Manufacturing organizations purchase raw materials from suppliers and convert

Manufacturing organizations purchase raw materials

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Manufacturing organizations = purchase raw materials from suppliers and convert these materials into tangible products through the use of labour and capital inputs. Therefore, types of inventory: - Raw materials; - Work in process; - Finished goods. Merchandising organizations = sell tangible products that they have previously purchased in the same basic form from suppliers. Therefore type of inventory is finished goods. Service organizations = provide tasks or activities for customers; they provide perishable services that cannot be stored for future use. Therefore service organizations do not have finished goods inventory but some service organizations do have work in process . For example, a firm of lawyers may have clients whose work is partially complete at the end of the accounting period
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Prime costs = all direct manufacturing costs (i.e. it is the sum of direct material and direct labour costs). Conversion costs = sum of direct labour and manufacturing overhead costs. It represents the cost of converting raw materials into finished products. Distinguishing direct and indirect costs . Sometimes, direct costs are treated as indirect because it is not cost effective to trace costs directly to the cost object. For example, the nails used to manufacture a particular desk can be identified specifically with the desk, but, because the cost is likely to be insignificant, the expense of tracing such items does not justify the possible benefits from calculating more accurate product costs. So the distinction depends on cost object. Cost allocation = The process of assigning indirect costs when a direct measure does not exist for the quantity of resources consumed by a particular cost object. Product costs = costs that are identified with goods purchased or produced for resale. In a manufacturing organization, they are costs that are attached to the product and that are included in the inventory valuation for finished goods or for partly completed goods (work in progress), until they are sold; they are then recorded as expenses and matched against sales for calculating profit.
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