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