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CHAPTER TWO
Product Costing: Manufacturing Processes,
Cost Terminology, and Cost Flows
Chapter two begins with a description of the production process for both
traditional manufacturing companies with inventory and manufacturing
companies with little or no inventory. The chapter also provides an introduction
to basic cost terminology applicable to manufacturing companies, merchandising
companies, and service providers and concludes with a description of cost flows
in each type of company. The chapter also discusses the impact of product and
period costs on a company’s income statement and balance sheet.
Key Concepts
• Production processes require the combination of raw materials, labor,
and other items such as electricity and supplies to create finished
goods.
Learning Objectives
LO1— Describe basic production processes used by manufacturing
companies
Instructor’s Manual
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Lecture Outline
A. Introduction
o Costs are associated with the products and services
produced and sold in all companies.
B. The Production Process (LO1)
o The production process converts raw material into finished
products. This process may be relatively simple or very
1. Manufacturing in a Traditional Environment
o In a traditional system, inventories are accumulated to serve
as buffers in case of unexpected demand.
goods.
Chapter 2 – Product Costing: Manufacturing Processes, Cost Terminology, and Cost Flows
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C. Lean Production and Manufacturing in a JIT Environment (LO2)
o JIT (just-in-time) systems secure raw material and provide
finished product when needed or just in time for production
or sale.
D. Product Costs in a Manufacturing Company (LO3)
1. Direct Materials: Materials that can be directly and conveniently
MAKING IT REAL
Lean Health Care
MAKING IT REAL
How Much Is Enough When Disaster Strikes?
Instructor’s Manual
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E. Nonmanufacturing Costs
o These costs are incurred outside the plant or factory and
typically are categorized as selling and administrative costs.
F. Cost Flows in a Manufacturing Company—Traditional Environment with
Inventory (LO4)
o Storeroom to Factory to Finished Goods to the Customer
G. The Cost-of-Goods-Sold Model for a Traditional Manufacturing Company
with Inventory
H. Cost Flows in a Manufacturing Company – JIT Environment
J. Service Companies and the Cost of Service
Key Concept
Manufacturing costs are incurred in the production facility, whereas
Chapter 2 – Product Costing: Manufacturing Processes, Cost Terminology, and Cost Flows
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o The cost of services includes three components (direct
K. Product Costs and Period Costs (LO5)
o Product costs are also called inventoriable costs. These
End-of-Chapter Material
This chapter has a number of good short exercises that deal with the concepts in