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Naveed Alam 1
Relationships Among Product Cost Classifications

M. Naveed Alam 2
 Manufacturing Costs
Product Costs Inventory Costs
Recognized as an expense when product is sold
Recorded as an asset in inventory when cost is incurred
Direct Costs Indirect Costs
Cost that cannot be
Cost that can be directly
directly traced to the
traced to the product
product

Direct Materials Manufacturing Overhead

Materials directly traceable All production costs except
to the product. direct materials and direct
labor.
Direct Labor
Indirect Materials
Work directly traceable to Indirect Labor
transforming material into
finished product Other Indirect Costs
M. Naveed Alam 3
 Manufacturing Costs

Product
InventoryCosts
Costs

Prime cost Direct Materials

The “primary” cost
of the product DirectLabor
Direct Labor

Conversion Costs Direct Labor

Cost necessary to
“convert” materials Manufacturing
into a product
Overhead

M. Naveed Alam 4
Product Cost Review
Prime cost?
Direct Materials = $8

Direct Labor = $7
Conversion cost?
Manufacturing
overhead = $14

Direct cost? Indirect cost?

Total Product Cost

M. Naveed Alam 5
Product Cost Review
Prime cost?
Direct Materials = $8 DM + DL = $15
Direct Labor = $7
Conversion cost?
Manufacturing DL + MOH = $21
overhead = $14

Direct cost? Indirect cost?

DM + DL = $15 MOH = $14

Total Product Cost

DM + DL + MOH = $29
M. Naveed Alam 6
Question
Following data relates to Zain & Co,
Rupees
Opening stock of raw material 80,000
Opening stock of work in process 51,000
Purchases of raw material 230,000
Direct labor cost 94,000
Factory overheads 79,000
Closing stock of raw material 66,000
Closing stock of work in process 44,000
Required:
1) Prime cost
2) Total Factory cost
M. Naveed Alam 7
Solution!!
1) Prime cost: Rupees
Opening stock of raw material 80,000
Add: Purchases of raw material 230,000
Less: Closing stock of raw material (66,000)
Cost of raw material consumed 244,000
Add: Direct labor cost 94,000
Prime cost/Direct cost 338,000

2) Total Factory Cost:

Prime cost 338,000
Add: Factory overheads 79,000
Total Manufacturing cost/Factory cost 417,000

M. Naveed Alam 8
The Manufacturing Cost Flow
… is the flow of manufacturing costs through the
Materials Inventory, Work in Process Inventory,
and Finished Goods Inventory accounts into the
Cost of Goods Sold account
Manufacturing costs include direct materials,
direct labor, and manufacturing overhead

 A defined, structured manufacturing cost flow is the foundation

for product costing, inventory valuation, and financial reporting

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Cost Flows Visualized

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Journal Entry & ‘T’ Account
 Opening balance of
 Raw Material $ 100,000
 WIP $ 20,000
 Finished Goods $ 78,000
 During the period, direct materials that cost $200,000 are
purchased.
 Direct materials that cost $250,000 are used in production.
 Direct Labour cost $ 120,000 used.
 Total Factory Overhead $ 60,000
 Cost of $ 300,000 transfer to Finished Goods
 Finished goods of Costing of $ 240,000 are sold.
M. Naveed Alam 11
 The Manufacturing Cost Flow
Materials Inventory
100,000 250,000
200,000
50,000
Because there are no indirect Work in Process Inventory
materials in this case, the
Materials Inventory account
shows the balance of unused
direct materials
Factory Payroll Manufacturing Overhead
During the period, direct
materials that cost $200,000
are purchased, increasing the
20,000
account
Direct materials that cost
$250,000 are used in
production, decreasing the
account

Finished Goods Inventory Cost of Goods Sold

78,000

M. Naveed Alam 12
The Manufacturing Cost Flow
Materials Inventory Factory Payroll Manufacturing Overhead
100,000 250,000 120,000 120,000
200,000
50,000 –0–

Work in Process Inventory

The Work in Process 20,000 As direct materials and
account records the direct labor are used, their
250,000
balance of partially costs are added to the
completed units of the
120,000 Work in Process Inventory
product account

Finished Goods Inventory Cost of Goods Sold

78,000

M. Naveed Alam 13
 The Manufacturing Cost Flow
Materials Inventory Factory Payroll Manufacturing Overhead
100,000 250,000 120,000 120,000 60,000 60,000
200,000
50,000 –0– –0–

Work in Process Inventory Total manufacturing costs

The cost of manufacturing
overhead incurred during
an accounting period is
also added to the Work in
Process Inventory account
20,000 equal the total costs of
direct materials, direct
250,000
labor, and manufacturing
120,000 overhead transferred to
60,000 work in process inventory
during an accounting
period

Finished Goods Inventory Cost of Goods Sold

78,000
Also called current
manufacturing
costs

M. Naveed Alam 14
 The Manufacturing Cost Flow
Materials Inventory Factory Payroll Manufacturing Overhead
100,000 250,000 120,000 120,000 60,000 60,000
200,000
50,000 –0– –0–

Work in Process Inventory Total manufacturing costs

Total manufacturing costs
for the current period
equal $430,000 ($250,000 +
$120,000 + $60,000)
20,000 are equal to the total costs
of direct materials, direct
250,000
labor, and manufacturing
120,000 overhead transferred to
60,000 work in process inventory
during an accounting period

Finished Goods Inventory Cost of Goods Sold

78,000

M. Naveed Alam 15
 The Manufacturing Cost Flow
Materials Inventory Factory Payroll Manufacturing Overhead
100,000 250,000 120,000 120,000 60,000 60,000
200,000
50,000 –0– –0–

Work in Process Inventory

Cost of goods 20,000 300,000 Cost of goods
manufactured is the cost manufactured for the
of all units completed 250,000 period decreases the Work
and moved to finished 120,000 in Process Inventory
goods storage during an account and increases the
accounting period 60,000 Finished Goods Inventory
150,000 account

Finished Goods Inventory Cost of Goods Sold

78,000
300,000

M. Naveed Alam 16
 The Manufacturing Cost Flow
Materials Inventory Factory Payroll Manufacturing Overhead
100,000 250,000 120,000 120,000 60,000 60,000
200,000
50,000 –0– –0–

Work in Process Inventory

The Finished Goods 20,000 300,000 As units of product are
Inventory account holds sold, the cost of the goods
the balance of costs 250,000 sold decreases the
assigned to all 120,000 Finished Goods Inventory
completed units of account and increases the
product that have not yet 60,000 Cost of Goods Sold
been sold 150,000 account

Finished Goods Inventory Cost of Goods Sold

78,000 240,000 240,000
300,000
138,000

M. Naveed Alam 17
 Question
Usama manufacturing company submits the following information on June 30,2005.
Raw material inventory, July 1, 2004 25,000
Purchases 125,000
Power, heat and light 3,500
Indirect material purchased and consumed 5,500
Administrative expenses 24,000
Depreciation of plant 18,000
Purchases returns 7,000
Fuel expenses 29,000
Depreciation of building 8,000
Carriage inwards 3,500
Bad debts 2,500
Indirect labor 4000
Other manufacturing expenses 15,000
Raw materials inventory, June 30,2005 26,000
Required:
1)Cost of raw material consumed.
2) Factory overhead cost

M. Naveed Alam 18
Solution
1) Cost of raw material consumed:
Raw materials inventory, July 1 2004 25,000
Add: purchases of materials 125,000
Less: purchase returns (7,000) 118,000
Add: carriage inwards 3,500
Less: materials inventory, June 30,2005 (26,000)
Cost of materials consumed 120,500

2) Factory overhead cost:

Power, heat and light 3,500
Indirect material purchased and consumed 5,500
Depreciation of plant 18,000
Indirect labor 4,000
Fuel expenses 29,000
Other manufacturing expenses 15,000
Total Factory cost 75,000
M. Naveed Alam 19
M. Naveed Alam 20
 COST OF GOODS SOLD
Direct Materials, beginning inventory
+ Direct Materials Purchases
– Direct Materials, ending inventory
Direct Materials Used in Production

Direct Materials Used in Production

+ Direct Labor
+ Manufacturing Overhead
Total Product Cost

Total Product Cost

+ Work in Process, beginning inventory
– Work in Process, ending inventory
Cost of Goods Manufactured

Cost of Goods Manufactured

+ Finished Goods, beginning inventory
Goods Available for Sale Hand-out
– Finished Goods, ending inventory
Cost of Goods Sold
M. Naveed Alam 21
Cost of Goods Sold
Statement
Example

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Quick Check 
Beginning raw materials inventory was $32,000. During the
month, $276,000 of raw material was purchased. Account
at the end of the month revealed that $28,000 of raw
material was still present. What is the cost of direct
material used?
A. $276,000
B. $272,000
C. $280,000
D. $ 2,000

M. Naveed Alam 23
Quick Check 
Beginning raw materials inventory was $32,000. During the
month, $276,000 of raw material was purchased. A count
at the end of the month revealed that $28,000 of raw
material was still present. What is the cost of direct
material used? Beg. raw materials $ 32,000
A. $276,000 + Raw materials
purchased 276,000
B. $272,000 = Raw materials available
for use in production $ 308,000
C. $280,000 – Ending raw materials
inventory 28,000
D. $ 2,000
= Raw materials used
in production $ 280,000

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Quick Check 
Direct materials used in production totaled
$280,000. Direct labor was $375,000 and factory
overhead was $180,000. What were total
manufacturing costs incurred for the month?
A. $555,000
B. $835,000
C. $655,000
D. Cannot be determined.

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 Direct Materials $ 280,000
+ Direct Labor 375,000
Quick Check  + Mfg. Overhead
= Mfg. Costs Incurred
180,000

for the Month $ 835,000

Direct materials used in production totaled

$280,000. Direct labor was $375,000 and factory
overhead was $180,000. What were total
manufacturing costs incurred for the month?
A. $555,000
B. $835,000
C. $655,000
D. Cannot be determined.

M. Naveed Alam 26
Quick Check 
Beginning work in process was $125,000.
Manufacturing costs incurred for the month
were $835,000. There were $200,000 of partially
finished goods remaining in work in process
inventory at the end of the month. What was
the cost of goods manufactured during the
month?
A. $1,160,000
B. $ 910,000
C. $ 760,000
D. Cannot be determined.
M. Naveed Alam 27
 Beginning work in
process inventory $ 125,000
+ Mfg. costs incurred
for the period 835,000
= Total work in process

Quick Check  –
during the period
Ending work in
process inventory
$ 960,000

200,000
= Cost of goods
manufactured $ 760,000

Beginning work in process was $125,000.

Manufacturing costs incurred for the month
were $835,000. There were $200,000 of partially
finished goods remaining in work in process
inventory at the end of the month. What was
the cost of goods manufactured during the
month?
A. $1,160,000
B. $ 910,000
C. $ 760,000
D. Cannot be determined.
M. Naveed Alam 28
Quick Check 
Beginning finished goods inventory was $130,000.
The cost of goods manufactured for the month
was $760,000. And the ending finished goods
inventory was $150,000. What was the cost of
goods sold for the month?
A. $ 20,000.
B. $740,000.
C. $780,000.
D. $760,000.

M. Naveed Alam 29
Quick Check 
Beginning finished goods inventory was $130,000.
The cost of goods manufactured for the month
was $760,000. And the ending finished goods
inventory was $150,000. What was the cost of
goods sold for the month?
A. $ 20,000.
$130,000 + $760,000 = $890,000
B. $740,000. $890,000 - $150,000 = $740,000
C. $780,000.
D. $760,000.

M. Naveed Alam 30
 COGS Statement?
The following data is available for ABC Manufacturing Company. For the year ended
Dec 31, 2009

Raw Material purchased Rs 1’946,700

Direct Labor Cost Rs 2’125,800
Factory Overhead Rs 764,000

Inventory Balance: Opening Bal Closing Bal

Raw Material Rs 268,000 Rs 167,000
W.I.P Rs 150,000 Rs 150,000
Finished Goods Rs 43,000 Rs 79,000

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M. Naveed Alam 32
 Income Statement ?
The following data is available for ABC Manufacturing Company. For the year ended
Dec 31, 2009

Raw Material purchased Rs 1’946,700

Direct Labor Cost Rs 2’125,800
Factory Overhead Rs 764,000
Marketing Expenses Rs 516,000
General and Administration Expenses Rs 461,000
Sales (12,400 Units) Rs 6’634,000

Inventory Balance: Opening Bal Closing Bal

Raw Material Rs 268,000 Rs 167,000
W.I.P Rs 150,000 Rs 150,000
Finished Goods Rs 43,000 Rs 79,000
Finished Goods (Refrigerator) 100 Units 200 Units

M. Naveed Alam 33
Q#4 Income & Cost of Good Sold Statement
 Direct labor Cost & $ 30,000
 Cost Of Goods Sold $ 111,000
 Factory over head 150% of Direct Labor Cost
 Inventory Balance: Opening Bal Closing Bal

 Finished Goods 15,000 17,500

 Work in Process 9,600 13,000
 Material 7,000 7,400
 Other Data:
 Marketing Expense 14,100
 General & Admin Exp 22,900
 Sales For the period 182,000

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Q#7 Cost of Good Sold Statement
 Direct Material Used $ 193,000
 Cost Of Goods available for sales $ 684,000
 Total Manufacturing Cost $584,000
 Factory Over Head $167,000
 Inventory Balance: Opening Bal Closing Bal

 Finished Goods $110,000 $95,000

 Work in Process 70,000 80,000
 Material 90,000 95,000

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