DIRECT AND INDIRECT MANUFACTURING COSTS
The costs of direct materials and direct labor may be traced conveniently and directly to specific units of product. At Conquest, for example, it is relatively easy to determine the cost of the metal tubing and the cost of the direct labor that go into making a particular bicycle. For this reason, accountants call these items direct manufacturing costs. Overhead, however, is an indirect manufacturing cost . Consider, for example, the types of costs that Conquest classifies as overhead. These costs include property taxes on the factory, depreciation on tools and equipment, supervisors' salaries, and repairs to equipment.

How much of these indirect costs should be assigned to each bicycle? There is no easy answer to this question. By definition, indirect costs cannot be traced easily and directly to specific units of production. While these costs are often easier to view as a whole than on a per-unit basis, we will see that both financial and management accountants require unit cost information. Therefore, manufacturing companies must develop methods of allocating an appropriate portion of total manufacturing overhead to each product manufactured. These methods will be discussed in detail in Chapter 17.

WORK IN PROCESS INVENTORY, FINISHED GOODS

INVENTORY, AND THE COST OF GOODS SOLD

We have devoted much of this chapter to discussing the three types of manufacturing costs direct materials, direct labor, and manufacturing overhead. We will now shift our attention to the three accounts that provide the structure for the flow of these costs-the Work in Process
Inventory account, the Finished Goods Inventory account, and the Cost of Goods Sold account.

The Work in Process Inventory account is used (1) to record the accumulation of manufacturing costs associated with the units of product worked on during the period and (2) to allocate these costs between those units completed during the period and those that are only partially completed.

Because direct materials, direct labor, and manufacturing overhead are consumed in production, their related costs are debited to the Work in Process Inventory account. The flow of costs into this inventory account (rather than into a corresponding expense account) is consistent
with the idea that manufacturing costs are product costs, not period costs.
As specific units are completed, the cost of manufacturing them is transferred from the Work in Process Inventory account to the Finished Goods Inventory account. Thus, the balance in the Work in Process account represents only the manufacturing costs associated with
units still "in process."

It is important to realize that once products are classified as finished goods, no additional costs are allocated to them. Therefore, the costs of storing, marketing, or delivering finished goods are regarded as selling expenses, not manufacturing costs. When units of finished goods are sold, their related costs must "flow" from the balance sheet through the income statement in compliance with the matching principle. Accordingly, as products are sold, their costs are transferred from the Finished Goods Inventory account to the Cost of Goods Sold account.