Terminology, interpretation of statements (continuation of...

Terminology, interpretation of statements (continuation of $2-41$ ). 1. Calculate total prime costs and total conversion costs. 2. Calculate total inventoriable costs and period costs. 3. Design costs and $\mathrm{R} \& \mathrm{D}$ costs are not considered product costs for financial statement purposes. When might some of these costs be regarded as product costs? Give an example. 4. Suppose that both the direct materials used and the depreciation on plant and equipment are related to the manufacture of 2 million units of product. Determine the unit cost for the direct materials assigned to those units and the unit cost for depreciation on plant and equipment. Assume that yearly depreciation is computed on a straight-line basis. 5. Assume that the implied cost-behavior patterns in requirement 4 persist. That is, direct material costs behave as a variable cost and depreciation on plant and equipment behaves as a fixed cost. Repeat the computations in requirement $4,$ assuming that the costs are being predicted for the manufacture of 3 million units of product. Determine the effect on total costs. 6. Assume that depreciation on the equipment (but not the plant) is computed based on the number of units produced because the equipment deteriorates with units produced. The depreciation rate on equipment is $\$ 1.50$ per unit. Calculate the depreciation on equipment assuming (a) 2 million units of product are produced and (b) 3 million units of product are produced.

Terminology, interpretation of statements (continuation of $2-41$ ).
1. Calculate total prime costs and total conversion costs.
2. Calculate total inventoriable costs and period costs.
3. Design costs and $\mathrm{R} \& \mathrm{D}$ costs are not considered product costs for financial statement purposes. When might some of these costs be regarded as product costs? Give an example.
4. Suppose that both the direct materials used and the depreciation on plant and equipment are related to the manufacture of 2 million units of product. Determine the unit cost for the direct materials assigned to those units and the unit cost for depreciation on plant and equipment. Assume that yearly depreciation is computed on a straight-line basis.
5. Assume that the implied cost-behavior patterns in requirement 4 persist. That is, direct material costs behave as a variable cost and depreciation on plant and equipment behaves as a fixed cost. Repeat the computations in requirement $4,$ assuming that the costs are being predicted for the manufacture of 3 million units of product. Determine the effect on total costs.
6. Assume that depreciation on the equipment (but not the plant) is computed based on the number of units produced because the equipment deteriorates with units produced. The depreciation rate on equipment is $\$ 1.50$ per unit. Calculate the depreciation on equipment assuming (a) 2 million units of product are produced and (b) 3 million units of product are produced.

Key Concepts

Variable Costs vs. Fixed Costs

Variable costs change in direct proportion to changes in the level of production or activity, such as raw materials, while fixed costs remain constant regardless of production volume, such as rent or depreciation based on time. Recognizing the behavior of these costs is key to budgeting, forecasting, and performing break-even analysis in various managerial accounting contexts.

Product Costs vs. Non-Product Costs

Product costs are costs that are directly involved in the production of goods and are therefore attached to inventory. Non-product costs, often referred to as period costs, are not directly tied to production and are expensed immediately. This differentiation is important for financial statement analysis and decision-making, especially when determining cost allocation for pricing or profitability analysis.

Depreciation Methods

Depreciation methods, such as the straight-line method and the units-of-production method, are used to allocate the cost of an asset over its useful life. The straight-line method spreads the cost evenly over time, treating depreciation as a fixed cost, whereas the units-of-production method allocates the cost based on actual usage or output levels, making it behave more like a variable cost. These methods are crucial for accurately matching expenses with revenues and for investment decision-making.

Conversion Costs

Conversion costs refer to the costs incurred to convert raw materials into finished products. They encompass direct labor and manufacturing overhead costs, such as utilities, depreciation on production equipment, and indirect materials. This concept is critical in analyzing the overall production process and determining how efficiently resources are being used in transforming inputs into outputs.

Prime Costs

Prime costs are the direct costs of manufacturing a product, typically including only direct materials and direct labor. These costs are directly attributable to the production process and form a significant part of the manufacturing expenses, making them essential for determining the efficiency and cost-effectiveness of production activities.

Inventoriable Costs vs. Period Costs

Inventoriable costs are the costs associated with manufacturing a product that can be capitalized as inventory on the balance sheet until the goods are sold. In contrast, period costs are expensed in the period incurred and do not become part of the inventory cost, such as selling and administrative expenses. Understanding the distinction between these two cost types is crucial for accurate product costing and financial reporting.

Transcript

00:01 So the first question is how would the answer to problem 234 be modified if you were asked for a schedule of cost of goods manufactured and sold instead of a schedule of cost of goods manufactured be specific? so the schedule that is worked out in the problem 224 can be worked out for the schedule of cost of good manufactured and the cost of goods sold.

00:26 So this new shadow can be changed by adding the beginning and the ending finished goods.

00:33 So the new schedule can be changed by adding beginning and ending finished goods inventory to the new schedule of cost of goods sold and cost of goods manufactured.

01:22 So the cost of goods manufactured means that the goods which are ready to be sold during the accounting period and sometimes sometimes some costs which are incurred during the manufacturing of the product i regarded as the ending working process and some costs which are incurred in the beginning are considered as the cost are considered in the cost of goods manufactured so moving on to the second question.

01:57 Would the sales manager salary be accounted for any differently if the hour corporation were a merchandising sector company instead of a manufacturing sector company? use the flow of manufacturing cost outline in exhibit 2 .9.

02:16 Describe how the wages of an assembler in the plants would be accounted for in this manufacturing company.

02:25 So in both the companies, may it be the manufacturing or the merchandising company, the salaries of the sales manager is taken into the account as the marketing cost.

02:41 The salary of managers is taken as the marketing costs in manufacturing and merchandising.

03:22 So the item of the marketing and the advertisement costs is taking as the operating operating.

03:29 Cost in the income statements.

03:37 So marketing and advertisement costs is taken as the operating costs in the income statements.

04:11 Now the wages of a worker would come under the specific tax which he or she is doing and therefore the daily wages is going to be treated as the cost in work in process, in progress and will continue till the goods are combated into the finished goods are ready for the sale.

04:28 So daily wages are treated as a cost in the work in progress until the goods are converted to finish goods.

05:26 So the third one, plant supervisory salaries are usually regarded as manufacturing overhead costs.

05:36 When might some of these costs be regarded as direct manufacturing costs? give an example.

05:41 So planting, plant subarizing salaries can be regarded as direct manufacturing costs.

05:51 And to know whether the supervisory salaries be treated as direct cost or indirect cost will depend on the type of transactions that are done...

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