Essay on Inventory and Direct Labor

Submitted By Sheldon-Cheng
Words: 1385
Pages: 6

BUSN7031
Management Accounting
& Cost Analysis
Week 1
Introduction & Cost Terms
Chapter 1 & 2
Yangxin Yu
1

Lectures & Tutorials
Lecture notes on Wattle prior to lecture – please print and review before class.
90-100 minutes (One go, No Break)
Lecture problem solutions will be posted on Wattle after lecture.
Tutorial solutions will be posted on Wattle after the last tutorial.

2

Introduction
1. Financial Accounting

External
Reporting

reporting to external users: investors, creditors and governmental agencies. must be based on GAAP

2. Management Accounting reporting to managers need not be GAAP compliant

Internal
Reporting

3

Purpose of Managerial Accounting

4

5

Management Accounting
Managerial Accounting

R&D

Design

Production Marketing Distribution
& Sales

Customer
Service

BUSN7031

6

Cost Classifications Classification by Traceability
Direct costs
Costs traceable to a single cost object.
Examples: material and labor cost for a product.

Indirect costs
Costs that cannot be traced to a single cost object.
Example: A maintenance expenditure benefiting two or more departments.

7

Direct Materials
Direct material costs are the expenditures for direct materials that are separately and readily traced through the manufacturing process to finished goods.
Example:
Steel used in the frame of a mountain bike.

8

Direct Labor
Direct labor costs are the wages and salaries for direct labor that are separately and readily traced through the manufacturing process to finished goods.

Example:
Wages paid to a mountain bike assembly worker.

9

Factory Overhead
Factory overhead consists of all manufacturing costs that are not direct materials or direct labor and the costs cannot be separately or readily traced to finished goods.
Examples:
Indirect labor – maintenance
Indirect material – cleaning supplies
Factory utility costs
Supervisory costs
10

Flow of Physical Goods in Production
Direct
Materials
Purchased

Direct
Materials
Used

Finished
Goods

Direct
Labor

Manufacturing
Overhead

Goods
Sold
MegaLoMart
11

Identifications of Cost Classifications

* Although an assembly worker’s wages are classified as variable costs, their actual behavior depends on how workers are paid and whether their wages are based on a union contract (such as piece rate or monthly wages).

12

Manufacturer’s Costs

13

Reporting Manufacturing Activities
Merchandisers . . .

Manufacturers . . .

Buy finished goods.

Buy raw materials.
Produce and sell finished goods.

Sell finished goods.
SaleMart

14

Manufacturer’s Balance Sheet
Merchandiser

Manufacturer

Current Assets

Current Assets

Cash
Receivables
Merchandise
Inventory

Cash
Receivables
Inventories
Raw Materials
Goods in Process
Finished Goods

The primary difference is inventory.
15

Financial Statements of a Manufacturing Company

Income Statement

Balance Sheet

16

CONQUEST, INC.
Income Statement
For the Year Ended December 31, 2011
Sales
Cost of goods sold
Gross profit on sales
Operating expenses
Income from operations
Less: Interest expense
Income before income taxes Income tax expense
Net income

$ 1,300,000
782,000
$
518,000
400,000
$
118,000
18,000
$
$

100,000
30,000
70,000

The income statement is prepared using established
17
financial accounting procedures.

Financial Statements of a Manufacturing Company
CONQUEST, INC.
Partial Balance Sheet
December 31, 2011
Current Assets:
Cash and Cash Equivalents
Accounts Receivable, net
Inventories
Materials
Work in Process
Finished Goods
Total Inventories
Total current Assets

$ 60,000
190,000
$

20,000
40,000
168,000
228,000
$ 478,000

Manufacturers have three inventory accounts.
18

Inventories of a Manufacturing Business

Raw materials - inventory on hand
and…