ACCT 322: WINTER 2020 NOTES 1
CHAPTER 2: COST TERMS, CONCEPTS, AND CLASSIFICATIONS
TOPIC SUMMARY
Manufacturing Costs / - Manufacturing companies typically divide manufacturing costs into three
Product Cost categories:
Direct Materials
1. Materials that become an important part of the finished product and can be
conveniently traced to
- Materials that are used in the final products are raw materials
o The finished product of one company can become raw materials for
another.
o E.g.) wood in a table
2. Indirect materials are small items of material that can become an important
part of a finished product
- Can be considered raw materials, but not treated a direct materials because
the costs of tracing them to the finished product exceed the benefits
Direct Labour
1. Consists of labour costs that can be easily tracked to individuals units of
products (aka touch labour)
- E.g.) assembly line workers in a plant
- payroll
2. Indirect labour is labour costs (of janitors, supervisors, material handlers, and
other factory workers) that cannot be physically traced to the creation of
products
Manufacturing Overhead
, ACCT 322: WINTER 2020 NOTES 2
1. Costs associated with manufacturing except direct materials and direct labour
- Includes indirect materials, indirect labour, maintenance and repairs on
production equipment, heat and light, property tax, depreciation, and
insurance on manufacturing facilities.
2. Only costs associated with operating the production facility (factory) are
included in manufacturing overhead.
3. Synonym:
- Indirect manufacturing costs
- Factory overhead
- Factory burden
4. Conversion cost = manufacturing overhead + direct
- Stems from the fact that direct labour costs and overhead costs are gained
labour
to convert raw materials into finished products.
5. -Prime cost = direct labour + direct materials
Classification of Costs
Manufacturing
Costs
Conversion
Prime Cost
Cost
Direct Labour
Manufacturing
Direct Material
Overhead
1. Overtime premiums represents the extra hourly wage rate paid to workers who
work more than their normal time requirements.
, ACCT 322: WINTER 2020 NOTES 3
- Classification of overtime as direct labour or overhead depends on the
cause of the overtime
o A job-specific reason (e.g. a rush order) dictates a direct job cost
o A normal over time results from conditions such as peak
production needs dictate an overhead (indirect) job cost.
2. Employee benefit costs for indirect labour are classified as additional indirect
overhead
3. The employee benefit costs for direct labour are usually added to the base direct
labour rate (in calculating a total direct labour cost, including benefits)
Overtime Premiums - the overtime premiums (payrolls) for factory workers are usually considered
to be part of manufacturing overhead.
- Product specific overtime premiums are part of direct labour.
Non-Manufacturing Costs Marketing of Selling Costs
(Period Costs) - Costs that are necessary to get the order and deliver the products.
- often called order-getting and order fulfilling costs
- order getting (advertising, sales travel, and commissions)
Administrative Costs
- All executive, organizational, and clerical costs assocaited with the general
management of an organization.
o accounting, human resources, public relations, and other costs
involved in the general administration of the organization as a
whole
Product Costs vs. Period - Period costs include all selling costs and administrative costs
Costs o Advertising, executive, sales commission, public relations, etc.
o Do not get attached to the product (inventory)
, ACCT 322: WINTER 2020 NOTES 4
o Expensed in the period incurred
o Salaries****
Income
Expense
Statement
- Product costs include direct materials, direct labour, and maunfacturing
overhead (costs involved in getting or making a product).
Balance
Inventory
Sheet
SALE
Cost of Goods Income
Sold (Expenses) Statement
SALES – PRODUCT COST = GROSS PROFIT – PERIOD COSTS =
OPERATING EXPENSES
Balance Sheet 1. Merchandiser
- Current Assets
o Cash
o Receivables
o Prepaid Expenses
o Merchandise Inventory
CHAPTER 2: COST TERMS, CONCEPTS, AND CLASSIFICATIONS
TOPIC SUMMARY
Manufacturing Costs / - Manufacturing companies typically divide manufacturing costs into three
Product Cost categories:
Direct Materials
1. Materials that become an important part of the finished product and can be
conveniently traced to
- Materials that are used in the final products are raw materials
o The finished product of one company can become raw materials for
another.
o E.g.) wood in a table
2. Indirect materials are small items of material that can become an important
part of a finished product
- Can be considered raw materials, but not treated a direct materials because
the costs of tracing them to the finished product exceed the benefits
Direct Labour
1. Consists of labour costs that can be easily tracked to individuals units of
products (aka touch labour)
- E.g.) assembly line workers in a plant
- payroll
2. Indirect labour is labour costs (of janitors, supervisors, material handlers, and
other factory workers) that cannot be physically traced to the creation of
products
Manufacturing Overhead
, ACCT 322: WINTER 2020 NOTES 2
1. Costs associated with manufacturing except direct materials and direct labour
- Includes indirect materials, indirect labour, maintenance and repairs on
production equipment, heat and light, property tax, depreciation, and
insurance on manufacturing facilities.
2. Only costs associated with operating the production facility (factory) are
included in manufacturing overhead.
3. Synonym:
- Indirect manufacturing costs
- Factory overhead
- Factory burden
4. Conversion cost = manufacturing overhead + direct
- Stems from the fact that direct labour costs and overhead costs are gained
labour
to convert raw materials into finished products.
5. -Prime cost = direct labour + direct materials
Classification of Costs
Manufacturing
Costs
Conversion
Prime Cost
Cost
Direct Labour
Manufacturing
Direct Material
Overhead
1. Overtime premiums represents the extra hourly wage rate paid to workers who
work more than their normal time requirements.
, ACCT 322: WINTER 2020 NOTES 3
- Classification of overtime as direct labour or overhead depends on the
cause of the overtime
o A job-specific reason (e.g. a rush order) dictates a direct job cost
o A normal over time results from conditions such as peak
production needs dictate an overhead (indirect) job cost.
2. Employee benefit costs for indirect labour are classified as additional indirect
overhead
3. The employee benefit costs for direct labour are usually added to the base direct
labour rate (in calculating a total direct labour cost, including benefits)
Overtime Premiums - the overtime premiums (payrolls) for factory workers are usually considered
to be part of manufacturing overhead.
- Product specific overtime premiums are part of direct labour.
Non-Manufacturing Costs Marketing of Selling Costs
(Period Costs) - Costs that are necessary to get the order and deliver the products.
- often called order-getting and order fulfilling costs
- order getting (advertising, sales travel, and commissions)
Administrative Costs
- All executive, organizational, and clerical costs assocaited with the general
management of an organization.
o accounting, human resources, public relations, and other costs
involved in the general administration of the organization as a
whole
Product Costs vs. Period - Period costs include all selling costs and administrative costs
Costs o Advertising, executive, sales commission, public relations, etc.
o Do not get attached to the product (inventory)
, ACCT 322: WINTER 2020 NOTES 4
o Expensed in the period incurred
o Salaries****
Income
Expense
Statement
- Product costs include direct materials, direct labour, and maunfacturing
overhead (costs involved in getting or making a product).
Balance
Inventory
Sheet
SALE
Cost of Goods Income
Sold (Expenses) Statement
SALES – PRODUCT COST = GROSS PROFIT – PERIOD COSTS =
OPERATING EXPENSES
Balance Sheet 1. Merchandiser
- Current Assets
o Cash
o Receivables
o Prepaid Expenses
o Merchandise Inventory
