cost concepts

manufacturing costs

the costs incurred in the production of a product

• direct materials

• direct labor

• manufacturing overhead

direct materials

raw materials that become an integral part of the finished product and can be easily and efficiently traced to the product

• materials not directly traced to products considered indirect

direct labor

represents the payroll cost of those employees who work directly on the product being manufactured

• employees who work in the factory but not on products, indirect

manufacturing overhead

represents all manufacturing costs other than direct materials and direct labor

non-manufacturing costs (S&A costs)

costs incurred outside of the manufacturing process

product costs

manufacturing costs

period costs

non-manufacturing costs

direct (raw) materials

inventory on hand and available for use

work in process

partially completed goods

finished goods

completed goods awaiting for sale

direct material inventory

the materials have been purchased and are available in the storeroom

direct material cost

the materials are actually used in the production of goods

direct materials used equations

beginning DM inventory + DM purchased - ending DM inventory

cost of goods manufactured

the costs transferred from work in process to finished goods

costs of goods manufactured equation

beginning WIP inventory + DM used + direct labor + overhead - ending WIP inventory

COGS equation

beginning finished goods inventory + cost of goods manufactured - ending finished goods inventory

manufacturing costs

• DM used + direct labor = prime costs

• direct labor + manufacturing overhead = conversion costs

income statement

sales revenue - COGS - selling & advertising (S&A) expenses = net income