Chapter 2 notes - SECTION 2.1 COST CLASSIFICATIONS...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
SECTION 2.1 COST CLASSIFICATIONS MANUFACTURING FIRMS Manufacturing Costs : (also known as product costs, considered asset inventory until sold) are all the costs associated with the production of goods. They include three cost categories: direct material, direct labor, and manufacturing overhead . Direct material cost : the cost of all materials and parts that are directly traced to items produced. For a manufacturer of motorboats, direct material includes the wood, the steering assembly, the motor, and a variety of other items. Direct material cost often does not include the cost of minor materials, such as screws and glue, difficult to trace. Materials that are not directly traced to a product are referred to as indirect materials . Direct labor cost : the cost of labor that is directly traced to items produced. For a manufacturer of motorboats, direct labor includes the labor cost of the workers directly involved in constructing each motorboat. It probably does not include the cost of production supervisors because they oversee the production of many boats (difficult to trace). Labor costs that are not traced directly to products produced are referred to as indirect labor costs . Manufacturing Overhead : the cost of all manufacturing activities other than direct material and direct labor. It includes indirect material and indirect labor , as well as a wide variety of other cost items. For manufacturer of motorboats, manufacturing overhead includes the costs of screws, glue, varnish, supervisor salary, depreciation of tools, depreciation of the building where manufacturing takes place, utilities, rent etc. Indirect factory labor Power, heat, and light in the factory Indirect material Depreciation of factory equipment Overtime premium Depreciation of plant Nightshift premium Insurance on plant and factory equipment Vacation and holiday pay for factory workers Repair of factory equipment Social Security and Medical taxes for factory workers Maintenance of factory building and grounds Health insurance for factory workers Property taxes related to the factory Nonmanufacturing Costs : (also known as period costs) can be defined simply as all costs that are not associated with the production of goods. These costs typically include selling and general and administrative costs. General Administrative Costs : are all the costs associated with the firm's general management. (salaries of company president and accounting personnel, depreciation of office building, depreciation of office equipment used by general managers, and the cost of supplies used by clerical employees)
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Product Costs (Manufacturing Costs) : are those costs assigned to goods produced. Considered Assets (inventory) until goods are sold, then the expense is incurred. Thus, direct labor cost incurred in 2008 to produce goods sold in 2009 does not reduce income until 2009, the year of the sale.
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern