Page 744 - Accounting Principles (A Business Perspective)

18. Managerial accounting concepts/job costing

environments, accountants have had to become more sophisticated in finding the sources of
overhead costs, which have become a larger part of total product cost.

Understanding the learning objectives
• Financial accounting refers to providing financial information primarily for external use. Managerial
accounting information is intended for internal use to provide more detailed information to managers.
• In manufacturing companies, a product's cost is made up of three cost elements: direct materials costs,
direct labor costs, and manufacturing overhead costs.

• Direct materials costs are clearly and easily traceable to the product.
• Direct labor costs include only those labor costs clearly traceable to, or readily identifiable with, the finished
product.
• Overhead costs (1) include all costs of making the product except direct materials and direct labor costs; (2)
are costs that must be incurred in making the product but cannot or will not be traced directly to specific units
produced; and (3) include a number of costs related to the production process, such as depreciation and
maintenance on machines, supervisors' salaries, and utility costs for production facilities.

• Product costs are costs incurred in making products. These costs include costs of direct materials, direct
labor, and overhead.
• Period costs are not assigned to units of a product but are related more closely to periods of time. For this
reason, period costs are expensed (deducted from revenues) in the period in which they are incurred.
• The major difference between a merchandiser and a manufacturer is in the types of inventories carried.
• The statement of cost of goods manufactured supports the cost of goods sold figure on the income
statement and has two important calculations: (1) Cost to manufacture, which includes the costs of all
resources put into production during the period and (2) Cost of goods manufactured, which consists of the cost

of all goods completed during the period.
• The manufacturer's balance sheet shows materials, work in process, and finished goods inventories
separately.
• The accounting flow of costs follows the physical flow of the manufacturing process.
• Accountants record the flow of direct materials costs from Materials Inventory into Work in Process
Inventory. They add the costs of direct labor and overhead to Work in Process Inventory. When the products
are completed and transferred to the finished goods storeroom, accountants transfer their costs from Work in

Process Inventory to Finished Goods Inventory. As the goods are sold, the related costs are transferred from
Finished Goods Inventory to Cost of Goods Sold.
• Companies producing individual, unique products known as jobs use job costing (also called job order
costing).
• Companies such as furniture manufacturers produce batches of products and use job costing methods to
accumulate the cost of each batch.
• Repetitive manufacturing companies (automobile assembly plants) and companies producing in a
continuous flow (oil refineries) use process costing, discussed in the next chapter.

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