- Cost is a financial measure of the resources used or given
up to achieve a stated purpose.
- Costs may be classified as manufacturing
costs, which include
- direct materials
- direct labor
- manufacturing overhead
- They can also be classified as non-manufacturing costs, which
- selling and administrative costs.
- Costs may be also be classified as either product costs or period costs.
- Finally, costs may be classified according to the degree to
which they are affected by the level of manufacturing activity. Fixed costs remain constant in total
amount over wide variations in the level of activity, while variable costs vary in total amount
directly with changes in the level of business activity.
|Financial Reporting by
- Financial reporting by manufacturers is similar to that of
merchandisers. The primary differences between manufacturer and
merchandiser financial reporting are:
- a manufacturer prepares a Statement
of Cost of Goods Manufactured to support the cost of goods sold
figure on the income statement, and
- a manufacturer will typically have separate account
balances for materials, work in process, and finished goods inventories, while a
merchandiser has only a merchandise
inventory account balance.
- A job cost system is appropriate when the company
manufactures products to meet customers’ unique specifications.
- Each product is likely to be different.
- The important point is that in job cost systems, each job or batch of product can be
- Companies use a predetermined
overhead rate to assign overhead as goods are produced.
- This enables the company to determine the unit costs at any
time during the period instead of having to wait until the end of the
- The rate is calculated using the expected level of activity
and estimated overhead costs.
- The base for the expected level of activity can be direct
labor hours, hours to set up the job, machine hours, units produced, or
any other appropriate base or multiple bases (as proposed by advocates
of activity based costing).
- Overapplied or underapplied overhead occurs when the actual
overhead cost is different from estimated overhead cost or the actual
level of activity is different from the expected level of activity.
|Variable versus Absorption Costing:
- Absorption costing allocates
all manufacturing costs, variable and fixed, to the units of
- Variable costing only
allocates variable manufacturing costs to products produced, and
treats fixed manufacturing costs as period costs.
- While absorption costing is required for external reporting
and tax purposes, variable costing can be very helpful to management in
the decision making process.