Key Terms

conversion cost

total of labor and overhead for a product; the costs that “convert” the direct material into the finished product

equivalent units

number of units that would have been produced if the units were produced sequentially and in their entirety in a particular time period

expense recognition principle

(also, matching principle) matches expenses with associated revenues in the period in which the revenues were generated

manufacturing costs

(also, product costs) total of all costs expended in the manufacturing process; generally consists of direct material, direct labor, and manufacturing overhead

period costs

typically related to a particular time period instead of attached to the production of an asset; treated as an expense in the period incurred (examples include many sales and administrative expenses)

prime costs

direct material expenses and direct labor costs

process costing

costing system used when a standardized process is used to manufacture identical products and the direct material, direct labor, and manufacturing overhead cannot be traced to a specific unit

product costs

all expenses required to manufacture the product: direct materials, direct labor, and manufacturing overhead

production cost report

shows the costs used in the preparation of a product, including the cost per unit for materials and conversion costs and the amount of work in process and finished goods inventory

selling and administrative (S&A) expenses

period costs not directly assigned to the items produced or services provided; include costs of departments not directly associated with manufacturing but necessary to operate the business

spoilage

any units that are not fit for sale due to breakage or other imperfections