ShmoopTube

Where Monty Python meets your 10th grade teacher.

Search Thousands of Shmoop Videos

Cost Accounting: What do you need to know about product costs in a nutshell? 1 Views


Share It!


Language:
English Language

Transcript

00:00

And finance Allah shmoop What do you need to know

00:04

about product costing In a nutshell Products there what companies

00:11

make and sell and well track and fix and upgrade

00:16

and lather Rinse Repeat until they make a lot of

00:19

profit or go bankrupt well especially if the product that

00:21

they make is shampoo Well the tracking and accounting for

00:25

products is actually strangely complex Why Well accountants have to

00:30

find ways to build clients right Yeah that's an accounting

00:34

joke Assorted But actually the tracking of products is in

00:37

theory a good way to optimize the way in which

00:39

managers run a business So products get looked at through

00:43

a whole bunch of lenses like this one and this

00:46

one and this one Weird products Weird filtered lenses So

00:50

let's start by breaking up a product so that its

00:52

production fits into a time schema We'LL think about all

00:56

the units of shampoo for bald men that scalp and

01:00

shoulders makes in a quarter of a lot of units

01:02

and gas Bald men shampoo too It's not just for

01:05

you know the haired all right We'LL scalp and shoulders

01:07

and makes a million bottles in those ninety one day's

01:10

important point here Product costs are recognized not as the

01:15

stuff is made but rather as expenses when they are

01:19

sold So they all sit on the balance sheet as

01:21

an asset usually at their cost or book value until

01:25

told otherwise those our product costs But then there are

01:28

costs incurred keeping the home fires burning as it were

01:32

you know making the shampoo But the workers in the

01:34

factory keep being paid whether bottles are sold or not

01:38

Same deal with the electricity and gas bills and insurance

01:42

and rent and so on All those or costs incurred

01:45

in that period and in parallel period costs are usually

01:49

expensed in the period in which they were incurred like

01:52

a quarter or a month or a year is a

01:55

period to get a clearer picture of the meaning of

01:57

measuring and assessing of all things product Divide that shampoo

02:01

bottle into two components you know like that First comes

02:04

the direct manufacturing costs of that bottle Stuff like the

02:08

goop inside of it You know the bottle itself the

02:10

shrink wrapping and packaging for anti tampering security like it

02:15

would not be cool for a prankster It's safe way

02:17

to replace the shampoo in a bottle of shampoo for

02:21

haired people with Nair So that's direct direct cost to

02:24

make the thing Then you have indirect costs which includes

02:28

like well pretty much everything else Or at least all

02:31

the other things that go into the process of making

02:33

the shampoo You know from the capital originally spent like

02:37

interest on it and now being depreciated on the giant

02:40

twenty thousand gallons that oh gu to the commitments of

02:44

paying rent on the buildings for years ahead and insurance

02:48

and employee pension benefit things all indirect costs direct cost

02:53

break into a few subcategories Here is well so well

02:56

let's just note um you have materials like plastic bottle

02:59

goop inside shrink wrap safety rap thing cleverly called direct

03:04

materials costs or raw uncooked materials for a manufacturing company

03:09

that makes coffee mugs with swear words on them Well

03:12

it'd be the mug itself with raw materials of clay

03:15

and glaze and then the ink for the swears and

03:18

then the daily cost of the robot Engraving them all

03:22

raw materials and direct costs and you have to figure

03:25

out how you want allocate cost of the kiln to

03:27

drive that thing there That's probably a direct costs as

03:29

well Appreciating the capital cost toe by that robot though

03:33

the swear word righty two thousand That would be an

03:36

indirect costs Got it So if it was human and

03:39

not a robot then direct labor would be a cost

03:41

of the human painting on you and someone that's direct

03:46

labour And then you have the third component of direct

03:49

product costs here which is just overhead like think mush

03:52

pot for every other expense to be thrown into the

03:56

secretaries who take orders and manage the building Maintenance ops

03:59

the janitors and of course yes the lawyers Don't forget

04:02

the lawyers although we wish we could They're a part

04:04

of what's called indirect labor in that they you know

04:08

labour but only indirectly to do the most important part

04:11

of what shareholders wanted to dio with a company to

04:13

do anyway which is to produce mugs or shampoo or

04:17

whatever a given company does for a living So we

04:19

saw direct materials these things and of course there are

04:22

indirect materials like lube for the robot and solvent to

04:26

clean spilled clay and glaze off the floor and the

04:29

monthly cleaning service for that Oh Gu And also in

04:33

manufacturing overhead comes the depreciation of the cap ex or

04:36

capital expenditures and the amortization of sales output Deals like

04:40

those contracts on anything else They all go into the

04:43

mush pot so here's more vocab to throw it your

04:46

head as it relates to the cost of products or

04:48

product costing You have prime costs like no relation to

04:52

the rib Prime means primary stuff you need to build

04:56

units of your product It's not just the materials that

04:58

go into the mugs or shampoo bottles or whatever's It's

05:01

also the labour behind it that assembled it ever so

05:05

lovingly ish So the term prime cost is usually attributed

05:09

to companies who make some things from nothing's like That

05:12

shampoo maker takes eighteen parts lye soap dissolves It mixes

05:16

it with waters from Nee Paul then ads fourteen units

05:19

of whale blubber and four drops of chlorine which it

05:22

is carefully synthesized to be of jaws The right concentration

05:26

or density that is the shampoo maker makes the product

05:29

prime ingredients for primary costs But other manufacturers do more

05:33

assembling then making like think about a carmaker getting great

05:37

tax benefits and anti protectionist breaks by assembling cars in

05:42

the country in which they're being sold That companies selling

05:44

oh say Ford trucks in France Lew Ford might have

05:48

made their engine in Mexico then bought tires locally from

05:52

Michelin and then brought in windshield wiper seats and other

05:55

leather goods from Morocco and then the electric guidance system

05:59

from Israel and well the rest shipped in from the

06:01

U S Of a Well all the parts were made

06:04

They just needed labor to assemble them in France and

06:07

be all ready to drive on little tiny one D

06:10

five hundred year old roads with bottles In that case

06:12

the manufacturing term for product cost really revolves around conversion

06:17

costs That is you're converting already assembled subsets of raw

06:20

materials into a finished good which people actually want Yes

06:24

they actually want these things So if these air manufacturing

06:27

costs and what are non manufacturing costs Well basically two

06:31

things the company has to be organized or administered So

06:34

there are secretaries and lawyers and CEOs and CFOs and

06:37

line managers and yes accountants They're all overhead They don't

06:40

actually make the product They just rule over people who

06:43

do and they get lumped as administrative costs They you

06:47

know administer So that's one category The other marketing Yeah

06:51

like how do you get stores to stock your shampoo

06:54

for bald men And how do you assess what color

06:57

bottle works best to sell at Christmas time And how

07:00

do you know if you should suggest a retail price

07:03

of seven ninety nine seven ninety five or just say

07:05

about eight bucks Yeah the marketing department deals with all

07:09

that and here's where it gets dicey Let's say you

07:12

sell five different types of shampoo Shampoo for bald men

07:15

shampoo for bald women Yes much smaller market shampoo for

07:18

the nether region And then of course shampoo for Democrats

07:21

in the Blue Bottle and shampoo for Republicans in the

07:24

Red One Yeah that's five products You spend one hundred

07:27

million dollars a year marketing them Well the division manager

07:30

of Shampoo for the Nether region just like all the

07:32

other managers gets paid on operating profits of her division

07:36

She feels she doesn't need marketing because everyone who wants

07:40

sf tnr yeah already knows about it and buys it

07:43

secretly Yeah they pay cash and quietly walk out of

07:46

the store Yet she gets charged a product cost of

07:50

one fifth of the marketing budget or twenty million dollars

07:53

that goes on her bottom line against her bottom line

07:55

So she gets paid a lot less in bonus money

07:58

then does the flagship brand shampoo for Bald Man which

08:00

really doesn't need the marketing spin because it's a very

08:03

competitive out there Well she might argue that the marketing

08:05

should be allocated according to the units sold of that

08:08

particular product or based on a brand Surveys toe why

08:12

people buy a given product But just dividing the marketing

08:15

spend in fifties and an equally apportioning it feels very

08:19

unfair to her right and make sense Well The company's

08:22

most senior management however wants this to be a team

08:25

company a team production a team vibe in its corporate

08:28

culture So it applies a kind of cost allocation socialism

08:33

to the big expenses They're not fair talked to a

08:36

bald guy or gal about fairness Yeah well what do 00:08:39.511 --> [endTime] you think Oh no

Up Next

GED Social Studies 1.1 Civics and Government
39794 Views

GED Social Studies 1.1 Civics and Government

Related Videos

Fake News
11938 Views

How do you tell fake news from real news?

Finance: What is Bankruptcy?
260 Views

What is bankruptcy? Deadbeats who can't pay their bills declare bankruptcy. Either they borrowed too much money, or the business fell apart. They t...

Finance: What is a Dividend?
1777 Views

What's a dividend? At will, the board of directors can pay a dividend on common stock. Usually, that payout is some percentage less than 100 of ear...

Finance: How Are Risks and Rewards Related?
589 Views

How are risk and reward related? Take more risk, expect more reward. A lottery ticket might be worth a billion dollars, but if the odds are one in...