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Inventories: Measurement

  • Labor and factory overhead applied to raw material to produce finished goods

Period Costs Period costs are those costs that are allocated to the accounting period and are not included in inventory. They include

  • Selling expenses

  • General and administrative expenses

  • Interest expense

Manufacturing Costs Manufacturing costs include all of the costs directly involved in the production of a product that becomes finished goods. They include

Direct materials

Direct labor

Manufacturing overhead costs

¾

Indirect material

¾

Indirect labor

¾

Depreciation

¾

Taxes

¾

Insurance

¾

Heat

¾

Electricity

Freight-In As indicated above freight-in on merchandise purchases are added to the cost of the merchandise inventory. Under the perpetual method the amount is added to inventory along with the cost of the merchandise. Using the periodic method a company would set up a nominal account, “Freight-In” and would book all freight-in charges to this account. At the end of the year this account becomes part of the multi-step income statement analysis that determines cost of goods available for sale, ending inventory, and cost of goods sold.

Purchase Returns and Allowances Purchase returns and allowances are the counter part to sales returns and allowances. Under the perpetual method the purchasing company removes the amount returned from inventory and accounts payable. Using the periodic method a company would set up a nominal account, “Purchase Returns and Allowances” and would book all returns to this account. At the end of the year this account becomes part of the multi-step income statement analysis that determines cost of goods available for sale, ending inventory, and cost of goods sold.

Purchase Discounts There are two methods of recording purchase discounts (1) Gross Method Under the gross method a purchase discounts account is used. The purchase and related account payable is recorded at the full invoice amount. If the purchaser makes payment by the discount date, the credit for the discount is recorded in the “purchase discounts” account.

F:\Teaching\3321\web\module4\c8\tnotes\c8a.doc

3/12/2007

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