Use the DWC Virtual Library to search for articles on product and period costs, fixed and variable costs, direct and indirect costs, and calculation of costs of goods sold. Prepare a paper addressing product costs and period costs for a merchandising company and manufacturing company. In the paper, address the following points:
• What are the differences between product costs and period costs and the differences in their accounting treatment?
• What are the differences between fixed and variable costs, and direct and indirect costs?
• Describe the components of the cost of services provided by a service firm.
• Discuss how cost of goods sold and cost of goods manufactured for a merchandising company and a manufacturing company are calculated.
The necessary costs associated with manufacturing a product such as those related to raw material, direct labor and manufacturing overheads are the product costs for a manufacturer. Period costs and their expense cannot be directly attributed to any part of the manufacturing process and it occurs over a prolonged period of time. Interest expenses, selling and administrative expenses, etc. are period expenses. The matching principle of accounting requires product costs to be considered only when the revenue arising from the same comes into the picture and the actual sale of goods is made (Kimball, 2008). The accounting entry, hence, is passed when sale has been done. Period costs, on the other hand, have nothing to do with sales and are registered during the accounting period in which it has been incurred.
Fixed costs are those that remain unchanged by any other factor of production, etc. Items such as rent, salaries, etc. need to be paid irrespective of the volume of production. The fixed cost is a constant function and can be ascertained well before they even occur. Variable costs, on the other hand, are a function which is influenced by factors such as number of working days, units produced, volume of production, etc. Variable costs may increase or decrease depending on many different factors and cannot be accurately ascertained in advance (Fine, 2010). The costs of materials and labor can be direct if the same can be attributed to some fixed product production whereas it is known as indirect cost where the cost cannot be attributed to any particular production.
Cost of services can be considered to be the same as cost of goods sold is for manufacturing companies. It takes care of all direct costs that are associated with a particular service system that has been created by the company. It, however, does not take into account indirect costs such as salaries, etc. and only those costs which are relevant to a particular service can be enlisted in the cost of services.
The Product Cost Planning function can be used to calculate Cost of Goods Sold and Cost of Goods Manufactured. COGM comprises of the raw material cost, direct production cost, processing cost and overhead costs such as those pertaining to materials and production. COGS consist of not just the components of COGM but also the sales and administration overhead costs.
Therefore, it is a single process wherein COGM and COGS can be calculated together. After putting together all elements required for COGM, the sales and administration overhead costs need to be added in order for it to show the value for cost of goods sold (Sanderson, 2001). Basically, the difference between COGM and COGS is that the former represents the goods which were manufactured in their entirety and then shifted to the finished goods inventory from the manufacturing process line. COGS, on the other hand, represent those goods which have been sold and have been flushed out of the entire system of the organization (Cohen, 2006). COGM can be calculated by adding and subtracting the finished goods inventory as well.
Cohen, M.A. (2006). Optimal Technology Choice in a Dynamic-Stochastic Environment, Journal of Operations Management, 6, 317-331.
Fine, C.H. (2010). Optimal Investment in Product-Flexible Manufacturing Capacity, Management Science, 36, 449-466.
Kimball, G.E. (2008). General Principles of Inventory Control, Journal of Manufacturing and Operations Management, 1 (1988), 119-130.
Sanderson, S.W. (2001). Cost Models for Evaluating Virtual Design Strategies for Multicycle Product Families, Journal of Engineering and Technology Management, 8, 339-358.