Product Costs

necessary costs incurred to manufacture a product

Period Costs
necessary costs incurred to produce a product
Direct Materials
Materials used in a product that are easily and conveniently traceable
Indirect Materials
Materials used in a product that are NOT easily and conveniently traceable
Direct Labor
Labor in which employees have direct contact in making a product and is easily
traceable
Indirect Labor
Labor in which employees CANNOT be easily traced to but work in the factory.
Example: Janitor
Manufacturing Overhead
All manufacturing costs excluding direct labor and direct material; these are all not
easily traceable labor or material
Fixed Cost
Remains constant in total, changes in level of activity
Variable Cost
Cost that varies, in total, in direct proportion to changes in level of activity variable cost
per unit is constant
Mixed Cost
Mixture of fixed and variable costs
Direct Cost
Easily traceable cost that goes into the cost of a specific product
Indirect Cost
Not easily traced cost that goes into the cost of a specific product
Differential Cost
Difference in cost between two different decisions/outcomes
Opportunity Cost
Potential benefit that is given up when another outcome is chosen
Raw Material Inventory
Materials used in making a product
Work-in-Process Inventory
Products that are in process of being completed but are not yet finished
Finished Goods Inventory
Products that are complete and ready to sell or deliver to a customer
Total Manufacturing Cost
Total costs incurred to manufacture a product
Cost of Goods Manufactured
Total costs of goods finished this period
Job Cost Sheet
Sheet that tracks and records of Job Costs
Materials requisition
Records issued materials to manufacturing floor
Identify the three major cost components of a manufactured product.
Direct Labor, Direct Material, Manufacturing Overhead
Explain the major characteristic of an organization that would be more likely to use a
job-order costing system of accumulating product costs rather than a process costing
system.
Organization that are more likely to use a job order costing system are manufacturers of
heterogeneous products

ex. Boeing
Explain the major characteristic of an organization that would be more likely to use a
process costing system of accumulating product costs rather than a job-order costing
system.
Organization that are more likely to use a process costing system are manufacturers of
homogeneous products

ex. Auto Maker, Sherwin-Williams, Harley Davidson

Explain the primary criterion in the choice of an allocation base for indirect costs
(manufacturing overhead)
Should be the activity that actually drives the cost of being allocated
Explain what should be done with over-applied or under-applied manufacturing
overhead at the end of the year if the amount is NOT considered material
Write off to Cost of Goods Sold
Explain what should be done with over-applied or under-applied manufacturing
overhead at the end of the year if the amount is considered material
Allocate to Finished Goods, Cost of Goods Sold, Work-in-Process
If the manufacturing overhead account has a credit balance, be able to explain the
relationship between applied and actual manufacturing overhead (which amount is
larger). Be able to identify whether manufacturing over is under-applied or over-applied.
Credit = Over-applied = Applied
If the manufacturing overhead account has a debit balance, be able to explain the
relationship between applied and actual manufacturing overhead (which amount is
larger). Be able to identify whether manufacturing over is under-applied or over-applied.
Debit = Under-applied = Actual
Equation for Total Manufacturing Overhead Costs
Indirect Material
+ Indirect Labor
+ Other Manufacturing Overhead
Equation for Total Product Costs
Direct Material
+ Direct Labor
+ Manufacturing Overhead
Equation for Total Period Costs
Administrative costs
+ Selling Costs
Equation for Direct Materials used in Production
Beginning Direct Materials
+ Raw Materials Purchased
+ Raw Materials Available
- Ending Direct Materials
Equation for Total Manufacturing Cost
Direct Materials Used
+ Direct Labor
+ Factory Overhead
Equation for Cost of Goods Manufactured
Beginning Work In Process
+ Total Manufacturing Cost
- Ending Work In Process
Calculate Predetermined Manufacturing Overhead
Estimated Manufacturing Overhead Cost/ Estimated Activity
Calculate Unit Cost
Unit Cost = Total Product Cost/ Units Produced
Applied Manufacturing Overhead
Predetermined Manufacturing Overhead x Actual Activity
Over-Applied Manufacturing Overhead Cost
Applied Manufacturing Overhead -- Actual Manufacturing Overhead
Under-Applied Manufacturing Overhead Cost
Actual Manufacturing Overhead -- Applied Manufacturing Overhead
Conversion Cost
Direct Labor
+ Manufacturing Overhead
+Direct Expenses
Prime Cost
Direct Materials
+Direct Labor
+Direct Expenses
Cost of Goods Manufactured Schedule
Raw Materials Beginning
+ Raw Materials Purchased
= Raw Materials Available for Use
- Raw Material Ending
= Raw Material Used in Production

+ Indirect Materials Used

+ Direct Materials Used
+ Direct Labor
+ Applied Manufacturing OH
= Total Manufacturing cost
+ Work in process Beg
- Work in process End

= Cost of Goods Manufactured