Planning Control DecisionMaking Directing Process of Management Managers need cost information toperform each of these functions.
DirectLabor DirectMaterial Manufacturing Overhead TheProduct Manufacturing Costs
Classifications of Costs in Manufacturing Companies Manufacturing costs are oftencombined as follows: DirectMaterial DirectLabor ManufacturingOverhead PrimeCost ConversionCost
Cost Classifications on Financial Statements – Balance Sheet • Manufacturer • Current Assets • Cash • Receivables • Prepaid Expenses • Inventories • Raw Materials • Work in Process • Finished Goods Merchandiser Current Assets • Cash • Receivables • Prepaid Expenses • Merchandise Inventory
Income StatementExpenses Work in Process Cost of GoodsSold FinishedGoods Selling andAdministrative Period Expenses Manufacturing Cost Flows Balance SheetCosts Inventories Material Purchases Raw Material Direct Labor ManufacturingOverhead Selling andAdministrative
Direct costs Costs that can beeasily and conveniently traced to a product or department. Example: cost of paint in the paint department of an automobile assembly plant. Indirect costs Costs that must be allocated in order to be assigned to a product or department. Example: cost of national advertising for an airline is indirect to a particular flight. Direct and Indirect Costs
Marginal Costs and Average Costs The extra costincurred to produceone additional unit. The total cost toproduce a quantitydivided by thequantity produced. Marginal and average costs arelargely a function of cost behavior -- variable and fixed costs.
Benefits Costs Costs and Benefits of Information More information does not mean more benefits if information overload results.