DescriptionManufacturing firms capture the costs of production in three different inventory categories: raw material, work in process, and finished goods. As the product moves through the different phases of production, the associated costs also flow from one category to another. The primary cost areas are direct material, direct labor, and overhead. All costs need to be associated with the product for costing and financial accounting purposes. In cost accounting, the information provides the baseline for pricing and production decisions. In the financial accounting area, the allocation of labor and overhead costs to a product transfers these costs from expenses to assets (inventory) on financial statements.
At A Glance
- Cost of goods sold is one of the first cost breakdowns in income analysis.
- Specific components go into the cost of goods sold calculation.
- Because manufacturing companies hold inventory, the cost of goods manufactured is an important cost.
- The cost of goods manufactured and the cost of goods sold are different but related figures.
- Direct material costs are reflected in the inventory management system, costing system, and general ledger.
- Product costs can include both direct and indirect material costs.
- In most companies, labor can be directly allocated to a job.
- There are multiple applications for labor costs.
- A supervisor's time needs to be allocated to the jobs that they oversee.
- Absorption costing combines variable and fixed costs into one cost unit.
- To ensure that one allocates costs correctly, the overapplication or underapplication of overhead costs needs to be recorded.