Inventoriable costs and period costs

1. Inventoriable costs and period costs

2. Types of Inventory Manufacturing-sector Manufacturing-sector companies typically have one or more of the following three types of inventories: Direct materials inventory – direct materials in stock and awaiting use. Work-in-process inventory – goods not yet fully completed. Finished goods inventory – goods fully completed but not sold.

3. Types of Inventory - other Merchandising-sector companies hold only one type of inventory – the product in its original purchased form. Service-sector companies do not hold inventories of tangible products.

4. Direct materials costs • are the acquisition costs of all materials that eventually become part of the cost object. • can be traced economically. Acquisition costs include freight-in charges, sales taxes, and customs duties are included.

5. Direct Labor Costs • - include the compensation of all manufacturing labor that can be directly traced. Wages and fringe benefits are included How about compensation for training time idle timevacation pay sick leaveextra compensation for overtime

6. Indirect manufacturing costs • Indirect manufacturing costs are all manufacturing costs that are considered to be part of the cost object, but that cannot be traced to that cost object in an economically feasible way. • Other terms for this cost category include manufacturing overhead costs and factory overhead costs.

7. Inventoriable Costs– manufacturing companies h are all costs of a product that are regarded as an asset when they are incurred and then become inventories before becoming cost of goods sold in income statement when the product is sold. h are included in work-in-process and finished goods inventory (direct materials, direct labor and indirect manufacturing costs). For manufacturing-sector companies, all manufacturing costs are inventoriable costs.

8. Inventoriable Costs – other companies • For merchandising-sector companies, inventoriable costs are the costs of purchasing the goods which are resold in their same form. • For service-sector companies, the absence of inventories means there are no inventoriable costs.

9. Capitalized inventoriable costs: either associated with the purchase of goods for resale (merchandising) or with the acquisition and conversion of materials and other manufacturing inputs into goods for sale (manufacturing). These costs become Cost of Goods Sold (COGS) when the inventory is sold.

10. Capitalized non-inventoriable costs: are those associated with any aspect of the business other than inventory. e.g – Deprectiation of office computer, patent amortization Operating costs: the periodic expensing of capitalized noninventoriable assets consumed in the generation of revenue. + noncapitalized costs. e.g – Selling, R &D

11. Period Costs • are all costs in the income statement other than cost of goods sold and expensed in the accounting period in which they are incurred. For manufacturing companies, period costs include all non-manufacturing costs (research and development, distribution, etc.). For merchandising companies, period costs include all costs not related to the cost of goods purchased for resale. For service companies, all of their costs are period costs.

12. Cost of materials used Direct materials inventory costs are used to compute the cost of materials used = Beginning direct materials inventory + Purchases of direct materials - Ending direct materials inventory

13. Cost of goods manufactured Work-in-process inventory costs are used to compute the cost of goods manufactured = Beginning work-in-process inventory + Manufacturing costs incurred during the period - Ending work-in-process inventory

14. Cost of goods sold Finished goods inventory costs are used to compute the cost of goods sold. Beginning finished goods inventory + Cost of goods manufactured - Ending finished goods inventory

15. Measuring Costs Requires Judgment 1 Manufacturing labor-cost classifications vary among companies. The following distinctions are generally found: Direct manufacturing labor Manufacturing overhead Indirect labor Depreciation Managers’ salaries Payroll fringe costs

16. Measuring Costs Requires Judgment 2 Indirect labor • Forklift truck operators (internal handling of materials) • Janitors • Rework labor • Overtime premium • Idle time

17. Overtime premium - 1 Overtime premium consists of the wages paid to all workers in excess of their straight-time wages Overtime premium is usually considered part of overhead. Why? Because it does not “penalize” (add to) the cost of a particular batch of work solely because it happened to be worked on during the overtime hours.

18. Overtime premium - 2 Assume that a worker gets $18 per hour for straight-time and gets time and one-half for overtime. Overtime premium $18 × 50% = $9 per overtime hour. If this worker works 44 hours on a given week Direct labor: 44 hours × $18 $792 Overtime premium: 4 hours × $9 (assigned to indirect costs) 36 Total gross wages $828 Indirect manufacturing costs

19. Many Meanings of Product Cost For pricing and product emphasis decisions, the costs included are all areas of the value chain. When preparing financial statements for external reporting, the focus is on inventoriable costs. Usually under generally accepted accounting principles, only manufacturing costs are inventoriable. When contracting with government agencies and for tax purposes, guidelines provided on the allowable and nonallowable items must be followed.

20. Prime Costs and Conversion Costs Prime Costs are all direct manufacturing costs. Prime Costs and Conversion Costs are all manufacturing costs other than direct materials cost.

21. Product costs = Direct Materials costs + Conversion costs = Direct Materials costs + Direct manufacturing labor costs + Indirect manufacturing costs

22. Different costs Research & development Design Production Marketing Distributionn Customer Service Costs for Financial Statements Costs for Reimbursement Costs for Pricing and Product Emphasis