Cost Accounting & Management Essentials You Always Wanted To Know

every company has Direct and Indirect costs. Using these costs, companies compute Cost of Goods Sold (COGS), which is used for Financial Reporting via Income Statement

Conversion Costs
These are the costs incurred in converting the raw materials into finished products. They are computed as given below:
Conversion costs = Direct manufacturing labor costs + Manufacturing overhead costs

Prime Costs
These are all direct manufacturing costs. They are computed as given below:
Prime costs = Direct material costs + Direct manufacturing labor costs

These costs appear under expenses in the income statement.

All costs that are not inventoriable are period costs

Companies can have three types of inventory as below:
a) Direct materials inventory – inventory of raw materials
b) Work-in-process inventory – inventory of partially manufactured products
c) Finished goods inventory – inventory of ready products that are not yet sold

All inventoriable costs appear in the company’s balance sheet under the item “Inventory” until the products are sold, after which they appear in the company’s income statement under the item “Cost of Goods Sold”

All costs related to manufacturing that can be inventorized into the company’s balance sheet are called inventoriable costs

unit costs should always be computed by first separating fixed costs from variable costs and keeping in mind the effect of volume discounts and economies of scale

Net Income = Operating Income * (1 – Tax rate)