Determining Product Cost
Determining Product Cost
Managerial accountants must decide what types of managerial accounting information to provide to managers, how to measure such information, and when and to whom to communicate the information. For example, when making most strategic and operating decisions, managers typically rely on managerial accounting information that is prepared in whatever manner the managerial accountant believes provides the best analysis for the decision at hand. However, there is one major exception. Managerial accountants must follow specific external reporting rules (i.e., generally accepted accounting principles) when their companies provide outside parties with cost information about the amount of ending inventory on the balance sheet and the cost of goods sold on the income statement.
In order to calculate these two amounts, managerial accountants must subdivide costs into functional categories: production and period (i.e., nonproduction).
• Product (manufacturing) costs are those costs, both direct and indirect, of producing a product in a manufacturing firm or of acquiring a product in a merchandising firm and preparing it for sale. Therefore, only costs in the production section of the value chain are included in product costs. A key feature of product costs is that they are inventoried. Product costs initially are added to an inventory account and remain in inventory until they are sold, at which time they are transferred to cost of goods sold (COGS). Product costs can be further classified as direct materials, direct labor, and manufacturing overhead, which are the three cost elements that can be assigned to products for external financial reporting.
• Direct materials are those materials that are a part of the final product and can be directly traced to the goods being produced. The cost of these materials can be directly charged to products because physical observation can be used to measure the quantity used by each product. Materials
Managerial accountants must decide what types of managerial accounting information to provide to managers, how to measure such information, and when and to whom to communicate the information. For example, when making most strategic and operating decisions, managers typically rely on managerial accounting information that is prepared in whatever manner the managerial accountant believes provides the best analysis for the decision at hand. However, there is one major exception. Managerial accountants must follow specific external reporting rules (i.e., generally accepted accounting principles) when their companies provide outside parties with cost information about the amount of ending inventory on the balance sheet and the cost of goods sold on the income statement.
In order to calculate these two amounts, managerial accountants must subdivide costs into functional categories: production and period (i.e., nonproduction).
• Product (manufacturing) costs are those costs, both direct and indirect, of producing a product in a manufacturing firm or of acquiring a product in a merchandising firm and preparing it for sale. Therefore, only costs in the production section of the value chain are included in product costs. A key feature of product costs is that they are inventoried. Product costs initially are added to an inventory account and remain in inventory until they are sold, at which time they are transferred to cost of goods sold (COGS). Product costs can be further classified as direct materials, direct labor, and manufacturing overhead, which are the three cost elements that can be assigned to products for external financial reporting.
• Direct materials are those materials that are a part of the final product and can be directly traced to the goods being produced. The cost of these materials can be directly charged to products because physical observation can be used to measure the quantity used by each product. Materials
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