1-1
Cost Terms, Concepts and
Classifications
Topic 2
Classify general cost.
Learning Objective 1
1
The Product
Direct
Materials
Direct
Labor
Manufacturing
Manufacturing
Overhead
Manufacturing Costs
Manufacturing costs include all costs
incurred to produce the physical product.
2
Direct Materials
Direct materials are major material inputs
that can be physically and conveniently
traced directly to the final product.
Example: Glass windows installed in an
automobile
3
Direct Labor
Direct labor is the cost of labor that can be
physically and conveniently traced to the
final product.
Example: Wages paid to automobile
assembly workers
4
Manufacturing costs that cannot be traced
directly to specific units produced.
Manufacturing Overhead
Examples: Indirect materials and indirect labor
Wages paid to employees
who are not directly
involved in production
work.
Examples: Maintenance
workers, janitors and
security guards.
Materials used to support
the production process.
Examples: Lubricants and
cleaning supplies used in the
automobile assembly plant.
5
1-2
Manufacturing Costs
Direct
Materials
Direct
Labor
Manufacturing
Overhead
Prime
Cost
Conversion
Cost
Manufacturing costs are often
combined as follows:
6
Nonmanufacturing Costs
Marketing or
Selling Costs
Costs necessary to
secure the order and
deliver the product.
Administrative
Costs
All executive,
organizational, and
clerical costs.
7
Distinguish between product
costs and period costs.
Learning Objective 2
8
Product Costs Versus Period Costs
Product costs include
direct materials, direct
labor, and manufacturing
overhead.
Period costs include all
selling costs and
administrative costs.
Inventory Cost of
Good Sold
Balance
Sheet
Income
Statement
Sale
Expense
Income
Statement
9
Finished
Goods
Cost of
Goods
Sold
Selling and
Administrative
Period Costs
Selling and
Administrative
Manufacturing
Overhead
Work in
Process
Direct Labor
Balance Sheet
Costs Inventories
Income
Statement
Expenses
Material Purchases Raw Materials
10
Product Costs Versus Period Costs
11
Merchandisers . . .
Buy finished
goods.
Sell finished
goods.
Manufacturers . . .
Buy raw materials.
Produce and sell
finished goods.
C-Mart
Comparing Merchandising and
Manufacturing Companies
1-3
Prepare a schedule of cost of
goods manufactured.
Learning Objective 3
12
Schedule of Cost of Goods
Manufactured
Calculates the cost of raw
materials, direct labor, and
manufacturing overhead
used in production.
Calculates the manufacturing
costs associated with goods
that were finished during the
period.
13
Product Cost Flows
Conversion
costs are costs
incurred to
Conversion
costs are costs
incurred to
Product Cost Flows
