacturing Company Work in Process Beginning Inventory + Raw Materials Used + Direct Labor + Manufacturing Overhead - Ending Inventory = Cost of Goods Manufactured Finished Goods

Cost Flows in a Manufacturing Company Finished Goods Beginning Inventory + Cost of Goods Manufactured = Goods available for sale - Ending Inventory = Cost of Goods Sold

Cost Flows in a Manufacturing Company Raw MaterialsWork in Process Beginning Inventory Purchases Raw Materials Used Ending Inventory Beginning Inventory Raw Materials Used Direct Labor Manufacturing Overhead Ending Inventory Cost of Goods Manufactured

Cost Flows in a Manufacturing Company Work in Process Cost of Goods Manufactured Finished Goods Cost of Goods Sold Beginning Inventory CGM Ending Inventory Cost of Goods Sold

Cost Flow in a Manufacturing Company, JIT Environment Direct material, direct labor and overhead costs can essentially be accumulated directly in a cost of goods sold account.

Topics to Finish Our Discussion Merchandising Companies and the Cost of Products Cost Flows in a Service Company Product Costs and Period Costs

Merchandising Companies Beginning Inventory + Cost of Goods Purchased = Cost of Goods Available for Sale - Ending Inventory Cost of Goods Sold Hats for Sale

Cost Flows in a Service Company CPA Firm Small amount of direct material Large amounts of direct labor Large amounts of overhead

Product Costs and Period Costs Product Costs Inventoriable costs Direct materials, direct labor, overhead costs Stay with product until the product is sold Included in one of three inventory accounts Period Costs Nonmanufacturing costs Expensed in the period incurred Included in selling and administrative costs

The Path to the Income Statement Direct Materials Direct Labor Factory Overhead Inventories Income Statement Period Costs

Product Costs and Period Costs Key Concept Product Costs attach to the product and are only expenses when the product is sold, whereas period costs are expensed in the period in which they are incurred.

End of Chapter 2 Can you follow the flow of costs?