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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

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

10. 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 ,000
Gross Profit $140,000
Less Operating Expenses
Selling expenses ,000
Administrative expenses ,000
Operating Income $40,000
S-V: Product Costing, MBA 502B,
Univ. of Scranton, Dr. R. Lawrence

11. 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

12. 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

13. 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 ,000
Direct materials used $ 65,000
Direct Labor ,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 ,000
Total current period manufacturing costs ,000
Total cost of work in process (Total costs to account for) $383,000
Less: Work in process, December (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

14. 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