These expenses are period costs, meaning they must be expensed in the period in which they are incurred. While depreciation on manufacturing equipment is considered a manufacturing cost, depreciation on the warehouse in which products are held after they are made is considered a period cost. While carrying raw materials and partially completed products is a manufacturing cost, delivering finished products from the warehouse to clients is a period expense. MasterCraft records these manufacturing costs as inventory on the balance sheet until the boats are sold, at which time the costs are transferred to cost of goods sold on the income statement. Recall from other tutorials that variable costs change in proportion to production. For instance, in our example of Friends Company, the company purchases metal parts (raw material) to produce valves.

Any expenditure exceeding the budget by more than $25 must be approved by the board of directors. A financial report comparing actual revenues and expenditures with budgeted revenues and expenditures (produced using QuickBooks software) is submitted to the board of directors monthly. Once revenues and expenses are established for the next budget period, the bookkeeper enters the information using QuickBooks software and prints a preliminary budget report, which the budget committee reviews. nonmanufacturing costs include Once the budget committee has balanced the budget, reviewed it for reasonableness, and approved it, it goes to the board of directors for approval. Direct materials are raw materials that become an integral part of the finished goods. You should consider our materials to be an introduction to selected accounting and bookkeeping topics, and realize that some complexities (including differences between financial statement reporting and income tax reporting) are not presented.

3: Cost Terminology

Examples of nonmanufacturing overhead costs are the compensation of sales and marketing personnel, rent and utility costs on administrative facilities, interest on loans and lines of credit, marketing costs, liability insurance, and office supplies. For accounting purposes, nonmanufacturing costs are expensed periodically (typically in the period they are incurred). However, for management objectives, managers frequently require the assignment of nonmanufacturing costs to goods. This is especially true for specific product-related commissions and promotions. Examples of marketing and selling costs include advertising costs, order taking costs and salaries of sales persons etc.

Examples of indirect materials (part of manufacturing overhead) include glue, paint, and screws. Direct labor includes the production workers who assemble the boats and test them before they are shipped out. Indirect labor (part of manufacturing overhead) includes the production supervisors who oversee production for several different boats and product lines. These costs are not directly tied to the production of goods or services, but rather to the overall operation of the company.

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Note “Business in Action 2.3.2” provides examples of nonmanufacturing costs at PepsiCo, Inc. Note 1.48 “Business in Action 1.6” provides examples of nonmanufacturing costs at PepsiCo, Inc. The two broad categories of costs are manufacturing costs and nonmanufacturing costs. Examples include advertising costs, salaries and commission of sales personnel, storage costs, shipping and delivery, and customer service. Examples of general and administrative costs include salaries and bonuses of top executives and the costs of administrative departments, including personnel, accounting, legal, and information technology. Manufacturing and non-manufacturing costs together form total costs for a manufacturing entity.

• While depreciation on manufacturing equipment is considered a manufacturing cost, depreciation on the warehouse in which products are held after they are made is considered a period cost.
• For instance, in our example of Friends Company, the company purchases metal parts (raw material) to produce valves.
• Factory overhead – also called manufacturing overhead, refers to all costs other than direct materials and direct labor spent in the production of finished goods.
• The relevance of costing to manufacturing companies is highly important to running an efficient and successful business.
• Examples of indirect materials (part of manufacturing overhead) include glue, paint, and screws.

PepsiCo, Inc., produces more than 500 products under several different brand names, including Frito-Lay, Pepsi-Cola, Gatorade, Tropicana, and Quaker. Net sales for 2010 totaled $57,800,000,000, resulting in operating profits of $6,300,000,000. Cost of sales represented the highest cost on the income statement at $26,600,000,000. The second highest cost on the income statement—selling and general and administrative expenses—totaled $22,800,000,000.

Non-manufacturing Costs

Direct materials should be distinguished from indirect materials (part of overhead costs), about which we will talk later. Nonmanufacturing overhead costs are the company’s selling, general and administrative (SG&A) expenses plus the company’s interest expense. The sum of direct materials cost and direct labor cost is known as prime cost. The finished product of a company may become raw material of another company. For example, cement is a finished product for manufacturers of cement and raw materials for companies involved in construction business.

Lime stone is usually direct material for that manufacturers of bare cement. Direct materials usually includes a significant portion regarding total manufacturing charge. Nonmanufacturing, also known as “period” costs, consists of selling and administrative expenses. The relevance of costing to manufacturing companies is highly important to running an efficient and successful business. Identifying, separating and apportioning cost data provides management and outside decision makers (investors) valuable information on the company’s profitability and cost control systems.

Costs that are not related to the production of goods are called nonmanufacturing costs23; they are also referred to as period costs24. Direct labor manufacturing costs is determined by calculating the cost of employees directly responsible for producing the product. For example, a clothing manufacturer considers employees that dye the cloth, cut the cloth and sew the cloth into a garment as direct labor costs. However, designers and sales personnel are considered nonmanufacturing labor costs.