Cost Accounting: Why Your Best Seller May Lose Money
How firms work out what things really cost: cost behavior, job and process costing, overhead, activity-based costing, joint products, standards and variances.
Try 3 questions
1. Under absorption costing, where does the factory rent attached to unsold goods end up?
- Among administrative expenses
- In inventory on the balance sheet
- As an expense of the current period
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Answer: In inventory on the balance sheet
Factory costs are product costs: they stay in inventory until the goods are sold and only then become cost of goods sold.
2. For a manufacturer, is the chief executive's salary a product cost?
- Yes, as direct labor
- No, it is a period cost
- Yes, as factory overhead
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Answer: No, it is a period cost
Only manufacturing costs are attached to products; head-office salaries are expensed in the period they are incurred.
3. In a furniture factory, how are glue and screws usually treated?
- As period costs of the sales team
- As indirect materials in overhead
- As direct materials traced to each chair
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Answer: As indirect materials in overhead
They are part of the product, but tracing tiny amounts to each unit costs more than it is worth, so they are pooled into overhead.
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