Data like the cost of production per unit or the cost to produce one batch of product can help a business set an appropriate sales price for the finished item. These costs are reported on a company’s income statement below the cost of goods sold, and are usually charged to expense as incurred. Since nonmanufacturing overhead costs bookkeeping are treated as period costs, they are not allocated to goods produced, as would be the case with factory overhead costs. Since they are not allocated to goods produced, these costs never appear in the cost of inventory on a firm’s balance sheet. Even though nonmanufacturing overhead costs are not product costs according to GAAP, these expenses (along with product costs and profit) must be covered by the selling prices of a company’s products. In other words, selling prices must be large enough to cover SG&A expenses, interest expense, manufacturing overhead, direct labor, direct materials, and profit.

Categories

Each table is unique and built to customer specifications for use in homes (coffee tables and dining room tables) and offices (boardroom and meeting room tables). The sales price of each table varies significantly, from $1,000 to more than $30,000. Figure 2.4 shows examples of production activities at Custom Furniture Company for each of the three categories (we continue using this company as an example in Chapter 2). Costs that are not related to the production of goods are called nonmanufacturing costs23; they are also referred to as period costs24. These costs have two components—selling costs and general and administrative costs—which are described next. MasterCraft records these manufacturing costs as inventory on the balance sheet until the boats are sold, at which time the costs are transferred to cost of goods sold on the income statement.

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• For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.
• Data like the cost of production per unit or the cost to produce one batch of product can help a business set an appropriate sales price for the finished item.
• For instance, in our example of Friends Company, the company purchases metal parts (raw material) to produce valves.
• For example, sales commissions and shipping costs for a specific product could be assigned to the product.
• These costs do not specifically contribute to the actual production of goods but are essential to ensure overall functioning of the business.

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• Non-manufacturing costs – not incurred in transforming materials to finished goods.
• The key takeaway of this case study is that understanding the fluctuations in manufacturing costs can empower companies to make informed and timely choices between outsourcing and in-house production.
• Period costs include non-manufacturing costs, i.e. selling expenses and administrative expenses.
• For Friends Company, other direct materials would include, for example, plastic parts and paint.
• This account balance or this calculated amount will be matched with the sales amount on the income statement.
• However, as we noted earlier, managerial accounting information is tailored to meet the needs of the users and need not follow U.S.

Costs that are not related to the production of goods are called nonmanufacturing costs; they are also referred to as period costs. Figure 2.3.1 shows examples of production activities at Custom Furniture Company for each of the three categories. Hence, they are considered period costs rather than product costs.

Example #4: Indirect manufacturing costs (factory overheads)

Direct labor includes the production workers who assemble the boats and nonmanufacturing costs include test them before they are shipped out. Indirect labor (part of manufacturing overhead) includes the production supervisors who oversee production for several different boats and product lines. Manufacturing costs initially form part of product inventory and are expensed out as cost of goods sold only when the inventory is sold out. Non-manufacturing costs, on the other hand, never get included in inventory rather are expensed out immediately as incurred. This is why the manufacturing costs are often termed as product costs and non-manufacturing costs are often termed as period costs. Manufacturing costs – incurred in the factory to convert raw materials into finished goods.