horngren_ima15_im 04.doc

See exhibit 4 3 iii cost terms used for external

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information services, and executive salaries). (See EXHIBIT 4-3 .) III. Cost Terms Used for External Reporting Purposes A. Categories of Manufacturing Costs {L. O. 5} Direct-Materials Costs - the acquisition costs of all materials that are physically identified as a part of the manufactured goods and that may be traced to the manufactured goods in an economically feasible way. 47
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Direct-Labor Costs - the wages of all labor that can be traced specifically and exclusively to the manufactured goods in an economically feasible way. Indirect Production Costs ( Indirect Manufacturing Costs, Factory Overhead, Factory Burden, or Manufacturing Overhead ) - include all costs other than direct material or direct labor that are associated with the manufacturing process (e.g., power, supplies, indirect labor, supervisory salaries, property taxes, rent, insurance, and depreciation). B. Product Costs and Period Costs Product Costs - costs (e.g., direct materials, direct labor, and factory overhead) initially identified with goods produced or purchased for resale (i.e., inventory) and become expenses (i.e., cost of goods sold) only when the inventory is sold. Period Costs - costs (e.g., selling and general administration expenses) that are deducted as expenses during the current period without going through the inventory stage. EXHIBIT 4-4 shows the flow of costs for both merchandising companies and manufacturing companies. Note that manufacturing companies have three categories of inventory while only one is present for merchandisers. Direct-Materials Inventory - materials on hand and awaiting use in the production process. Work-In-Process Inventory - goods undergoing the production process but not yet fully completed. Costs include appropriate amounts of the three major manufacturing costs (i.e., direct material, direct labor, and factory overhead). Finished-Goods Inventory - goods fully completed but not yet sold. C. Balance Sheet and Income Statement Presentation {L. O. 6} of Costs Typically, manufacturing and merchandising companies treat selling and administrative expenses in the same manner, but the detail of COGS differs. Manufacturers show the manufacturing cost of goods produced and then sold, which is composed of the three major cost categories: direct materials, direct 48
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labor, and factory overhead (see EXHIBIT 4-4 ). Merchandisers simply show the purchased cost of items, including freight, rather than the cost of goods manufactured and sold. IV. Traditional and Activity-Based Cost Accounting Systems {L. O. 7} In the past, almost all companies used traditional costing systems – those that do not accumulate or report costs of activities or processes. This works well for fairly simple production and operating systems. The business environment has become more complex. This has led to the most significant improvement in cost accounting system design – activity-based costing (ABC) . Many ABC teams find it useful to develop a process map – a schematic diagram with symbols that captures the interrelationships between cost objects, activities, and resources (see EXHIBIT 4-5 ).
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