Product and Service Costs
Output represents one of the most important cost objects. There are two types of output: products and services. Products are goods produced by converting raw materials through the use of labor and indirect manufacturing resources, such as the manufacturing plant, land, and machinery. Televisions, hamburgers, automobiles, computers, clothes, and furniture are examples of products. Services are tasks or activities performed for a customer or an activity performed by a customer using an organization’s products or facilities.
Insurance coverage, medical care, dental care, funeral care, and accounting are examples of service activities performed for customers. Car rental, video rental, and skiing are examples of services where the customer uses an organization’s products or facilities. Organizations that produce products are called manufacturing organizations. Organizations that provide services are called service organizations. Managers of both types of organizations need to know how much individual products or services cost. Accurate cost information is vital for profitability analysis and strategic decisions concerning product design, pricing, and product mix. Incidentally, retail organizations, such, buy finished products from other organizations, such as manufacturers, and then sell them to customers.
The accounting for inventory and cost of goods sold for retail organizations, often referred to as merchandisers, is much simpler than for manufacturing organizations and is usually covered extensively in introductory financial accounting courses. Therefore, the focus here is on manufacturing and service organizations.
Services differ from products in many ways. First, a service is intangible. The buyers of services cannot see, feel, hear, or taste a service before it is bought. Second, services are perishable; they cannot be stored for future use by a consumer but must be consumed when performed. Inventory valuation, so...
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