BUSI 562

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BUSI 562

• Managerial Accounting

Product Costs
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Operating Costs

• Companies incur various types of expenses during
  the year.
• Product Costs are can be traced directly to the
  product or production process.
• Direct Materials
• Direct Labor
• Manufacturing Overhead
• Other Expenses can not be directly traced to
  production, and are reported separately on the
  income statement.
• Selling Expenses
• General and Administrative Expenses

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Product Costs

• Only costs directly or indirectly related to
  production are product costs.
• Product Costs Direct Materials, Direct Labor
  and Manufacturing Overhead
• Prime Costs -- Direct Materials and Direct Labor
• Conversion Costs Direct Labor and Manufacturing
  Overhead

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Product Costs

• Direct Materials attach directly to the product
  and become part of the product itself flour,
  yeast, salt and water become dough for bread.
• Direct Labor is the cost of labor that work to
  produce the product.
• Manufacturing Overhead is a collection of various
  indirect costs that are necessary for producing
  the product, but they dont attach to or become
  part of the product. Some examples are
• Gas to fire furnaces that bake the bread
• Maintenance on the building and equipment
• Heating, cooling, lights and other building costs
• Salary of managers who oversee the production
  process

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Other Costs

• Not all costs are product costs.
• Selling Expenses include the costs related to
  warehousing, marketing, selling and distributing
  the product, including the cost of storefronts
  and sales employees.
• General and Administrative Expenses include
  general costs of running the company, managing
  corporate business, dealing with stockholders,
  managing company finances, and other top level
  administrative and managerial activities.

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Inventory Accounts

• A Retail business has Merchandise Inventory,
  which it buys and resells at a markup.
• A Manufacturing business uses 3 types of
  Inventory. We say that costs flow through and
  are accumulated in the various inventory
  accounts.
• Materials Inventory raw materials or
  unassembled items which will become part of the
  product or be used to create the product
• Work in Process Direct Materials, Direct Labor
  and Manufacturing Overhead are accumulated in the
  WIP account as the product is being worked on and
  created.
• Finished Goods The sum total of all
  manufacturing costs, attributed to completed
  units of product, which are now ready for sale.

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Articulation

• Articulation refers to the transfer, or flow, of
  costs from the Balance Sheet to the Income
  Statement.
• When Finished Goods are sold, they are shipped or
  delivered to the Buyer. They no longer belong to
  the company and thus do not meet the definition
  of an Asset. This triggers the recognition of a
  cost Cost of Goods Sold.
• Cost of Goods Sold is an expense on the Income
  Statement.