Merchandising and Manufacturing Firms

Manufacturing Costs• Direct Materials

- Cost of materials directly traceable to items produced -Materials not directly traceable are indirect materials

• Direct Labor- Cost of labor directly traceable to items produced- Labor costs not directly traceable are indirect labor

• Manufacturing Overhead- Cost of manufacturing activities other than direct materials and direct labor

Nonmanufacturing Costs

• Selling Costs- Costs associated with securing and filing customer orders e.g. advertising, sales salaries, depreciation of sales equipment

• General and Administrative Costs- Costs associated with the firm’s general management e.g. Human resources, accounting, corporate headquarters and other support costs

Product and Period Costs

• Product Costs- Costs assigned to goods produced (i.e. direct materials,

direct labor, and manufacturing OH)- Included in inventory until goods sold

• Period Costs- Costs identified with accounting periods (i.e selling and

administrative expenses)- Expensed in period incurred

Relationships Among Cost Categories

Job-Order versus Process Costing

Job Order Costing• Companies produce goods to a customer’s unique

specifications e.g. construction, shipping • Cost of job accumulated on job cost sheet

Process Costing• Companies produce large quantities of identical items e.g.

producers of paints and plastics• Cost accumulated by each operation• Unit cost of items determined dividing costs of production by

number of units produced

Relating Product Costs to Jobs

Job Costs – Direct Materials

Requisition of raw materials for use on a specific job

Job Costs – Direct Labor

Cost of direct labor related to a particular job

Job Costs – Manufacturing Overhead

Apply manufacturing overhead to jobs• Choose an allocation base e.g. direct labor hours or

direct labor cost• Calculate overhead allocation rate

Estimated overhead /estimated quantity of the allocation base

• Use rate to apply overhead to jobs based on actual quantity of base used

Job Costs – Manufacturing Overhead

Job Costs – Manufacturing Overhead

Job Cost Sheet

Allocating Overhead to Jobs

• Most firms use a single overhead rate• Activity Based Costing (ABC) assigns overhead costs

to products using a number of allocation bases-The major activities which create overhead costs

are identified and grouped (pools)-Multiple rates calculated by dividing each pool by

its corresponding activity (driver)

Job-Order Costing for Service Companies

• Service companies use same process-Allocate costs incurred to jobs-Use predetermined rate to apply overhead to jobs

• Examples-Hospitals-Repair Shops-Consulting Firms