Managerial Accounting

Job Order Costing

-typically used when a company produces lower volume, relatively costly, and distinct goods -ex. are ship builders and custom carpentry shops

Process costing

-used when the products being produced are relatively homogeneous

The cost of inventory for a manufacturing firm includes three types of costs

1) raw materials inventory, (2) direct labor, and (3) manufacturing overhead

non-inventoriable expenses

Other expenses of the business that are not related to the factory operations

Asssets

The three inventory accounts ("raw materials", "work-in-process", and "finished goods") are all asset accounts and together they make up the total "Inventory" that is reported on the company's Balance Sheet. The "raw materials inventory" account includes only the direct materials purchased to be used in production.

work-in-process inventory

When the company puts these materials into production, the cost of the materials used is deducted from the "raw materials inventory" account and added to the "work-in-process inventory" account. -collects the cost of all direct materials used during the production process, the direct labor used to convert the raw materials, and also a portion of manufacturing overhead.

Period costs

are costs that a company incurs that do not get included in the cost of the products being produced. These are costs that are not directly related to the manufacturing facility -ex. the salaries of the office workers, salesmen, and president of the company are period costs. Also, rent and utilities on the office building are period costs. These costs are charged off in the period they are incurred, rather than becoming associated with the products being produced.

variable costs

ex. direct materials,salesmen's commissions and transportation of the finished products to a warehouse.

inventoriable expenses

factory expenses three categories: raw materials, direct labor, and manufacturing overhead.

Managerial Accounting

is primarily for those within the company. The information gained from a managerial accounting system is used by managers to more efficiently run the company

Raw materials

the materials the company buys that go directly onto the product being produced. Because of this, raw materials are often called "direct materials". This category only includes materials that go directly on the product being produced.

Product costs

those costs that are "inventoriable". This refers to the total costs that make up the cost of the product, which is the raw materials, direct labor, and manufacturing overhead associated with the products produced. All costs associated with the factory are allocated to the products produced and are called product costs. Product costs are called inventoriable because they are included in the company's inventory accounts.

Direct labor

includes the cost of all the employees working directly on the product to convert the raw materials into a finished product. If an employee is working in the factory but not directly on the product, such as a maintenance employee or a fork-lift driver, their salaries are not classified as direct labor.

Fixed costs

stay the same in total regardless of the volume produced. -ex. rent, property taxes, the salary of the CEO, and depreciation.

Manufacturing overhead

-includes all other expenses of the factory. - Any manufacturing expense that is not direct materials or direct labor - ex. factory utilities, factory rent, rags used by the factory workers, and salaries of the maintenance employees in the factory, fork-life drivers, and factory supervisors. -Any other expenses the company incurs that are not specifically factory-related, such as the administrative expenses or the expenses of the salesmen, are not included in manufacturing overhead.

NOTE****

As the products complete the production process, the cost associated with the finished products are taken out of "work-in-process inventory" and put into "finished goods inventory". When the finished goods are sold, just as was true with a merchandising firm, two balancing entries are made. One is to record the sale on the Income Statement with the balancing entry either to "cash" or "accounts receivable". The other entry is to record the fact that the company's inventory has declined. The cost associated with the product sold is taken out of the "finished goods inventory" account and put into "cost of goods sold" on the Income Statement.

"work-in-process inventory" account

account includes the raw materials that are put in production, the direct labor that has been used as well as manufacturing overhead that has been applied to the products being produced. The "work-in-process inventory" account is now more than just the cost of the raw materials.

The main difference between these two systems

how the costs are accumulated. In a job order costing system, the costs are accumulated by jobs. In a process costing system, the costs are accumulated in departments and then divided over the total number of units produced.