Chapter 29
Prepared by Diane Tanner
University of North Florida

Merchandising Companies Manufacturing Companies
• Buy products
• Sell products
• Buy materials
• Use labor and other economic resources to produce products
• Sell products
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Merchandising Companies Manufacturing Companies
Balance Sheet Balance Sheet
Current Assets
Inventories ….$4,000
3 separate inventories
Current Assets
Raw Materials ……..$4,000
Work in Process …....1,000
Finished Goods …….1,200
Both Merchandising & Manufacturing Companies
Income Statement
Sales ……………………………$34,000
Less cost of goods sold ……...21,000

Manufacturing or Non-manufacturing?
The Key Think about where in the operational process the cost occurs.
If the cost occurs in the factory while being produced
If the cost occurs after the product is produced or outside the factory
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Product Costs
Expensed when the product is sold
Period Costs
Expensed in a period unrelated to sales

Direct Materials
• Traced to products
• Easily identified with specific products
Direct Labor
• Traced to products
• Easily identified with specific products
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Manufacturing
Overhead
• Allocated to products
• Not easily identified with specific products
Only product costs (not period costs) are labeled as direct or indirect.

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 Material costs that can be traced to products or services provided
 Includes all materials costs directly related to getting the materials ready to use (ultimately to get the product ready to sell)
 Invoice cost to buy materials
 Less cash discount
 Plus sales taxes
 Plus freight-in
Parallels accounting for merchandise inventory

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 Labor costs that can be directly traced to products or services provided
 Includes all direct labor needed to get the product ready to sell
 Assumed to be hourly wages
 Fringe benefits should be included as part of the hourly rate

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INDIRECT manufacturing (product) costs that cannot be traced directly to specific units produced, but are costs of production
Indirect materials
• Factory supplies
• Oil, lubricants, blades
• Glue, staples
Indirect labor
Factory-related costs
• Janitor labor
• Production supervisor labor
• Dedicated cost accountant labor
• Factory and equipment depreciation
• Factory insurance
• Factory rent and utilities
• Other factory costs

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Direct
Materials
Examples:
Lid, bottle, label, water
Manufacturing
Overhead
Direct
Labor
Examples:
Wages and fringes for assembly and packaging
The Product
Examples:
Factory supervisor and factory janitor salaries (indirect labor), indirect materials (supplies), factory rent/ insurance/depreciation/ utilities

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 Known as ‘Operating Expenses’
 Not associated with the production of goods
 Examples:
 Selling, advertising, marketing costs, delivery costs
 General and administrative ‘corporate’ costs
 Corporate rent, insurance, utilities, depreciation
 R&D costs, product development costs, accounting and payroll department costs, President Delaney’s salary

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