Merchandising and

Manufacturing Firms

Manufacturing
Costs
Direct Materials
- Cost of materials directly traceable to items
produced
-Materials not directly traceable are indirect
materials

Direct Labor
- Cost of labor directly traceable to items produced
- Labor costs not directly traceable are indirect
labor

Manufacturing Overhead
- Cost of manufacturing activities other than direct
materials and direct labor

Nonmanufacturing Costs
Selling Costs
- Costs associated with securing and filing
customer orders e.g. advertising, sales salaries,
depreciation of sales equipment

General and Administrative Costs

- Costs associated with the firms general
management e.g. Human resources, accounting,
corporate headquarters and other support costs

Product and Period

Costs
Product Costs
- Costs assigned to goods produced (i.e. direct
materials, direct labor, and manufacturing OH)
- Included in inventory until goods sold

Period Costs
- Costs identified with accounting periods (i.e
selling and administrative expenses)
- Expensed in period incurred

Relationships Among
Cost Categories

Job-Order versus
Process Costing
Job Order Costing
Companies produce goods to a customers unique
specifications e.g. construction, shipping
Cost of job accumulated on job cost sheet

Process Costing
Companies produce large quantities of identical
items e.g. producers of paints and plastics
Cost accumulated by each operation
Unit cost of items determined dividing costs of
production by number of units produced

Relating Product
Costs to Jobs

Job Costs Direct

Materials
Requisition of raw materials for use on a
specific job

Job Costs Direct Labor

Cost of direct labor related to a particular job

Job Costs
Manufacturing Overhead
Apply manufacturing overhead to jobs
Choose an allocation base e.g. direct labor
hours or direct labor cost
Calculate overhead allocation rate
Estimated overhead /estimated quantity of
the allocation base
Use rate to apply overhead to jobs based
on actual quantity of base used

Job Costs
Manufacturing Overhead

Job Costs
Manufacturing Overhead

Job Cost Sheet

Allocating Overhead
to Jobs
Most firms use a single overhead rate
Activity Based Costing (ABC) assigns
overhead costs to products using a number
of allocation bases
-The major activities which create
overhead costs are identified and
grouped (pools)
-Multiple rates calculated by dividing each
pool by its corresponding activity (driver)

Job-Order Costing for

Service Companies
Service companies use same process
-Allocate costs incurred to jobs
-Use predetermined rate to apply overhead
to jobs

Examples
-Hospitals
-Repair Shops
-Consulting Firms