Managerial accounting garrison norren 11th ed chap002

11th Edition
Chapter 2

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Costs Terms, Concepts and
Classifications
Chapter Two

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Manufacturing Costs

Direct
Direct
Materials
Materials

Direct
Direct
Labor
Labor

Manufacturing
Manufacturing

Overhead
Overhead

The Product

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Direct Materials
Raw materials that become an integral part of the
product and that can be conveniently traced
directly to it.

Example:
Example: A
A radio
radio installed
installed in
in an
an automobile
automobile

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Direct Labor

Those labor costs that can be easily traced to
individual units of product.

Example:
Example: Wages
Wages paid
paid to
to automobile
automobile assembly
assembly workers
workers

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Manufacturing Overhead
Manufacturing costs that cannot be traced directly
to specific units produced.
Examples:
Examples: Indirect
Indirect labor
labor and
and indirect
indirect materials
materials
Wages paid to employees
who are not directly
involved in production

work.
Examples: maintenance
workers, janitors and
security guards.

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Materials used to support
the production process.
Examples: lubricants and
cleaning supplies used in the
automobile assembly plant.

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Classifications of Costs
Manufacturing costs are often
classified as follows:
Direct
Direct
Material
Material

Direct
Direct
Labor
Labor

Prime

Cost

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Manufacturing
Manufacturing
Overhead
Overhead

Conversion
Cost

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Non-manufacturing Costs

Marketing or
Selling Cost

Administrative
Cost

Costs necessary to get
the order and deliver
the product.

All executive,
organizational, and
clerical costs.

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Product Costs Versus Period Costs

Product costs include
direct materials, direct
labor, and manufacturing
overhead.
Inventory

Cost of Good Sold

Period costs include all
marketing or selling
costs and
administrative costs.
Expense

Sale

Balance
Sheet
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Income
Statement

Income
Statement
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Quick Check 
Which of the following costs would be considered a
period rather than a product cost in a manufacturing
company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.

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Quick Check 
Which of the following costs would be considered a
period rather than a product cost in a manufacturing
company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production

facility.
E. Sales commissions.

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Comparing Merchandising and
Manufacturing Activities
Merchandisers . . .
 Buy finished goods.
 Sell finished goods.

Manufacturers . . .
 Buy raw materials.
 Produce and sell
finished goods.

MegaLoMart

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Balance Sheet
Merchandiser
Current assets
 Cash

 Receivables
 Prepaid Expenses
 Merchandise

Inventory

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Manufacturer
Current Assets
Cash
Receivables
Prepaid Expenses
Inventories
Raw Materials
Work in Process
Finished Goods

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Balance Sheet
Merchandiser
Current assets
 Cash
 Receivables
 Prepaid Expenses

Partially complete
 Merchandise

products – some
Inventory

material, labor, or
overhead has been
added.

Manufacturer
Current Assets
Cash
Receivables
Materials
waiting to
be processed.
Prepaid
Expenses
Inventories
Raw Materials
Work in Process
Finished Goods

Completed products
awaiting sale.
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The Income Statement
Cost of goods sold for manufacturers differs only

slightly from cost of goods sold for merchandisers.
Merchandising Company
Cost of goods sold:
Beg. merchandise
inventory
+ Purchases
Goods available
for sale
- Ending
merchandise
inventory
= Cost of goods
sold

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$ 14,200
234,150
$ 248,350

(12,100)
$ 236,250

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Inventory Flows
Beginning
Beginning
balance

balance
$$
$$

Available
Available
$$$$$
$$$$$

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+

Additions
Additions
$$$
$$$

_ Withdrawals
Withdrawals
$$$
$$$

=

=

Available
Available
$$$$$

$$$$$

Ending
Ending
balance
balance
$$
$$

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Quick Check 
If your inventory balance at the beginning of the
month was $1,000, you bought $100 during the
month, and sold $300 during the month, what would
be the balance at the end of the month?
A. $1,000.
B. $ 800.
C. $1,200.
D. $ 200.

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Quick Check 
If your inventory balance at the beginning of the
month was $1,000, you bought $100 during the

month, and sold $300 during the month, what would
be the balance at the end of the month?
A. $1,000.
$1,000 + $100 = $1,100
B. $ 800.
$1,100 - $300 = $800
C. $1,200.
D. $ 200.

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Schedule of Cost of Goods
Manufactured
Calculates the cost of raw
material, direct labor and
manufacturing overhead used
in production.

Calculates the manufacturing
costs associated with goods
that were finished during the
period.
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Product Cost Flows

Raw Materials

+
=

–
=

Beginning raw
materials inventory
Raw materials
purchased
Raw materials
available for use
in production
Ending raw materials
inventory
Raw materials used
in production

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Manufacturing
Costs

Work
In Process

Direct materials

As
As items
itemsare
areremoved
removedfrom
fromraw
raw
materials
materialsinventory
inventoryand
andplaced
placedinto
into
the
theproduction
productionprocess,
process,they
theyare
are
called
calleddirect
directmaterials.
materials.
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Product Cost Flows

Raw Materials

+
=

–
=

Beginning raw
materials inventory
Raw materials
purchased
Raw materials
available for use
in production
Ending raw materials
inventory
Raw materials used
in production

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Manufacturing
Costs
Direct materials
+ Direct labor
+ Mfg. overhead
= Total manufacturing
costs

Work
In Process

Conversion
Conversion
costs
costsare
arecosts
costs
incurred
incurredto
to
convert
convert the
the
direct
direct material
material
into
intoaafinished
finished
product.
product.

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Product Cost Flows

Raw Materials

+
=

–
=

Beginning raw
materials inventory
Raw materials
purchased
Raw materials
available for use
in production
Ending raw materials
inventory
Raw materials used
in production

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Manufacturing
Costs
Direct materials
+ Direct labor
+ Mfg. overhead
= Total manufacturing
costs

Work

In Process
Beginning work in
process inventory
+ Total manufacturing
costs
= Total work in
process for the
period

All
Allmanufacturing
manufacturingcosts
costs incurred
incurred
during
during the
theperiod
periodare
areadded
addedto
tothe
the
beginning
beginningbalance
balanceof
ofwork
workin
in
process.
process.

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Product Cost Flows

Raw Materials
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production

Manufacturing
Costs

Work
In Process

Direct materials
+ Direct labor
+ Mfg. overhead
= Total manufacturing
costs

Beginning work in
process inventory
Total manufacturing
costs

Total work in
process for the
period
Ending work in
process inventory
Cost of goods
manufactured

+
=

–

Costs
Costsassociated
associatedwith
withthe
thegoods
goodsthat
that
are
arecompleted
completedduring
duringthe
theperiod
periodare
are
transferred
transferredto
tofinished

finishedgoods
goods
inventory.
inventory.
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=

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Product Cost Flows

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Manufacturing Cost Flows

Costs

Balance Sheet
Inventories

Material Purchases

Raw Materials

Direct Labor

Work in
Process

Manufacturing
Overhead

Selling and
Administrative
McGraw-Hill/Irwin

Finished
Goods

Period Costs

Income
Statement
Expenses

Cost of
Goods
Sold
Selling and
Administrative
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