CMA course lec2

CMA Certified Management Accountant

LECTURE 2

3. Manufacturing vs. Nonmanufacturing

a. The costs of manufacturing a product can be classified as one of three types:

1) Direct materials are the materials that are directly put into the finished product.
The costs included in the direct material cost are all of the costs associated withacquiring it.                                                                   

2) Direct labor is the costs of labor that can be directly traced to the production of a unit. Assembly line workers are direct labor costs for a manufacturing company, and the compensation of an auditor is direct labor for an auditing firm.

3) Manufacturing overhead are the company's costs related to the production process that are not direct materials or direct labor, but are necessary costs of production.

a) Indirect materials are tangible inputs to the manufacturing process that cannot practicably be traced to the product.

b) Indirect labor is the cost of human labor connected with the manufacturing process that cannot practicably be traced to the product.

c) Factory operating costs such as utilities, real estate taxes, insurance, depreciation on factory equipment, etc.

b. Manufacturing costs are often grouped into the following classifications:

1) Prime costs are the costs of direct materials plus direct labor. These are the direct inputs.

2) Conversion costs include direct labor plus manufacturing overhead. These are the costs that are required to convert the direct materials into the final product.

c. Operating a manufacturing concern requires the incurrence of nonmanufacturing costs:

1) Selling (marketing) costs are those costs incurred in getting the product from the factory to the consumer, e.g., sales personnel salaries and product transportation.

2) Administrative expenses are those costs incurred by a company not directly related to producing or marketing the product, e.g., executive salaries and depreciation on the headquarters building.

Ql. Conversion cost pricing

A. Places minimal emphasis on the cost of materials used in manufacturing a product.B. Could be used when the customer furnishes the material used in manufacturing a
product.                                         

C. Places heavy emphasis on indirect costs and disregards consideration of direct costs.

D. Places heavy emphasis on direct costs and disregards consideration of indirect costs.

Q2. Mello Joy produces 200,000 units of a good that has the following costs:Direct material costs                                           $2,000,000                   Direct manufacturing labor costs               1,000,000                     Indirect manufacturing labor costs             600,000Mello Joy^'s per unit prime costs and conversion costs, respectively, are

A.        $8 and $15

B.        $8 and $18

C.        $10 and $8
D.       $15 and $8

Q3. A cost that always can be physically traced to a cost objective isA. 
A variable cost.
B. An indirect cost.
C. A conversion cost.
D. A prime cost.