Question

c. Would a consumer products division that sells products directly to consumers normally be considered a horizontal or vertical unit within a company? 3. What manufacturing cost term is used to describe the cost of materials that are an integral part of the manufactured end product? 4. Distinguish between prime costs and conversion costs. 5. What is the difference between a product cost and a period cost? 6. Name the three inventory accounts for a manufacturing business, and describe what each balance represents at the end of an accounting period. 7. In what order should the three inventories of a manufacturing business be presented on the balance sheet? 8. What are the three categories of manufacturing costs included in the cost of finished goods and the cost of work in process? 9. How do the manufacturing costs incurred during a period differ from the cost of goods manufactured for a period? 10. How does the "Cost of goods sold" section of the income statement differ between retail and manufacturing companies? 775

Answer 1

3. Direct material cost – Direct material cost are integral part of manufacturing the end product. For examples: Chips in mobile, metals in vehicle

4. Prime cost is the sum of direct material and direct labor. Conversion cost is the sum of direct labor and manufacturing overheads

5. Product cost is the cost associated directly with manufacturing of products. They are used for inventory valuation. For example: Direct material, direct labor, factory maintenance, factory rent, etc

Period cost is the cost which is incurred for selling and administrative purpose. They are not part of product and hence charged to the period in which they are incurred. For example: Sales commission, office salaries, office insurance, office rent etc

6. Raw material Inventory – Balance of direct material (indirect material if accounted in same account)

Work in process Inventory – The cost of production started and not completed

Finished goods – The completed units produced and not sold

7. Order of presentation in Balance sheet is

· Finished goods

· Work in process

· Raw Materials

8. 3 categories of cost incurred in cost of finished goods and cost of work in process

· Direct material

· Direct labor

· Manufacturing overheads

9. The manufacturing cost incurred during the period is added for opening work in process which gives the manufacturing cost to account for minus the closing work in process gives the cost of goods manufactured. Hence the difference is Work in process inventory balance

10. The Cost of goods sold for Retail includes opening stock of merchandise purchase plus purchase during the period less returns and adjusted for closing stock of merchandise. Retail companies are not engaged in production or manufacture. They are trading firms and hence purchase and resell.

The cost of goods sold for manufacturing includes opening stock of finished goods plus cost of goods manufactured and adjusted for closing stock of finished goods.

C . Consumer product division will be considered as a vertical unit within the organisation since it will add to top line revenue generation.