Inventoriable costs and period costs

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Inventoriable costs and period costs
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Types of Inventory Manufacturing-sector

• Manufacturing-sector companies typically have one
  or more of the following three types of
  inventories
• Direct materials inventory direct materials in
  stock and awaiting use.
• Work-in-process inventory
• goods not yet fully completed.
• Finished goods inventory
• goods fully completed but not sold.

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Types of Inventory - other

• Merchandising-sector companies hold only one type
  of inventory the product in its original
  purchased form.
• Service-sector companies do not hold inventories
  of tangible products.

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Direct materials costs

• are the acquisition costs of all materials that
  eventually become part of the cost object.
• can be traced economically.
• Acquisition costs include freight-in charges,
  sales taxes, and customs duties are included.

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Direct Labor Costs

• - include the compensation of all manufacturing
  labor that can be directly traced.
• Wages and fringe benefits are included
• How about
• compensation for training time idle timevacation
  pay sick leaveextra compensation for overtime

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Indirect manufacturing costs

• Indirect manufacturing costs are all
  manufacturing costs that are considered to be
  part of the cost object, but that cannot be
  traced to that cost object in an economically
  feasible way.
• Other terms for this cost category include
  manufacturing overhead costs and factory overhead
  costs.

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Inventoriable Costs manufacturing companies

• h are all costs of a product that are regarded as
  an asset when they are incurred and then become
  inventories before becoming cost of goods sold in
  income statement when the product is sold.
• h are included in work-in-process and finished
  goods inventory (direct materials, direct labor
  and indirect manufacturing costs).
• For manufacturing-sector companies, all
  manufacturing costs are inventoriable costs.

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Inventoriable Costs other companies

• For merchandising-sector companies, inventoriable
  costs are the costs of purchasing the goods which
  are resold in their same form.
• For service-sector companies, the absence of
  inventories means there are no inventoriable
  costs.

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Capitalized inventoriable costs

• either associated with the purchase of goods for
  resale (merchandising)
• or with the acquisition and conversion of
  materials and other manufacturing inputs into
  goods for sale (manufacturing).
• These costs become Cost of Goods Sold (COGS)
• when the inventory is sold.

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Capitalized non-inventoriable costs

• are those associated with any aspect of the
  business other than inventory. e.g
• Deprectiation of office computer, patent
  amortization
• Operating costs
• the periodic expensing of capitalized
  noninventoriable assets consumed in the
  generation of revenue.
• noncapitalized costs. e.g
• Selling, R D

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Period Costs

• are all costs in the income statement other than
  cost of goods sold and expensed in the accounting
  period in which they are incurred.
• For manufacturing companies, period costs include
  all non-manufacturing costs (research and
  development, distribution, etc.).
• For merchandising companies, period costs include
  all costs not related to the cost of goods
  purchased for resale.
• For service companies, all of their costs are
  period costs.

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Cost of materials used

• Direct materials inventory costs are used to
  compute the
• cost of materials used
• Beginning direct materials inventory
• Purchases of direct materials
• - Ending direct materials inventory

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Cost of goods manufactured

• Work-in-process inventory costs are used to
  compute
• the cost of goods manufactured
• Beginning work-in-process inventory
• Manufacturing costs incurred during the
  period
• - Ending work-in-process inventory

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Cost of goods sold

• Finished goods inventory costs are used to
  compute
• the cost of goods sold.
• Beginning finished goods inventory
• Cost of goods manufactured
• - Ending finished goods inventory

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Measuring Costs Requires Judgment 1

• Manufacturing labor-cost classifications vary
  among companies. The following distinctions are
  generally found
• Direct manufacturing labor
• Manufacturing overhead
• Indirect labor
• Depreciation
• Managers salaries
• Payroll fringe costs

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Measuring Costs Requires Judgment 2

• Indirect labor
• Forklift truck operators (internal handling of
  materials)
• Janitors
• Rework labor
• Overtime premium
• Idle time

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Overtime premium - 1

• Overtime premium consists of the wages paid to
  all workers in excess of their straight-time
  wages
• Overtime premium is usually considered part of
  overhead.
• Why?
• Because it does not penalize (add to) the cost
  of a particular batch of work solely because it
  happened to be worked on during the overtime
  hours.

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Overtime premium - 2

• Assume that a worker gets 18 per hour for
  straight-time and gets time and one-half for
  overtime.
• Overtime premium 18 50 9 per overtime
  hour.
• If this worker works 44 hours on a given week
• Direct labor 44 hours 18 792
• Overtime premium 4 hours 9
• (assigned to indirect costs) 36
• Total gross wages 828

Indirect manufacturing costs
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Many Meanings of Product Cost

• For pricing and product emphasis decisions, the
  costs included are all areas of the value chain.
• When preparing financial statements for external
  reporting, the focus is on inventoriable costs.
  Usually under generally accepted accounting
  principles, only manufacturing costs are
  inventoriable.
• When contracting with government agencies and for
  tax purposes, guidelines provided on the
  allowable and nonallowable items must be
  followed.

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Prime Costs and Conversion Costs

• Prime Costs are all direct manufacturing costs.
• Prime Costs and Conversion Costs are all
  manufacturing costs other than direct materials
  cost.

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Product costs

• Direct Materials costs
• Conversion costs
• Direct Materials costs
• Direct manufacturing labor costs
• Indirect manufacturing costs

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Different costs
Design
Production
Marketing
Distributionn
Customer Service
Research development
Costs for Financial Statements
Costs for Reimbursement
Costs for Pricing and Product Emphasis