Accounting for Manufacturing Entities

Vocabulary practice covering fundamental concepts, cost classifications, and valuation methods in manufacturing accounting.

Merchandizing Firm

A business that purchases finished products from manufacturers or wholesalers and resells them to customers to generate revenue.

Manufacturing Firm

A business that transforms raw materials or components into finished goods using labour, machinery, and chemical or biological processing.

Direct Costs

Costs that are easily traced to a particular cost object.

Indirect Costs

Also known as overheads, these are costs that are difficult to trace to a particular cost object.

Manufacturing Costs

Costs that are incurred specifically for the purpose of producing a product.

Non-Manufacturing Costs

Costs incurred after the production process is complete to support selling, administration, distribution, or finance, and are not linked to production activity.

Manufacturing Statement

Also called a cost of goods manufactured statement, it is a financial report that calculates the total cost of producing finished goods, including direct materials, direct labour, and manufacturing overhead.

Prime Costs

The total of all direct costs, calculated as the sum of direct materials, direct labour, and direct expenses.

Factory Costs

The sum of Prime Costs and manufacturing overhead costs ($\text{Prime} + \text{OH Cost}$).

Work in Process (WIP)

Inventory consisting of unfinished goods in the manufacturing process, representing the value of materials and labour invested in incomplete goods.

Equivalent Units

A calculation used in WIP valuation defined as $\text{Units} \times \text{Percentage Completion}$.

Transfer Price

A valuation method for finished goods that approximates market value, calculated as $\text{Cost} + \text{markup}$, representing the price of buying a product from outside instead of producing it.

Manufacturing Profit

The measurement of efficiency when the factory produces a product at a lower cost than purchasing the same product from an outside supplier.

Provision for Unrealized Profit (PURP)

An adjustment made to prevent inflating profit by removing the markup included in opening and closing finished goods inventory when valued at transfer price.

Net Realisable Value

The estimated selling price in the ordinary course of business less the estimated costs of completion and costs to be incurred in marketing, selling, and distribution.