University:
California State University, Northridge
Course:
ACCT 230 | Introduction to Managerial Accounting
Academic year:

2024
Views:

236

Pages:

11
Author:

Mercedes Bishop

Chapter 1 Managerial Accounting Part 2 Study Objective 4 Distinguish between product and period costs. Product Costs Product costs (also called inventoriable costs) include each of the manufacturing cost elements (direct materials, direct labor, and manufacturing overhead). They are the costs that are a necessary and integral part of producing the finished product. These costs are not expensed (as cost of goods sold) under the matching principle until the finished goods inventory is sold. Product Costs: Prime and Conversion Direct materials and direct labor are often referred to as prime costs due to their direct association with the manufacturing of the finished product. Direct labor and manufacturing overhead are often referred to as conversion costs since they are incurred in converting raw materials into finished goods. Period Costs Period costs are identifiable with a specific time period rather than a salable product. Period costs are deducted from revenues in the period in which they are incurred. Period costs relate to nonmanufacturing, (thus, noninventoriable) costs, and include selling and administrative expenses. Product Versus Period Costs All Costs Product Costs Period Costs Manufacturing Costs Nonmanufacturing Costs (Go to Balance Sheet before Income Statement) Direct Materials Direct Labor Manufacturing Overhead (Go straight to Income Statement) Prime Costs Conversion Costs Selling Expenses Administrative Expenses Illustration 1-4 Study Objective 5 Explain the difference between a merchandising and a manufacturing income statement. Merchandising versus Manufacturing Income Statements Under a periodic inventory system, the income statements of a merchandising company and a manufacturing company differ in the cost of goods sold section. For a merchandising company, cost of goods sold is calculated by adding the beginning merchandise inventory and the cost of goods purchased, and subtracting the ending merchandise inventory. For a manufacturing company, cost of goods sold is calculated by adding the beginning finished goods inventory and the cost of goods manufactured, and subtracting the ending finished goods inventory. Cost of Goods Sold Components Merchandising Company Beginning Merchandise Inventory + Cost of Goods Purchased - Ending Merchandise Inventory = Cost of Goods Sold Manufacturing Company Beginning Finished Goods Inventory + Cost of Goods Manufactured - Ending Finished Goods Inventory = Illustration 1-5 Cost of Goods Sold Sections of Merchandising and Manufacturing Companies The following cost of goods sold sections for merchandising and manufacturing enterprises highlight the different presentations: MERCHANDISING COMPANY Partial Income Statement For the Year Ended December 31, 1999 Cost of goods sold Merchandise inventory, January 1 Cost of goods purchased Cost of goods available for sale Merchandise inventory, December 31 Cost of goods sold $ 70,000 650,000 720,000 400,000 $ 320,000 Illustration 1-6a Cost of Goods Sold Sections of Merchandising and Manufacturing Companies MANUFACTURING COMPANY Partial Income Statement For the Year Ended December 31, 1999 Cost of goods sold Finished goods inventory, January 1 Cost of goods manufactured Cost of goods available for sale Finished goods inventory, December 31 Cost of goods sold $ 90,000 370,000 460,000 80,000 $ 380,000 Illustration 1-6b