3 Types of Product (manufacturing) Costs
- DM - materials to be converted into the finished product, does not include indirect materials
- DL - work of factory employees, usually given as is, does not include indirect labor
- MOH - anything associated with manufacturing that isn’t DM or DL, includes indirect materials and labor, depreciation, insurance, property taxes, maintenance… on factory facilities
Prime costs vs conversion costs
P - sum of DM and DL, all direct manufacturing costs
C - sum of DL and MOH, costs of converting raw materials into a final product
Product vs Period Costs
Product - all manufacturing cost components (DM, DL MOH)
Period - non manufacturing costs
How are product costs recorded
As inventory when incurred, don’t become expenses until the company sells the finished goods inventory, where the company then records it as COGS
What is a cost behavior analysis
Study of how specific costs respond to changes in the level of business activity - some costs change while others stay the same
What are variable costs, and what type of company is more likely to have high % of variable costs. and examples
Costs that vary in total directly and proportionally with changes in the activity level.
If level increases by 10%, total variable costs will increase by 10%.
Companies that rely heavily on labor.
DM, DL, COGS
What are fixed costs and examples, and it’s relationship between volume and unit cost
Costs that remain the same in total regardless of changes in activity levels.
Property taxes, insurance, rent, supervisory salaries, depreciation… mainly MOH.
As volume increases, unit cost decreases
What are mixed costs
Costs that have both a variable and fixed component - they change in total, but not proportionally with changes in the activity level.
Ex: U-Haul truck - insurance is $50 per day + 25 cents per km
Equation/steps for high-low method to get cost equation
- get variable cost per unit with formula (change in total costs at high vs low activity level) / (change in total activity at high vs low activity level) = variable cost per unit
- get fixed cost by subtracting total variable cost at either the high or ow activity level from the total cost at that activity level
Manufacturer’s Balance Sheet - name inventory accounts and how are they listed
Raw materials, work in process, finished goods.
In order of liquidity, so finished goods, work in process, then raw materials
COGS equation and other equations to get there
COGS = beg f/g invt. + COGM - end f/g invt
COGM = beg w/p invt. + product costs - end w/p invt.
Product costs = DM + DL + MOH
DM used = beg RM invt. + purchases + freight in - discounts - returns - end RM invt.
Know what the graphs for VC, FC, MC look like for $/unit and $ in total
