Manufacturing Accounting

Recall: –Assets are measured at full absorption cost Includes all costs of acquiring asset and putting in place –Expenses are measured at the carrying value of the asset sacrificed Issue: How do we measure all the costs?

Cost Allocation Same issue exists for merchandising firms Easier for merchandising, –purchase price (major) –shipping cost (minor) –taxes (minor)

Manufacturing costs Have to include costs for: –direct materials (major) –direct labor (major) –overhead (major) utilities, indirect labor, depreciation on plant, etc.

Have to spread between: –inventory (balance sheet) raw materials work-in-process finished goods –cost of goods sold (income statement)

Review of Cost Classification Period costs--just like merchandising –not part of inventory/cost of goods sold –can’t be matched to a future benefit –charged to expense as incurred –SG&A, most interest costs, etc. Product costs--cost of obtaining inventory –originally held in inventory account –charged to cost of goods sold when sold

Manufacturing Product Costs Direct costs--can be traced to units produced –direct labor –direct materials Overhead--can’t be traced to units –indirect labor--e.g., janitorial, supervisory –indirect materials--e.g., miscellaneous supplies –other--e.g., depreciation, utilities, rent –allocated to units based on “drivers”

Steps in recording Place purchases in raw materials inventory Transfer raw materials inventory to work-in-process inventory when production starts

Add in direct labor and overhead to WIP Transfer costs of completed units to finished goods inventory

Transfer costs associated with sold goods to CGS