ShmoopTube

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And finance Allah shmoop What do you need to know

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about product costing In a nutshell Products there what companies

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make and sell and well track and fix and upgrade

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and lather Rinse Repeat until they make a lot of

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profit or go bankrupt well especially if the product that

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they make is shampoo Well the tracking and accounting for

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products is actually strangely complex Why Well accountants have to

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

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joke Assorted But actually the tracking of products is in

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theory a good way to optimize the way in which

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managers run a business So products get looked at through

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a whole bunch of lenses like this one and this

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one and this one Weird products Weird filtered lenses So

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

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

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the units of shampoo for bald men that scalp and

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shoulders makes in a quarter of a lot of units

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

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

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

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important point here Product costs are recognized not as the

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stuff is made but rather as expenses when they are

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sold So they all sit on the balance sheet as

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an asset usually at their cost or book value until

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told otherwise those our product costs But then there are

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costs incurred keeping the home fires burning as it were

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you know making the shampoo But the workers in the

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factory keep being paid whether bottles are sold or not

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Same deal with the electricity and gas bills and insurance

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and rent and so on All those or costs incurred

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in that period and in parallel period costs are usually

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expensed in the period in which they were incurred like

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a quarter or a month or a year is a

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period to get a clearer picture of the meaning of

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measuring and assessing of all things product Divide that shampoo

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bottle into two components you know like that First comes

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the direct manufacturing costs of that bottle Stuff like the

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goop inside of it You know the bottle itself the

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shrink wrapping and packaging for anti tampering security like it

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

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to replace the shampoo in a bottle of shampoo for

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

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make the thing Then you have indirect costs which includes

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like well pretty much everything else Or at least all

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the other things that go into the process of making

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the shampoo You know from the capital originally spent like

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interest on it and now being depreciated on the giant

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twenty thousand gallons that oh gu to the commitments of

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paying rent on the buildings for years ahead and insurance

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and employee pension benefit things all indirect costs direct cost

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break into a few subcategories Here is well so well

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

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goop inside shrink wrap safety rap thing cleverly called direct

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materials costs or raw uncooked materials for a manufacturing company

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that makes coffee mugs with swear words on them Well

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

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and glaze and then the ink for the swears and

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then the daily cost of the robot Engraving them all

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raw materials and direct costs and you have to figure

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out how you want allocate cost of the kiln to

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

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well Appreciating the capital cost toe by that robot though

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the swear word righty two thousand That would be an

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indirect costs Got it So if it was human and

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not a robot then direct labor would be a cost

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

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labour And then you have the third component of direct

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product costs here which is just overhead like think mush

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pot for every other expense to be thrown into the

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secretaries who take orders and manage the building Maintenance ops

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

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

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

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labour but only indirectly to do the most important part

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of what shareholders wanted to dio with a company to

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do anyway which is to produce mugs or shampoo or

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whatever a given company does for a living So we

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saw direct materials these things and of course there are

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indirect materials like lube for the robot and solvent to

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clean spilled clay and glaze off the floor and the

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monthly cleaning service for that Oh Gu And also in

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manufacturing overhead comes the depreciation of the cap ex or

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capital expenditures and the amortization of sales output Deals like

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those contracts on anything else They all go into the

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

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head as it relates to the cost of products or

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product costing You have prime costs like no relation to

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the rib Prime means primary stuff you need to build

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

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

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also the labour behind it that assembled it ever so

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lovingly ish So the term prime cost is usually attributed

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

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shampoo maker takes eighteen parts lye soap dissolves It mixes

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it with waters from Nee Paul then ads fourteen units

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of whale blubber and four drops of chlorine which it

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is carefully synthesized to be of jaws The right concentration

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or density that is the shampoo maker makes the product

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prime ingredients for primary costs But other manufacturers do more

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assembling then making like think about a carmaker getting great

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tax benefits and anti protectionist breaks by assembling cars in

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

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oh say Ford trucks in France Lew Ford might have

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made their engine in Mexico then bought tires locally from

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Michelin and then brought in windshield wiper seats and other

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leather goods from Morocco and then the electric guidance system

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from Israel and well the rest shipped in from the

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U S Of a Well all the parts were made

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They just needed labor to assemble them in France and

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be all ready to drive on little tiny one D

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five hundred year old roads with bottles In that case

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the manufacturing term for product cost really revolves around conversion

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

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materials into a finished good which people actually want Yes

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they actually want these things So if these air manufacturing

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costs and what are non manufacturing costs Well basically two

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things the company has to be organized or administered So

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there are secretaries and lawyers and CEOs and CFOs and

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

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actually make the product They just rule over people who

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do and they get lumped as administrative costs They you

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

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like how do you get stores to stock your shampoo

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for bald men And how do you assess what color

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bottle works best to sell at Christmas time And how

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do you know if you should suggest a retail price

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of seven ninety nine seven ninety five or just say

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about eight bucks Yeah the marketing department deals with all

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

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sell five different types of shampoo Shampoo for bald men

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shampoo for bald women Yes much smaller market shampoo for

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the nether region And then of course shampoo for Democrats

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in the Blue Bottle and shampoo for Republicans in the

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

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million dollars a year marketing them Well the division manager

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of Shampoo for the Nether region just like all the

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other managers gets paid on operating profits of her division

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

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sf tnr yeah already knows about it and buys it

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secretly Yeah they pay cash and quietly walk out of

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the store Yet she gets charged a product cost of

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one fifth of the marketing budget or twenty million dollars

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that goes on her bottom line against her bottom line

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So she gets paid a lot less in bonus money

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then does the flagship brand shampoo for Bald Man which

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

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competitive out there Well she might argue that the marketing

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should be allocated according to the units sold of that

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particular product or based on a brand Surveys toe why

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people buy a given product But just dividing the marketing

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spend in fifties and an equally apportioning it feels very

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

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most senior management however wants this to be a team

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company a team production a team vibe in its corporate

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culture So it applies a kind of cost allocation socialism

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

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

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