Question

Since we began the course emphasizing that costs of a manufacturing company product include only the materials, labor and overhead used in or occurring in the factory and costs of a merchandising company product include the only purchase of the product and expenses surrounding the procurement of it (like freight-in and insurance), why in this chapter do we learn to allocate non-manufacturing and non-procurement costs to products, including the intangible products of service companies?

Answer 1

After been studied the allocation of the Manufacturing product costs, here we study, the Non-manufacturing overhead costs and the non-procurement costs to products including intangible products of service companies.

The Non-manufacturing overhead costs and the non-procurement costs, which are accounting and business expenses truly outside the product manufacturing/operations overhead/costs. The business expenses are also called as Selling, General, Administrative and Interest expenses. Examples salaries, accounting, legal, selling, distribution, finance, IT, HR, taxes and other expenses.

These costs are not the product costs, but called as Period costs and are not allocated to products and also not included to Cost of Goods Sold. These costs have to be covered in the selling price of the products and forms a part of the Gross Profit alongwith the Net Income.