Differentiated between different costs and analyzed their relationships. Evaluate a scenario in which standard cost systems are in use by using direct labor and the materials’ variances calculations.
Imagine meeting David Baker, the owner of a T-shirt manufacturer, whose business produces T-shirts for local businesses and organizations where you live. David wants his business to grow considerably, though he knows that with growth comes many different costs, including increased labor costs, material costs, and maintenance on his building. He needs to know if there are ways he can continue to grow his company while cutting costs in the process. David knows that there are four main costs to consider (product costs, direct material cost, direct labor cost, and manufacturing overhead), and he knows that he must also consider his costs over time. But he is not sure if all of these costs are equally important, or if he should prioritize some costs over others. David has come to you for advice on how to facilitate the optimal growth of his company.
Consider how the classification of manufacturing costs will provide David with a better understanding of the current state of his business, and how it can inform effective financial decision making.
Categorize each of the following Cost Varieties by placing them within the Product Cost or Period Cost column/system.
Cost Variety
Product Cost
Period Cost
Advertising expenses for T-shirts
Depreciation on PCs in marketing department
Fire insurance on corporate headquarters
Fire insurance on plant
Overtime premium paid assembly workers
Factory building maintenance department
Factory security guards
Property taxes paid on corporate headquarters
Salaries of public relations staff
Salary of corporate controller
Wages of engineers in quality control
Wages paid to assembly-line employees
Wages paid to employees in finished goods warehouse
Once you have divided the Cost Varieties between the Product Cost and Period Cost systems, identify each product cost within the following appropriate sections: Direct Materials, Direct Labor, or Manufacturing Overhead.
