CMA course lec3

CMA Certified Management Accountant

LECTURE 3

  4. Product vs. Period

  a. One of the most important classifications a managerial accountant can    make is whether to capitalize costs in finished goods inventory or to      expense them as incurred.

1) Product costs (also called inventoriable costs) are capitalized as part of finished goods inventory. They eventually become a component of cost of goods sold.

2) Period costs are expensed as incurred, they are not capitalized in finished goods inventory, they are not involved in the production of the product, these include selling and administration costs as well as other similar department's costs, they can be variable, fixed or mixed and they are not included in the calculation of cost of goods sold.

b. This distinction is crucial because of the required treatment of manufacturing costs for

external financial reporting purposes.

1) Under GAAP, all manufacturing costs (direct materials, direct labor, variable overhead, and fixed overhead), must be treated as product costs, i.e., not recognized as expenses until the inventory is sold. At the same time, no portion of selling and administrative costs may be treated as product costs.

a) This approach is called absorption costing (also called full costing).

2) For internal reporting, a more informative accounting treatment is often to capitalize only variable manufacturing costs as product costs, and treat all other costs (variable S&A and the fixed portion of both production and S& A expenses) as period costs, a) This approach is called variable costing (also called direct costing).

 Ql. Which one of the following best describes direct labor?

A. A prime cost.

B. A period cost.

C. A product cost.

D. Both a product cost and a prime cost.

Q2. Which of the following is a period cost rather than aproduct cost of a manufacturer?A. Direct materials.B. Variable overhead.C. Fixed overhead.                    
D. Abnormal spoilage

Q3. Butler Company's production costs for July are Direct materials $120,000 

Direct labor     108,000

Factory overhead   6,000           

What is the amount of costs traceable to specific products?

A. $234,000

B. $228,000

C. $120,000

D. $108,000

5. Direct vs. Indirect

a. Costs can be classified by how they are assigned to cost objects.

1) A direct cost is one that can be associated with a particular cost object in an economically feasible way, i.e., Traced/to that object. Examples are the direct materials and direct labor inputs to a manufacturing process.

2) An indirect cost are ones that cannot be associated with a particular cost object in an economically feasible way and thus must be allocated to that cost object. For example, are the indirect materials and indirect labor inputs to a manufacturing process. depreciation on the headquarters building is a direct cost when treating the building as a whole, but it is an indirect cost of each department located in the building.

a) To simplify the allocation process, cost pools are established to collect

costs prior to allocation. Manufacturing overhead is an example of an indirect cost

pool.

1) A cost pool is an account into which a variety of similar cost elements with a common cause are accumulated.

2) Manufacturing overhead is a commonly used cost pool into which various untraceable costs of the manufacturing process are accumulated prior to being allocated.

Q1. Roberta Johnson is the manager of Sleep-Well Inn, one of a chain of motels located throughout the U.S. An example of an operating cost at Sleep-Well that is both direct and fix is

A. Johnson's salary.           

B. Water.

C. Toilet tissue.

D, advertising for the Sleep-Well Inn chain.