Audit

Chapter 2. Costs terms, concepts and classifications

Questions

1. What are the three major elements of product costs in a manufacturing company ?
-direct materials
-direct labor
-manufacturing overhead.

2. Distinguish between direct materials, indirect materials, direct labor, indirect labor, and manufacturing overhead.
-direct materials: raw materials that become an integral partof the product and that can be conveniently traced directly to it (ex: radio installed in an automobile)
-indirect materials: material used to support the production process (ex: lubricants and cleaning supplies used in the automobile assembly plant)
-direct labor: labor costs that can be easily traced to individual units of product (ex: wages paid to automobile assembly workers)
-indirectlabor: wages paid to employees who are not directly involved in production work (ex: maintenance workers, janitors and security guards)
-manufacturing overhead: manufacturing costs that cannot be traced directly to specific units produced (ex: indirect materials, indirect labor, all other manufacturing costs: property, plant, taxes, electricity, depreciation of production facilities)

3. Explain thedifference between a product cost and a period cost.
-product cost: manufacturing cost: cost directly involved in production. Product costs include direct materials, direct labor and manufacturing overhead.
-period cost: non-manufacturing cost: cost that is not directly involved in the production Period costs include Selling costs (to get the order and deliver the product) and Administrativecosts (all executive, organizational and clerical costs).

4. Describe how the income statement of a manufacturing company differs from the income statement of a merchandising company.
-manufacturing company: product costs are referenced as assets in the Balance sheet until goods are sold. When goods are sold, the net income is reduced in the Income statement by the amount of the cost of goodssold. (Until goods are sold, they are not considered as expenses.)
-merchandising company: period costs are referenced as expenses in the Income statement, and they reduce the net income.

5. Of what value is the schedule of cost of goods manufactured ? How does it tie into the income statement ?
The schedule of cost of goods manufactured permits to calculate the cost of direct materials, directlabor and manufacturing overhead. It also calculates the manufacturing costs associated with goods that were finished during the period.
The schedule of goods manufactured ties into the income statement as it permits to calculate the Cost of goods sold.

Beg RM
+ Purchases of raw materials
- End RM
= Direct materials
+ Direct labor
+ Manufacturing overhead
= Manufacturing costs
+Beg WIP
- End WIP
= COGM
+ FG beg
+ FG end
=COGS

Income statement:
Sales – COGS = gross margin

It is not an expense in the statement because in the income statement we pût costs associated with goods sold, and not goods manufactured.

6. Describe how the inventory accounts of a manufacturing company differ from the inventory account of a merchandising company.
-manufacturing company:raw materials, work in progress, finish goods
-merchandising company: finish goods

7. Why are product costs sometimes called inventoriable costs ? Describe the flow of such costs in a manufacturing company from the point of incurrence until they finally become expenses on the income statement.
Product costs can be referenced as merchandise inventory in the current assets of the balance sheet,so they are sometimes called inventoriable costs.
In a manufacturing company, product costs are referenced as assets in the Balance sheet until goods are sold. When goods are sold, the net income is reduced in the Income statement by the amount of the cost of goods sold. (Until goods are sold, they are not considered as expenses.)

In the balance sheet:
Direct materials are showed as Raw...