Inventoriable costs and period costs. 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
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.
– goods not yet fully completed.
Finished goods inventory
– goods fully completed but not sold.
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.
Acquisition costs include freight-in charges, sales taxes, and customs duties are included.
Wages and fringe benefits are included
compensation for training time idle timevacation pay sick leaveextra compensation for overtime
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.
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.
are those associated with any aspect of the business other than inventory. e.g –
Deprectiation of office computer, patent amortization
the periodic expensing of capitalized noninventoriable assets consumed in the generation of revenue.
noncapitalized costs. e.g –
Selling, R &D
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.
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
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
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
Manufacturing labor-cost classifications vary among companies. The following distinctions are generally found:
Direct manufacturing labor
Payroll fringe costs
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.
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.
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
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.
Prime Costs are all direct manufacturing costs.
Prime Costs and Conversion Costs are all manufacturing costs other than direct materials cost.
= Direct Materials costs
+ Conversion costs
= Direct Materials costs
+ Direct manufacturing labor costs
+ Indirect manufacturing costs
Research & development
Costs for Financial Statements
Costs for Reimbursement
Costs for Pricing and Product Emphasis