Product Costs

necessary costs incurred to manufacture a product

Period Costs
necessary costs incurred to produce a product

Direct Materials
Materials used in a product that are easily and conveniently traceable

Indirect Materials
Materials used in a product that are NOT easily and conveniently traceable

Direct Labor
Labor in which employees have direct contact in making a product and is easily traceable

Indirect Labor
Labor in which employees CANNOT be easily traced to but work in the factory. Example:
Janitor

Manufacturing Overhead
All manufacturing costs excluding direct labor and direct material; these are all not easily
traceable labor or material

Fixed Cost
Remains constant in total, changes in level of activity

Variable Cost
Cost that varies, in total, in direct proportion to changes in level of activity variable cost per
unit is constant

Mixed Cost
Mixture of fixed and variable costs

Direct Cost
Easily traceable cost that goes into the cost of a specific product

Indirect Cost
Not easily traced cost that goes into the cost of a specific product

Differential Cost
Difference in cost between two different decisions/outcomes

Opportunity Cost
Potential benefit that is given up when another outcome is chosen

Raw Material Inventory

Materials used in making a product
Work-in-Process Inventory
Products that are in process of being completed but are not yet finished

Finished Goods Inventory

Products that are complete and ready to sell or deliver to a customer

Total Manufacturing Cost

Total costs incurred to manufacture a product

Cost of Goods Manufactured

Total costs of goods finished this period

Job Cost Sheet

Sheet that tracks and records of Job Costs

Materials requisition
Records issued materials to manufacturing floor

Identify the three major cost components of a manufactured product.

Direct Labor, Direct Material, Manufacturing Overhead

Explain the major characteristic of an organization that would be more likely to use a job-order
costing system of accumulating product costs rather than a process costing system.
Organization that are more likely to use a job order costing system are manufacturers of
heterogeneous products
ex. Boeing

Explain the major characteristic of an organization that would be more likely to use a process
costing system of accumulating product costs rather than a job-order costing system.
Organization that are more likely to use a process costing system are manufacturers of
homogeneous products
ex. Auto Maker, Sherwin-Williams, Harley Davidson

Explain the primary criterion in the choice of an allocation base for indirect costs
(manufacturing overhead)
Should be the activity that actually drives the cost of being allocated

Explain what should be done with over-applied or under-applied manufacturing overhead at

the end of the year if the amount is NOT considered material
Write off to Cost of Goods Sold

Explain what should be done with over-applied or under-applied manufacturing overhead at

the end of the year if the amount is considered material
Allocate to Finished Goods, Cost of Goods Sold, Work-in-Process
If the manufacturing overhead account has a credit balance, be able to explain the relationship
between applied and actual manufacturing overhead (which amount is larger). Be able to
identify whether manufacturing over is under-applied or over-applied.
Credit = Over-applied = Applied

If the manufacturing overhead account has a debit balance, be able to explain the relationship
between applied and actual manufacturing overhead (which amount is larger). Be able to
identify whether manufacturing over is under-applied or over-applied.
Debit = Under-applied = Actual

Equation for Total Manufacturing Overhead Costs

Indirect Material
+ Indirect Labor
+ Other Manufacturing Overhead

Equation for Total Product Costs

Direct Material
+ Direct Labor
+ Manufacturing Overhead

Equation for Total Period Costs

Administrative costs
+ Selling Costs

Equation for Direct Materials used in Production

Beginning Direct Materials
+ Raw Materials Purchased
+ Raw Materials Available
- Ending Direct Materials

Equation for Total Manufacturing Cost

Direct Materials Used
+ Direct Labor
+ Factory Overhead

Equation for Cost of Goods Manufactured

Beginning Work In Process
+ Total Manufacturing Cost
- Ending Work In Process

Calculate Predetermined Manufacturing Overhead

Estimated Manufacturing Overhead Cost/ Estimated Activity

Calculate Unit Cost

Unit Cost = Total Product Cost/ Units Produced

Applied Manufacturing Overhead

Predetermined Manufacturing Overhead x Actual Activity
Over-Applied Manufacturing Overhead Cost
Applied Manufacturing Overhead -- Actual Manufacturing Overhead

Under-Applied Manufacturing Overhead Cost

Actual Manufacturing Overhead -- Applied Manufacturing Overhead

Conversion Cost
Direct Labor
+ Manufacturing Overhead
+Direct Expenses

Prime Cost
Direct Materials
+Direct Labor
+Direct Expenses

Cost of Goods Manufactured Schedule

Raw Materials Beginning
+ Raw Materials Purchased
= Raw Materials Available for Use
- Raw Material Ending
= Raw Material Used in Production

+ Indirect Materials Used

+ Direct Materials Used
+ Direct Labor
+ Applied Manufacturing OH
= Total Manufacturing cost
+ Work in process Beg
- Work in process End

= Cost of Goods Manufactured