Understanding Manufacturing Costs and Inventory Flow

Materials Inventory

Cost of materials purchased but not yet used.

Work in Process Inventory

Cost of units started but not yet completed.

Finished Goods Inventory

Cost of units completed but not yet sold.

Product Costs

Costs directly tied to production (e.g., direct materials, direct labor, manufacturing overhead). These are capitalized as inventory until the product is sold.

Period Costs

Costs not related to production (e.g., selling & administrative expenses). These are expensed in the period incurred.

Variable Costs

Change in direct proportion to production levels (e.g., raw materials, direct labor).

Fixed Costs

Do not change regardless of production levels (e.g., rent, insurance).

Mixed Costs

Contain both fixed and variable components (e.g., utility bills).

Direct Costs

Directly traceable to a specific product (e.g., direct materials, direct labor).

Indirect Costs

Cannot be traced directly to a product (e.g., factory utilities, supervisor salaries).

Job Order Costing

Used for unique/custom products (e.g., custom furniture, construction projects).

Batch costing

Multiple products low volume high product diversity some customization (batch production of eavy equipment ex caterpillar)

Assemly costing

A few major products higher volume lower diversity minimal customization (cars)

Cost of Goods Sold (COGS)

Debits (Increases): When finished goods are sold. Credits (Decreases): If products are returned or written off.

Cost Flow and Inventory Accounts

Debits (Increases): Raw material purchases. Credits (Decreases): Raw materials used in production (moved to Work in Process).

Wages Payable

Credit Direct and Indirect Labor.

Manufacturing Overhead

Debit Indirect materials: Indirect labor depreciation utilities, Insurance, Taxes, etc. Credit applied overhead.

Cost Management/Value Chain

Getting raw materials → research and development → product design → production → marketing → distribution → customer service.

Data Collection Problems

Issues: Misclassification, inaccurate tracking, missing data. Impact: Can lead to incorrect cost calculations, poor decision-making.

Cost Behavior

Variable Costs: Increase with production. Fixed Costs: Remain constant. Mixed Costs: Have both variable and fixed components.

Cost Flow

Direct materials, work in process inventory, finished goods inventory, cost of goods sold.

Raw Materials Inventory

Unused materials.

Work in Process (WIP) Inventory

Partially completed products.

Finished Goods Inventory

Completed products ready for sale.

Direct Materials

Raw materials that can be directly traced to a product (e.g., wood for furniture).

Direct Labor

Wages paid to workers directly involved in production (e.g., machine operators).

Manufacturing Overhead

Indirect costs related to production (e.g., utilities, depreciation, factory supervisor salaries).

Allocation of Manufacturing Overhead

Applied to WIP inventory based on a predetermined overhead rate.

Cost of Goods Sold (COGS) Calculation

COGS = Beginning Finished Goods Inventory + Cost of Goods Manufactured - Ending Finished Goods Inventory.

Schedule of Cost of Goods Manufactured

Includes Direct Materials Used, Direct Labor, Applied Manufacturing Overhead, Changes in Work in Process Inventory.

Product Costs

Related to manufacturing (recorded as inventory).

Period Costs

Related to selling/admin expenses (expensed immediately).

Fixed Costs per Unit

Decrease because total fixed costs are spread over more units when production increases.

Direct Cost for a Unit of Production

Direct materials (e.g., wood for furniture).

Flow of Product Costs

Raw Materials Inventory → Work in Process Inventory → Finished Goods Inventory → Cost of Goods Sold.

Manufacturing Overhead Example

Direct labor (since it's a direct cost, not overhead).

Cost of Goods Sold Calculation

COGS = Beginning Finished Goods Inventory + Cost of Goods Manufactured - Ending Finished Goods Inventory.

Types of Inventory on Balance Sheet

Raw Materials Inventory, Work in Process (WIP) Inventory, Finished Goods Inventory.

Objective of Managerial Accounting

To provide internal managers with relevant data for planning and decision-making.

Direct Materials vs. Indirect Materials

Direct Materials: Traceable to a product (e.g., wood for a table). Indirect Materials: Used in production but not directly traceable (e.g., glue, nails).

Key Characteristics of Managerial Accounting

Focuses on internal users, future-oriented, not GAAP regulated, detailed reporting.

Cost Behavior

Variable Costs: Change with production. Fixed Costs: Stay constant. Mixed Costs: Have both components.

Types of Production Processes

Job Order Costing: Custom products. Process Costing: Mass production. Hybrid: Combination of both.

Direct Labor vs. Manufacturing Overhead

Direct Labor: Workers directly making the product. Manufacturing Overhead: Indirect costs related to production (e.g., factory utilities).

Raw Materials Inventory

Materials purchased but not yet used.

Work in Process (WIP) Inventory

Partially completed products

Finished Goods Inventory:

Completed products ready for sale.

Cost of Goods Sold (COGS)

Costs transferred to the income statement when products are sold.

Continuous flow

high production volume highly standarized commodity products (ezzon mobil production of gas)

Raw material t account

Debit: Purchases of materials.

Credit: Materials transferred to WIP.

Work in Process (WIP) Inventory t account

Debit: Beginning balance Direct materials, direct labor, allocated manufacturing overhead. Ending balance

Credit: Cost of completed goods transferred to Finished Goods.

Finished Goods Inventory t account

Debit: Beginning Cost of goods completed from WIP,Ending balance

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

Manufacturing overhead t account

Indiret matierials, indirect labor,depreciation,utilities,insurance,taxes,etc

credit applied overhead