notes-c2 - C2- COST TERMS, CONCEPTS & CLASSIFICATIONS...

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1 C 2 - notes-c2.doc Written by Professor Gregory M. Burbage, MBA, CPA, CMA, CFM © CHAPTER LEARNING OBJECTIVES: MAJOR: - Be able to define and explain each term or concept in this chapter. - Be able to prepare a Cost of Goods Manufactured statement. - Understand the flow of costs through the accounting system. MINOR: - Conceptually correct recording of fringe benefit costs - Appendix 2A. - Cost of quality - Appendix 2B. NOT IMPORTANT: - Quality cost report - Appendix 2B. MANUFACTURING requires the use of DIRECT MATERIALS (DM), DIRECT LABOR (DL) and FACTORY OVERHEAD (FOH) to produce goods. DM is not difficult, inconvenient or expensive to trace to products but IDM is. DM would include most of the raw materials necessary to construct the finished product. Materiality will sometimes be a factor in classifying a cost as Direct versus Indirect. DL is not difficult, inconvenient or expensive to trace to products but IDL is. DL would include most, if not all, the labor costs related to those who actually transform the materials or assemble the product. This would usually include those who operate the machines that transform the product. IDL would include all others who work in the factory and don’t actually transform the materials or assemble the product. FOH includes all the costs incurred in the factory except for DM and DL. Every FOH item would be considered an Indirect Cost. DM and DL are Direct Costs. Therefore, DIRECT COSTS are not difficult, inconvenient or expensive to trace to a cost object, whereas, INDIRECT COSTS usually are. Remember, materiality will sometimes be a factor in determining how a cost is classified in this sense. Marketing (selling) costs are not part of FOH, nor are Administrative (ADM) costs. Both of these are also Period costs, whereas DM, DL and FOH are Product costs. PRIME costs are the combination of DM and DL. CONVERSION costs are the combination of DL and FOH. PRODUCT costs are the combination of DM, DL and FOH. They are also known as Inventory costs. These costs are not expensed (classified as cost of goods sold on the income statement) until the related products are sold. They are classified as inventory, usually a current asset, until the point in time that they are sold. PERIOD costs are the combination of Marketing and Administrative costs. These costs are expensed (show up on the income statement) in the period they are incurred. INVENTORIES of a manufacturing company consist of RAW MATERIALS (RM), WORK IN PROCESS (WIP) and FINISHED GOODS (FG).
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This note was uploaded on 01/13/2012 for the course ACCT 222 taught by Professor Staff during the Spring '11 term at Los Rios Colleges.

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notes-c2 - C2- COST TERMS, CONCEPTS & CLASSIFICATIONS...

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