Cost Terms,

Concepts
and
Classification

Weeks 1 - 2
Hermie T. Bola July 29, 2021
1
 Manufacturing costs is the sum of three cost
elements.

Direct Direct Manufacturing Finished

Material Labor Overhead
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 Manufacturing Costs (Production Costs)

Direct Labor
Direct Materials
All materials that form an Work of factory employees

integral part of the finished product that can be physically and

during the manufacturing process directly associated with

and can be physically and directly converting raw materials into

associated with the product. finished goods.

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 Manufacturing Costs (Production Costs)
Manufacturing Overhead
Costs that are indirectly associated with manufacturing the finished
product.

Indirect Materials
 Not physically part of the finished product.
 Insignificant part of finished product in terms of cost.
 Not classified as direct materials but needed for its completion.

Indirect Labor
 Costs that cannot be economically traced to the cost of the product,
but must be allocated to the finished goods.
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 Manufacturing Costs (Production Costs)

Direct
Materials Prime
Costs
Product
Costs Direct
Labor
Conversion
Costs
Manufacturing
Overhead
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 Manufacturing Costs (Production Costs)
Direct
Materials
Variable
Product Direct Costs
Costs Labor

Variable
Overhead
Manufacturing Fixed
Overhead Costs
Fixed
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Overhead
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 Total and Unit Cost Behavior

Total Cost Unit Cost

Varies in direct Remains constant

Variable proportion to throughout the
Cost changes in activity relevant range
a

Remains constant Varies inversely

Fixed with changes in
Cost throughout
the relevant range activity throughout
the relevant range
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 Cost in Relation to Changes in Activity
Total Unit

Variable Cost P P

# of Units # of Units

Fixed Cost
P P

# of Units # of Units
6/24/2020 Within the relevant range
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 Cost in Relation to Changes in Activity

Total Costs Cost Per Unit

Change in
proportion with Unchanged in
Variable Costs output relation to output
More output = Higher cost

Change inversely
Unchanged in with output
Fixed Costs relation to output
More output = lower cost/unit
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 Basic Cost Terminology

Fixed Costs cost that remains

Direct costs can be conveniently constant in total within a relevant
and distinctly traced (tracked) to range of activity. Does not change
a particular cost object. in total as business activity
increases or decreases.

Indirect costs cannot be traced

(tracked) explicitly or
Variable costs increases in total
conveniently to a particular cost
proportionately with an increase
object. Instead of being traced,
in activity and decreases
these costs are allocated to a cost
proportionately with a decrease
object in a rational and systematic
in activity.
manner.
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 Basic Cost Terminology

Inventoriable costs—product
manufacturing costs. These Direct Direct Manufacturing
costs are capitalized as assets Material Labor Overhead
(inventory) until they are sold
and transferred to Cost of
Goods Sold.

Period costs—have no future Administrative Selling

value and are expensed in the Expenses Expenses
period incurred.
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 Manufacturing Inventories

Direct materials Work-in-process – Finished goods –

resources in-stock the stage in the the stage in the
and available for production production process
use process where where the products
work has been are fully completed
started but not yet and ready for sale
completed.

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 Flow of Costs in a Manufacturing Firm
Cost Collected
Action Initially Cost Flow To and Through

Purchase Materials
materials Inventory

Direct Work in Finished

Pay direct
Labor Process Goods Cost of
laborers
Inventory Inventory Goods Sold

Incur
Manufacturing
overhead
Overhead
costs
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 Product Costs and Period Costs
Balance Sheet Income Statement

Sales
Purchases of Raw
Revenue
Raw Materials Materials
plus Freight In Inventory
minus
when
Product Direct labor
sales
Cost of Goods
Finished occur
Costs Work-in- Sold Product
Process Goods
Manufacturing Inventory Costs
Overhead Inventory
equals
Gross Profit
minus
Selling and
Administrative Period
Expenses Costs

equals
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Operating Income 14
Schedule 1 – Raw materials used

Raw materials inventory - beginning balance P 40,000

Add: Purchases - raw materials 220,000
Raw materials available for use 260,000
Less: Raw materials inventory - End (60,000)
Raw materials used P200,000

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 AMCAR CORPORATION
Statement of Cost of Goods Manufactured and Sold
December 31, 2019

Beginning work in process P 150,000

Raw materials used (Sched 1) P200,000
Direct labor 450,000
Variable overhead 115,500
Fixed overhead 95,000
Total manufacturing costs 860.500
Total costs of goods placed in process 1,010,500
Work in process - Eng (30,500)
Cost of goods manufactured P 980.000

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 AMCAR CORPORATION
Statement of Cost of Goods Manufactured and Sold
December 31, 2019

Finished Goods - Beginning 85,400

Add: Cost of Goods Manufactured 980,000
Cost of Goods Available for Sale P1,065,400
Less: Finished Goods - End (91,400)
Cost of Goods Sold P1,054,000

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 AMCAR CORPORATION
Income Statement
December 31, 2019

Sales P 1,500,000
Less: Cost of Goods Sold ( 980,000)
Gross Profit 520,000
Less: Operating Expenses 364,000
Income from Operation P 156,000

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a. AMCAR TEXTILE MANUFACTURING INC.
Cost of Goods Manufactured Schedule
For the Month Ended July 31, 2008
Beginning work in process inventory
Direct materials:
Beginning raw material inventory
Add: Raw material purchased
Raw material available
Ending raw material inventory
Raw material used
Indirect material used
Direct material used
Direct labor cost
Overhead:
Various
Indirect material used
indirect labor
Total overhead cost
Total costs
Less: Ending work in process inventory
Cost of goods manufactured
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a. Raggae Rocks Co.
Cost of Goods Sold Schedule
For the Month Ended March 31, 2008
Beginning finished goods inventory
Cost of goods manufactured
Cost of goods available for sale

Less: Ending finished goods inventory

Cost of goods sold

b. Raggae Rocks Co.

Cost of Goods Manufactured Schedule
For the Month Ended March 31, 2008
Beginning work in process inventory
Direct material:
Beginning direct material inventory
Direct material purchased
Direct material available

Less: Ending direct materials inventory

Direct materials used in production
Direct labor cost
Total overhead cost
Total cost to account for

Less: Ending work in process inventory

Cost of goods manufactured

c. Prime Cost
Direct materials
Direct labor
Total prime cost

d. Conversion Cost
Direct labor
Overhead
Total conversion cost
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