Suggested In-Class Exercises: E16-17, E16-18, E16-19 Classify costs for service, merchandising, and manufacturing companies Direct and indirect costs Product costs Direct materials Direct labor Manufacturing overhead Indirect materials Indirect labor Exhibit 16-6: Period and Product Costs for Smart Touch Learning Prime and conversion costs Exhibit 16-7: Prime and Conversion Costs Lecture Notes: Point out the distinction between direct and indirect manufacturing costs. Direct costs are added to WIP, whereas indirect costs are usually collected in one or more Manufacturing Overhead accounts, then applied to WIP using a predetermined overhead rate. Therefore, when materials are used, you must know whether they are indirect or direct. When labor is incurred, you must know whether it is direct or indirect. The recording of labor in an asset account (WIP) may need additional explanation. Students might want to expense labor because it was expensed in previous chapters. Remind students that manufacturing companies add all product costs to inventory, and they are expensed (COGS) when inventory is sold. Distinguish between product costs and period costs. GAAP requires that manufacturing costs be all treated as costs of making the product, which means these manufacturing costs (raw materials, manufacturing labor, and manufacturing overhead) are to the product. All “attached” costs go directly to the income statement in the period in which they occur. nonmanufacturing Assume an oversimplified company that has a factory in your local community and corporate offices in New York City (or some other major urban center). Everything that goes on at the factory in your local community is a manufacturing cost that becomes attached to the product by accumulating those costs in WIP. Everything that goes on in the corporate offices is a period cost that is charged directly to the income statement in the period in which it occurs. While this is an oversimplification (for example, sales offices or research labs can be located in a factory setting), it serves to fix the distinction in students’ minds. Overhead includes all manufacturing other than direct materials and direct labor. Therefore, students must know whether a cost is manufacturing or nonmanufacturing. For example, will no longer suffice. Is it manufacturing or nonmanufacturing? As discussed for “depreciation”
Suggested In-Class Exercises: E16-17, E16-18, E16-19 Classify costs for service, merchandising, and manufacturing companies Direct and indirect costs Product costs Direct materials Direct labor Manufacturing overhead Indirect materials Indirect labor Exhibit 16-6: Period and Product Costs for Smart Touch Learning Prime and conversion costs Exhibit 16-7: Prime and Conversion Costs Lecture Notes: Point out the distinction between direct and indirect manufacturing costs. Direct costs are added to WIP, whereas indirect costs are usually collected in one or more Manufacturing Overhead accounts, then applied to WIP using a predetermined overhead rate. Therefore, when materials are used, you must know whether they are indirect or direct. When labor is incurred, you must know whether it is direct or indirect. The recording of labor in an asset account (WIP) may need additional explanation. Students might want to expense labor because it was expensed in previous chapters. Remind students that manufacturing companies add all product costs to inventory, and they are expensed (COGS) when inventory is sold. Distinguish between product costs and period costs. GAAP requires that all manufacturing costs be treated as costs of making the product, which means these manufacturing costs (raw materials, manufacturing labor, and manufacturing overhead) are “attached” to the product. All nonmanufacturing costs go directly to the income statement in the period in which they occur. Assume an oversimplified company that has a factory in your local community and corporate offices in New York City (or some other major urban center). Everything that goes on at the factory in your local community is a manufacturing cost that becomes attached to the product by accumulating those costs in WIP. Everything that goes on in the corporate offices is a period cost that is charged directly to the income statement in the period in which it occurs. While this is an oversimplification (for example, sales offices or research labs can be located in a factory setting), it serves to fix the distinction in students’ minds. Overhead includes all manufacturing other than direct materials and direct labor. Therefore, students must know whether a cost is manufacturing or nonmanufacturing. For example, “depreciation” will no longer suffice. Is it manufacturing or nonmanufacturing? As discussed for
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