SCM Part 1

Primary classification of manufacturing costs

Direct materials, direct labor, manufacturing overhead

Direct materials

Raw materials and other parts that can be traced to a specific product

Direct labor

Payments and benefits for employees who convert direct materials into finished product

Manufacturing overhead

Costs of converting materials into finished product of indirect material, indirect labor, other overhead, indirect pertains to not easy to trace

Indirect material

Not part of finished product but used in its manufacture like repair parts or part of finished product but insignificant in cost like lightbulbs

Indirect labor

Wages of production employees who don’t work directly on product but are required to operate facility like supervisors and cleaners

Other overhead

Set up costs, support departments, overtime

Nonmanufacturing costs

Selling costs and administrtive costs

Cost behavior

Cost response to changes in business activity

Total variable costs

Costs that change in proportion to change in specified cost driver (activity that changes total cost for given cost object like number of batches produced)

Total fixed cost

Costs that don’t vary with small changes in activity levels

Relevant range

Total fixed costs and unit variable costs remain constant within certain range of activity

Marginal cost

Cost of producing additional unit of goods or service

Mixed costs

Cost has both fixed and variable component, ex. electricity bill has base charge plus $2 per shirt produced

Committed costs

Long term obligations that are difficult and costly to change in short term

Discretionary costs

Easier to alter in short term by current managerial decisions, ex. research and development, advertising

Product cost

Cost assigned to goods that’s manufactured or purchased for resale, used to value inventory of manufactured goods until goods are sold, when goods are sold product costs are recognized as COGS

Period cost

Cost of running the business and recorded as expense right away in period it happens, for external financial reporting SG&A and research and development costs are always period costs while this doesn’t have to be true for internal cost management reporting, ex. SG&A costs, research and development

Absorption (Full) costing

Both variable and fixed production costs become part of the product’s cost

Variable costing

Only variable manufacturing costs go into product while fixed manufacturing overhead is a period cost becoming an expense during current period