1. 0 CHAPTER 3 Product Costing: Manufacturing Processes, Cost Terminology, and Cost Flows © 2009 Cengage Learning

2. 1 1 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.

3. 2 2 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.

4. 3 3 The Production Process Inventories in a Traditional Environment Raw Materials Work-in-Process (WIP) Finished Goods Inventories serve as buffers in case of unexpected demand for products or unexpected problems in production.

5. 4 4 The Production Process Lean production and manufacturing in a JIT environment Lean production Is focused on eliminating waste and managing inventory 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

6. 5 5 The Production Process Lean production and JIT are more than inventory management tools. Key Concept

7. 6 6 Product Costs in a Manufacturing Company Manufacturing Costs Costs incurred in the factory or plant Nonmanufacturing Costs Costs that are incurred outside the plant or factory and typically categorized as selling and administrative costs.

8. 7 7 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 after the product is produced or outside the manufacturing area, then it is a nonmanufacturing cost.

9. 8 8 Direct Materials and Direct Labor Direct Materials Can be directly and conveniently traced to a particular product and become an integral part of the finished product Direct Labor The labor cost of all production employees who work directly on the product being made or service being provided

10. 9 9 Manufacturing Overhead Indirect Material Screws and solder Indirect Labor Janitors, maintenance workers, supervisors Depreciation Factory equipment and building Repairs and Maintenance Rent Insurance Utilities

11. 10 Life-Cycle Costs and the Value Chain Research & Development Experiment materials Staff Product Development Design specs Staff Production Direct materials Direct labor Manufacturing overhead

12. 11 Life-Cycle Costs and the Value Chain (continued) Marketing Advertising and promotions Staff Distribution Shipping costs Trucks Drivers Customer Service Call center personnel Phone and computer equipment

13. 12 Cost Flows in a Manufacturing Company Direct Materials + Direct Labor + Manufacturing Overhead The Cost to Produce the Product Costs flow in the same way that products flow through a production facility. Key Concept

14. 13 Cost Flows in a Manufacturing Company When the product is sold, the product costs become: Cost of Goods Sold

15. 14 Cost Flows in a Manufacturing Company Raw Materials Beginning Inventory + Purchases = Cost of Raw Materials Available for Use - Ending Inventory = Raw Materials Used To Work in Process

16. 15 Cost Flows in a Manufacturing Company Work in Process Beginning Inventory + Raw Materials Used + Direct Labor + Manufacturing Overhead - Ending Inventory = Cost of Goods Manufactured To Finished Goods From Raw Material Inventory

17. 16 Cost Flows in a Manufacturing Company Finished Goods Beginning Inventory + Cost of Goods Manufactured = Goods Available for Sale - Ending Inventory = Cost of Goods Sold From WIP

18. 17 Cost Flows in a Manufacturing Company Raw Materials In Out Work in Process In Out Beginning Inventory Purchases Raw Materials Used Ending Inventory Beginning Inventory Raw Materials Used Direct Labor Manufacturing Overhead Ending Inventory Cost of Goods Manufactured

19. 18 Cost Flows in a Manufacturing Company Work in Process In Out Cost of Goods Manufactured Finished Goods In Out Cost of Goods Sold In Out Beginning Inventory CGM Ending Inventory Cost of Goods Sold

20. 19 Cost Flows in a Manufacturing Company, JIT Environment Direct materials, direct labor and overhead costs can essentially be accumulated directly in a cost of goods sold account

21. 20 Merchandising Companies and the Cost of Products Beginning Inventory + Cost of Goods Purchased = Cost of Goods Available for Sale - Ending Inventory = Cost of Goods Sold Cost of Goods Sold

22. 21 Service Companies and the Cost of Services Service Firms Small amount of direct material Large amounts of direct labor Large amounts of overhead Use Work In Process accounts to accumulate and track costs for projects not yet complete at the end of a period

23. 22 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

24. 23 The Path to the Income Statement Direct Materials Direct Labor Factory Overhead Balance Sheet Inventories Income Statement Period Costs As products are produced As products are sold Every period

25. 24 Product Costs and Period Costs Product costs attach to the product and are expensed only when the product is sold, whereas period costs are expensed in the period in which they are incurred. Key Concept