Chapter 2 - Chapter 2 Cost Terms Concepts and...

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Chapter 2- Cost Terms, Concepts, and Classification I. General Cost Classifications A. Manufacturing Costs i. Direct Materials 1. Raw Materials- materials that go into the final product 2. Direct Materials- materials that become an integral part of the finished product and that can be physically and conveniently traced to it 3. Indirect Materials- included as part of manufacturing overhead ii. Direct Labor (Touch Labor) 1. Direct Labor- labor costs that can be easily traced to individual units of product 2. Indirect Labor- Labor costs that cannot be physically traced to the creation of products or that can be traced only at great cost and inconvenience and treated as part of the overhead iii. Manufacturing Overhead 1. Manufacturing Overhead- the third element of manufacturing costs, which includes all costs of manufacturing except direct materials and direct labor a. Indirect labor b. Indirect materials c. Maintenance and Repairs on production equipment d. Heat and Light e. Property Taxes f. Depreciation g. Insurance on manufacturing facilities 2. Conversion Cost (Value-added Cost)- Manufacturing overhead combined with direct labor 3. Prime Costs- Direct labor combined with direct materials B. Non-Manufacturing Costs (aka: Selling, General and Administrative Costs) i. Marketing or Selling Costs 1. Include all costs necessary to secure customer orders and get the finished product into the hands of the customer 2. Order getting and order-filling costs 3. Ex: Advertising, shipping, sales travel, sales commission, sales salaries, costs of finished goods warehouses ii.
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