accounting

Product Costs:

• Costs directly tied to production (direct materials, direct labor, manufacturing overhead). Capitalized as inventory until sold.

• Examples: Factory rent, raw materials, assembly-line wages.

Period Costs

• Definition: Non-production costs expensed immediately.

• Examples: Office rent, advertising, CEO salary.

Variable Costs

Change proportionally with activity (e.g., raw materials).

Fixed Costs:

Remain constant regardless of activity (e.g., factory rent).

Mixed Costs

Combine fixed and variable elements (e.g., utility bill: base fee + usage cost)

Direct Costs

Traceable to a specific product (e.g., wood for a chair, wages of assembly worker)

Indirect Costs:

Cannot be traced directly (e.g., factory supervisor’s salary, equipment depreciation).

Cost Flow Through Inventory Accounts

Raw Materials → Work in Process (WIP) → Finished Goods → Cost of Goods Sold (COGS)

Raw Materials Inventory T account

• Debit: Purchases of materials.

• Credit: Materials transferred to WIP.

Work in Process (WIP) Inventory:

• Debit: Direct materials, direct labor, allocated manufacturing overhead.

• Credit: Cost of completed goods transferred to Finished Goods.

Finished Goods Inventory

• Debit: Cost of goods completed from WIP.

• Credit: Cost of goods sold (transferred to COGS).

Manufacturing overhead t account

Indiret matierials, indirect labor,depreciation,utilities,insurance,taxes,etc
credit applied overhead

Variable Costs:

Increase as production increases (e.g., direct materials).

Fixed Costs

Constant within a relevant range (e.g., factory rent).

Mixed Costs

Part fixed, part variable (e.g., salesperson salary + commission).

Job Order Costing

Tracks costs by individual job (e.g., custom furniture).

Raw Materials:

Unused materials (debit when purchased, credit when used).

Work in Process (WIP)

Partially completed goods (debit for costs added, credit when completed)

Finished Goods

Completed goods (debit when transferred from WIP, credit when sold)

Cost of Goods Sold

COGS=Beginning Finished Goods+Cost of Goods Manufactured−Ending Finished Goods

Schedule of Cost of Goods Manufactured

• Direct materials used

• Direct labor

• Manufacturing overhead

Total Manufacturing Costs:

Direct materials + Direct labor + Overhead