Principles of Accounting III The Phuc Dinh (Mike)

The Phuc Dinh (Mike)

Date: Sep 24th

Class: ACCT 203

Professor David Duback

Chapter 18 Discussion Questions

(Questions: 4, 5, 6, 7, 10, 11, 12, 14, 15, and 16 page 785)

Question 4: Distinguish between direct labor and indirect labor?

Answer: Direct labor refers to the efforts of employees who physically convert materials to finished
product. Indirect labor are workers who assist or supervise in manufacturing the product, but they are not
clearly identified with specific product units.

Question 5: Distinguish between (a) factory overhead and (b) Selling and administrative overhead

Answer: Factory overheads, also called manufacturing overheads, consist of all manufacturing costs that
are not direct materials or direct labor. These costs support the production process, include indirect
material, indirect labor and related factory utilities. Factory overhead costs include factory manager’s
salary, depreciation on factory building and equipment, repairing manufacturing equipment….

Selling and administrative overhead costs are the costs that do not relate to the production process. These
are the activities involved with selling the product and help to run the business smoothly. These selling and
administrative overhead costs can be classified as period costs.

Question 6: Distinguish between direct material and indirect material

Answer: Direct materials are tangible components of a finished product. Indirect materials are components
used in manufacturing the product, but they are not clearly identified with specific product units.

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Principles of Accounting III The Phuc Dinh (Mike)

Question 7: What product cost is both a prime cost and a conversion cost?

Answer:

Prime costs are expenditures directly associated with the manufacturing of finished goods.

Prime costs = Direct material costs + Direct labor costs

Conversion costs are expenditures incurred in the process of converting raw materials to finished goods.

Conversion costs = Direct labor costs + Manufacturing overhead costs

As a result, direct labor costs can be either a prime cost or a conversion cost.

Question 10: Explain why knowledge of cost behavior is useful in product performance evaluation

Answer: Cost behavior is associated with learning how costs change when there is a change in an
organization's level of activity. The understanding of cost behavior is very important for management's
efforts to plan and control its organization's costs effectively.

Question 11: Explain why product costs are capitalized but period costs are expensed in the current
accounting period

Answer 11: A product cost is an expense incurred to produce a product that is capitalized as inventory.
Product costs typically include direct materials, direct labor, and factory overhead. These costs are
necessary to produce a finished good and are capitalized on the balance sheet because they provide a future
benefit (an asset) to the business.

Period costs are all costs not included in product costs. Period costs include costs of the corporate office,
selling, marketing, and the overall administration of company business. Because period costs are not
assigned to one particular product or the cost of inventory like product costs, period costs are listed as an
expense in the accounting period in which they occurred.

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Principles of Accounting III The Phuc Dinh (Mike)

Question 12: Explain how business activities and inventories for a manufacturing company, a
merchandising company, and a service company differ

Answer: A manufacturing business produces a product, while a merchandising or service business is not.
In making a product, the manufacturing business must control three types of inventories: raw materials,
work in process, and finished goods. On the other hand, a merchandising business only need to control
merchandise inventory, and a service company mostly does not need to control any inventory.

Question 14: How do an income statement and a balance sheet for a manufacturing company and a
merchandising company differ?

Answer: A manufacturing company converts raw materials into finished products. This company needs to
report three types of inventories on its balance sheet: raw materials, work in process, and finished goods.
The finished goods are also included on the income statement as part of cost of goods sold.

A merchandising company purchases inventories to resell. A merchandising company would report only
one inventory item (merchandise inventory) on its balance sheet, and would include the merchandise
inventory on the income statement as part of cost of goods sold.

Question 15: Besides inventories, what other assets often appear on manufacturers’ balance sheets but not
on merchandiser’s balance sheets?

Answer: Manufacturers’ balance sheets usually include, factory buildings, factory machinery, and patents
that are used to produce finished goods. For example, the “Plant Assets” category will often include
factory machinery and factory building. A merchandising company would usually not own these assets.

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