Cost Accounting (14th Edition)

42 CHAPTER 2 AN INTRODUCTION TO COST TERMS AND PURPOSES
Exhibit 2-9
General Ledger T-Accounts for Cellular Products’ Manufacturing Cost Flow (in thousands)
Work-in-Process Inventory
Bal. Jan. 1, 2011
Direct materials used
Direct manuf. labor
Indirect manuf. costs
6,000
76,000
9,000
20,000
Cost of goods
manufactured
104,000
Bal. Jan. 1, 2011
Finished Goods Inventory
22,000
104,000
Cost of
goods sold
108,000
Cost of Goods Sold
108,000
Bal. Dec. 31, 2011 18,000
Bal. Dec. 31, 2011 7,000
We are now in a position to prepare Cellular Products’ income statement for
2011. The income statement of Cellular Products is shown on the right-hand side of
Exhibit 2-7 and in Exhibit 2-8, Panel A. Revenues of Cellular Products are (in thousands)
$210,000. Inventoriable costs expensed during 2011 equal cost of goods sold
of $108,000.
Gross margin = Revenues - Cost of goods sold = $210,000 - $108,000 = $102,000.
The $70,000 of operating costs comprising R&D, design, marketing, distribution,
and customer-service costs are period costs of Cellular Products. These period costs
include, for example, salaries of salespersons, depreciation on computers and other equipment
used in marketing, and the cost of leasing warehouse space for distribution.
Operating income equals total revenues from operations minus cost of goods sold and
operating (period) costs (excluding interest expense and income taxes) or equivalently,
gross margin minus period costs. The operating income of Cellular Products is $32,000
(gross margin, $102,000 – period costs, $70,000). Those of you familiar with financial
accounting will note that period costs are typically called selling, general, and administrative
expenses in the income statement
Newcomers to cost accounting frequently assume that indirect costs such as rent, telephone,
and depreciation are always costs of the period in which they are incurred and are
not associated with inventories. When these costs are incurred in marketing or in corporate
headquarters, they are period costs. However, when these costs are incurred in manufacturing,
they are manufacturing overhead costs and are inventoriable.
Decision
Point
What are the
differences in the
accounting for
inventoriable versus
period costs?
Recap of Inventoriable Costs and Period Costs
Exhibit 2-7 highlights the differences between inventoriable costs and period costs for a
manufacturing company. The manufacturing costs of finished goods include direct materials,
other direct manufacturing costs such as direct manufacturing labor, and manufacturing
overhead costs such as supervision, production control, and machine maintenance.
All these costs are inventoriable: They are assigned to work-in-process inventory until the
goods are completed and then to finished goods inventory until the goods are sold. All
nonmanufacturing costs, such as R&D, design, and distribution costs, are period costs.
Inventoriable costs and period costs flow through the income statement at a merchandising
company similar to the way costs flow at a manufacturing company. At a
merchandising company, however, the flow of costs is much simpler to understand and
track. Exhibit 2-10 shows the inventoriable costs and period costs for a retailer or
wholesaler who buys goods for resale. The only inventoriable cost is the cost of merchandise.
(This corresponds to the cost of finished goods manufactured for a manufacturing
company.) Purchased goods are held as merchandise inventory, the cost of which
is shown as an asset in the balance sheet. As the goods are sold, their costs are shown in
the income statement as cost of goods sold. A retailer or wholesaler also has a variety of
marketing, distribution, and customer-service costs, which are period costs. In the
income statement, period costs are deducted from revenues without ever having been
included as part of inventory.