Lecture 1 Chapter 20: Manufacturing Costs and Accounting (VOCABULARY Flashcards)

Vocabulary flashcards covering key manufacturing costing concepts from Lecture 1 Chapter 20. Each card defines a term relevant to costs, inventories, costing methods, and related accounting procedures.

Direct materials

Cost of raw materials that are directly traceable to the finished product. Small, low-cost items (e.g., lubricants, glue, screws) are often treated as indirect materials and included in factory overhead.

Direct labour

Wages paid to employees whose time and costs can be traced to the product; if tasks are identifiable with converting materials into finished goods, the labour is a direct cost.

Factory overhead

All manufacturing costs other than direct materials and direct labour; includes indirect costs and is allocated to products.

Prime cost

Sum of direct materials cost and direct labour cost; represents the direct cost components of a product.

Manufacturing cost elements

The three basic cost elements in manufacturing: direct materials, direct labour, and factory overhead.

Absorption costing

A costing method where all manufacturing costs are treated as product costs, regardless of whether they vary with production levels.

Direct costing (variable costing)

A costing method where only manufacturing costs that vary with production levels are treated as product costs.

Variable costs

Costs that vary in total with the volume of production; includes items like direct materials, direct labour, and some variable overhead.

Fixed costs

Costs that remain constant in total within the normal operating range, regardless of the level of production.

Product costs

Costs that are necessary to produce the product and are included in inventory (direct materials, direct labour, factory overhead).

Period costs

Costs not tied to production; expensed in the period in which they are incurred (e.g., selling and administrative expenses).

Raw materials inventory

Inventory representing the cost of raw materials purchased but not yet placed into production.

Work in process inventory

Inventory of materials, labour, and overhead assigned to products that are partly completed.

Finished goods inventory

Inventory of completed products that have not yet been sold.

Cost of goods manufactured (COGM)

Total manufacturing costs of goods completed during the period, including direct materials, direct labour, and factory overhead.

Cost of goods manufactured statement

A statement showing the calculations for COGM, used to determine the cost of goods sold in the income statement.

Cost of sales (COGS) – manufacturing vs retail

In retail, cost of sales is calculated for finished goods sold; in manufacturing, COGS is derived from the finished goods inventory and COGM process.

Manufacturing plant and equipment

Accounts used to record machinery and equipment used in manufacturing, especially under a periodic inventory system.

Factory payroll

Wages paid to factory workers; part of manufacturing costs and allocated to products.

Periodic inventory system

An inventory system where stock levels are updated and COGS is determined at period end via stocktakes; requires specific manufacturing accounts.

Perpetual inventory system

An inventory system that continuously updates inventory records and COGS with each transaction.

Service departments

Support departments (e.g., stores, quality control, factory office) that aid production departments and incur overhead that must be allocated.

Manufacturing summary

Closing account that aggregates manufacturing costs and is closed to the Profit or Loss Summary after determining COGM.

Valuation of inventories under periodic system

Under a periodic system, ending inventories (raw materials, WIP, finished goods) must be estimated via stocktake, affecting financial statements.

Sustainability in manufacturing

Design and process choices aimed at reducing environmental impact and costs, including reduction, recycling, and remanufacturing.

GST considerations for manufacturers

GST (e.g., 10%) added to sales price; GST on purchases can be offset against GST payable on sales; tax invoices are required.