INVENTORY Accounting ASW Summer 2007 Manufacturing Accounting Manufacturing

Manufacturing Accounting • Manufacturing accounting – what if you make inventory rather than buying?

Overview of Manufacturing Firm • Period costs - Selling, general and administrative, etc. •

Period Costs • Examples - corporate headquarters - marketing, advertising - finance, interest -

Product Costs • Identify all relevant costs of “acquiring” – Direct labor • labor

• Direct materials – materials costs which can be linked to products –

• Overhead--can’t be linked to products – indirect labor • e. g. ,

Are these product or period costs? Cutting-machine operator Factory janitor Factory payroll clerks Factory

Physical flow • Raw materials into warehouse • Materials and labor on plant floor

Cost allocation • Cost of materials inputs into raw material inventory when acquired •

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INVENTORY Accounting ASW Summer 2007

Manufacturing Accounting • Manufacturing accounting – what if you make inventory rather than buying? – how do we value inventory/CGS for a manufacturing firm? – should include all costs of acquiring the product and making it ready for sale

Overview of Manufacturing Firm • Period costs - Selling, general and administrative, etc. • Production costs

Period Costs • Examples - corporate headquarters - marketing, advertising - finance, interest - research and development • Generate period costs charged to expense - just as in a merchandising firm

Product Costs • Identify all relevant costs of “acquiring” – Direct labor • labor costs which can be linked to specific product • typically costs of employees working directly on that product • assigned based on actual labor used

• Direct materials – materials costs which can be linked to products – typically major components of the product – assigned based on actual materials used

• Overhead--can’t be linked to products – indirect labor • e. g. , janitorial, supervisor – indirect materials • e. g. , supplies, small components – overhead • e. g. , depr. , rent, utilities on production facilities – allocate based on “drivers” • e. g. , direct labor, direct materials

Are these product or period costs? Cutting-machine operator Factory janitor Factory payroll clerks Factory superintendent General office secretary Guards at the factory gate Inspectors in a factory Factory maintenance workers Factory security guards General office clerks President of the firm Sales manager Raw materials receiving room workers Sweepers who clean a retail store Traveling salespersons

Physical flow • Raw materials into warehouse • Materials and labor on plant floor • Finished product to warehouse • Shipped out when sold

Cost allocation • Cost of materials inputs into raw material inventory when acquired • Cost of materials, labor & overhead into work in process inventory as produced • Total cost incurred into finished goods inventory when completed • Total cost into cost of goods sold at sale