INVENTORY Accounting ASW Summer 2007

Manufacturing Accounting Manufacturing accounting –what if you make inventory rather than buying? –how do we value inventory/CGS for a manufacturing firm? –should include all costs of acquiring the product and making it ready for sale

Overview of Manufacturing Firm Period costs - Selling, general and administrative, etc. Production costs

Period Costs Examples - corporate headquarters - marketing, advertising - finance, interest - research and development Generate period costs charged to expense - just as in a merchandising firm

Product Costs Identify all relevant costs of “acquiring” –Direct labor labor costs which can be linked to specific product typically costs of employees working directly on that product assigned based on actual labor used

Direct materials –materials costs which can be linked to products –typically major components of the product –assigned based on actual materials used

Overhead--can’t be linked to products –indirect labor e.g., janitorial, supervisor –indirect materials e.g., supplies, small components –overhead e.g., depr., rent, utilities on production facilities –allocate based on “drivers” e.g., direct labor, direct materials

Are these product or period costs? Cutting-machine operator Factory janitor Factory payroll clerks Factory superintendent General office secretary Guards at the factory gate Inspectors in a factory Factory maintenance workers Factory security guards General office clerks President of the firm Sales manager Raw materials receiving room workers Sweepers who clean a retail store Traveling salespersons

Physical flow Raw materials into warehouse Materials and labor on plant floor Finished product to warehouse Shipped out when sold

Cost allocation Cost of materials inputs into raw material inventory when acquired Cost of materials, labor & overhead into work in process inventory as produced Total cost incurred into finished goods inventory when completed Total cost into cost of goods sold at sale