Product Costing Session Five MBA 502B Managerial Accounting University of Scranton, Dr. Robyn Lawrence

What is Product Costing? The attaching of costs to products made by an entity. Manufacturing Environment — GAAP Requirements Product Costs $Raw Materials$ $Direct Labor$ $Indirect Manufacturing$ As used Balance Sheet Current Assets: Inventory When product is sold Income Statement Cost of Goods Sold Selling Expenses Administrative Expenses Period Costs $Selling$ $Administrative$ As incurred S-V: Product Costing, MBA 502B, Univ. of Scranton, Dr. R. Lawrence

Product versus Period Costs Product costs: costs that are a necessary and integral part of producing the finished product (direct materials, direct labor & manufacturing overhead). Inventoriable Costs: not expensed to cost of goods sold until the finished goods inventory is sold. (Matching Principle) Period costs: are identifiable with a specific time period, relate to non-manufacturing, non-inventoriable costs, and include selling and administrative expenses. S-V: Product Costing, MBA 502B, Univ. of Scranton, Dr. R. Lawrence

Manufacturing Cost Concepts Manufacturing: activities and processes that convert raw materials into finished goods. Direct Labor Finished Goods Raw Materials Work in Process (WIP) Manufacturing Overhead Three Inventory Accounts on the Balance Sheet Finished Goods Inventory – the cost of completed goods on hand, Work in Process Inventory – the cost applicable to units that have been started into production but are only partially completed, and Raw Materials Inventory – the cost of raw materials on hand. S-V: Product Costing, MBA 502B, Univ. of Scranton, Dr. R. Lawrence

S-V: Product Costing, MBA 502B, Univ. of Scranton, Dr. R. Lawrence Prime Costs Prime Costs = Direct Materials + Direct Labor Raw materials are the basic materials and parts that are to be used in the manufacturing process. Direct Materials: raw materials that can be physically and directly associated with the finished product. Indirect Materials: see next slide Direct labor: the work of factory employees that can be physically and directly associated with converting raw materials into finished products. S-V: Product Costing, MBA 502B, Univ. of Scranton, Dr. R. Lawrence 17

Indirect Manufacturing Costs Manufacturing Overhead Costs that are indirectly associated with the manufacture of the finished product. Indirect materials: some raw materials cannot be easily associated with the finished product. Do not physically become part of the finished product or Not cost effective to traced their physical association with the finished product (eg. glue or nails in cabinets) Indirect labor: efforts are not physically associated with the finished product. For example, wages of maintenance people, timekeepers, and supervisors or Where it is not cost effective to traced their physical association with the finished product. Depreciation on factory buildings and machines Insurance, taxes, utilities and maintenance on factory facilities. Conversion Costs = Direct Labor + Manufacturing Overhead S-V: Product Costing, MBA 502B, Univ. of Scranton, Dr. R. Lawrence

Cost Terminology Overview Direct Materials Prime Costs Product Costs Manufacturing Costs Direct Labor Conversion Costs Manufacturing Overhead Period Costs Non-manufacturing Costs Selling Expenses Administrative Expenses S-V: Product Costing, MBA 502B, Univ. of Scranton, Dr. R. Lawrence

S-V: Product Costing, MBA 502B, Univ. of Scranton, Dr. R. Lawrence Practice Identifying Costs (Direct labor; Direct Materials; Manufacturing Overhead; or Period Cost) Memory boards and chips used in assembling computers. Depreciation on the factory equipment. Salaries for quality control inspectors. Sales commissions paid to sell computers. Metals used in the exterior cover of the computers. Regular wages of workers assembling computers. Overtime wages of workers assembling computers. Property taxes on the factory building. Production supervisor’s salary. Soldering materials used on factory assembly lines. Salaries for the night security guards for the factory building. Transportation cost of direct materials from supplier. Direct Materials Manufacturing Overhead Manufacturing Overhead Period Cost Direct Materials Direct Labor Manufacturing Overhead Manufacturing Overhead Manufacturing Overhead Manufacturing Overhead Manufacturing Overhead Direct Materials S-V: Product Costing, MBA 502B, Univ. of Scranton, Dr. R. Lawrence

Financial Statement Effects— Balance Sheet Example Manufacturing Company Partial Balance Sheet December 31, 2007 Current Assets: Cash $100,000 Receivables, net 190,000 Inventories: Finished goods $70,000 Work in process 20,000 Raw materials 25,000 115,000 Prepaid expenses 35,000 Total Current Assets $440,000 S-V: Product Costing, MBA 502B, Univ. of Scranton, Dr. R. Lawrence

Financial Statement Effects— Income Statement Example Manufacturing Company Partial Income Statement For the Year Ended: December 31, 2007 Net Sales $430,000 Cost of Goods Sold 290,000 Gross Profit $140,000 Less Operating Expenses Selling expenses 70,000 Administrative expenses 30,000 Operating Income $40,000 S-V: Product Costing, MBA 502B, Univ. of Scranton, Dr. R. Lawrence

Components of Cost of Goods Sold Beginning Finished Goods Inventory + Cost of Goods Manufactured Goods Available for Sale - Ending Finished Goods Inventory Cost of Goods Sold S-V: Product Costing, MBA 502B, Univ. of Scranton, Dr. R. Lawrence

Cost of Goods Manufactured The cost of the goods completed this period. Beginning Work in Process Inventory + Direct Materials Used + Direct Labor Used + Manufacturing Overhead Total Current Period Manufacturing Costs Total Cost of Goods in Process (To Account For) - Ending Work in Process Inventory Cost of Goods Manufactured Leave WIP; go to Finished Goods Inventory S-V: Product Costing, MBA 502B, Univ. of Scranton, Dr. R. Lawrence

Cost of Goods Manufactured Schedule Example Manufacturing Company Cost of Goods Manufactured Schedule For the Year Ended December 31, 2007 (for internal purposes only) Work in process, January 1 $ 90,000 Direct Materials: Materials inventory, January 1 $15,000 Materials purchases 60,000 Total materials available for use $75,000 Less: Materials inventory, December 31 10,000 Direct materials used $ 65,000 Direct Labor 120,000 Manufacturing overhead: Indirect materials $ 5,000 Indirect labor 45,000 Factory maintenance 12,000 Factory utilities 16,000 Factory depreciation 20,000 Factory property tax 10,000 Total manufacturing overhead 108,000 Total current period manufacturing costs 293,000 Total cost of work in process (Total costs to account for) $383,000 Less: Work in process, December 31 (50,000) Cost of goods manufactured $333,000 If fixed versus variable components are available in the accounting system, then segregate them here. S-V: Product Costing, MBA 502B, Univ. of Scranton, Dr. R. Lawrence 13

S-V: Product Costing, MBA 502B, Univ. of Scranton, Dr. R. Lawrence This Ends Session 5: Product Costing S-V: Product Costing, MBA 502B, Univ. of Scranton, Dr. R. Lawrence