COST

ACCOUNTING
Chapter 2
Basic Cost Concepts and
Accounting for Mass Customization
Operations
Product Costs, Period Costs and Expenses

Product costs are costs associated with goods for

sale until the time period during which the products
are sold, at which time the costs become expenses.

Period costs are costs that are expensed during the

time period in which they are incurred.

Expenses are the consumption of assets for the

purpose of generating revenue.

2-2
 Activities that cause costs to be
incurred are called COST DRIVERS:
Cost Driver Examples
Activity Cost Driver
Machining operations Machine hours
Setup Setup hours
Production scheduling Manufacturing orders
Inspection Pieces inspected
Purchasing Purchase orders
Shop order handling Shop orders
Valve assembly support Customer requisitions

2-3
 Controllable and
Uncontrollable Costs
A cost that can be significantly influenced
by a manager is a controllable cost.

Cost item Manager Classificaton

Cost of food used Restaurant Controllable
in a restaurant manager
Cost of national Restaurant Uncontrollable
advertising by a manager
restaurant chain
2-4
 Opportunity Cost
The potential benefit that is
given up when one
alternative is selected over
another.
– Example: If you were
not attending college,
you could be earning
$20,000 per year.
Your opportunity cost
of attending college for one year
is $20,000.

2-5
 Sunk Costs
All costs incurred in the past that cannot be
changed by any decision made now or in the
future are sunk costs. Sunk costs should not be
considered in decisions.
– Example: You bought an automobile that cost
$12,000 two years ago. The $12,000 cost is
sunk because whether you drive it, park it, trade
it, or sell it, you cannot change the $12,000
cost.

2-6
 Differential Costs
Costs that differ between alternatives.

Example: You can earn $1,500 per month in your

hometown or $2,000 per month in a nearby city.
Your commuting costs are $50 per month in your
hometown and $300 per month to the city.

What is your differential cost?

$300 - $50 = $250

2-7
Marginal Costs and Average
Costs

The total cost to

The extra cost
produce a quantity
incurred to produce
divided by the
one additional unit.
quantity produced.

Marginal and average costs are

largely a function of cost behavior
-- variable and fixed costs.

2-8
Costs and Benefits of Information

Costs Benefits

More information does not mean more

benefits if information overload results.

2-9
Cost Classifications on Financial
Statements – Balance Sheet

Merchandiser Manufacturer
Current Assets Current Assets
– Cash
 Cash
– Receivables
 Receivables
– Prepaid Expenses
 Prepaid Expenses
– Merchandise
 Inventories
Inventory Raw Materials
Work in Process
Finished Goods

2-10
Cost Classifications on Financial
Statements – Balance Sheet

Merchandiser Manufacturer
Current Assets Current Assets
– Cash
 Those materials
Cash
 waiting to be
Receivables
– Receivables processed.
– Prepaid Expenses
 Prepaid Expenses
– Merchandise
 Inventories
Inventory Raw Materials
Work in Process
Finished Goods

2-11
Cost Classifications on Financial
Statements – Balance Sheet

Merchandiser Manufacturer
Partially complete
Current Assets Current Assets
products – material to
– Cash which
 Cash some labor
and/or overhead has
 Receivables
– Receivables been added.
 Prepaid Expenses
– Prepaid Expenses
 Inventories
– Merchandise
Inventory Raw Materials
Work in Process
Finished Goods

2-12
Cost Classifications on Financial
Statements – Balance Sheet

Merchandiser Manufacturer
Current Assets Current Assets
– Cash
 Cash
Completed products
 Receivables
– Receivables awaiting sale.
 Prepaid Expenses
– Prepaid Expenses
 Inventories
– Merchandise
Inventory Raw Materials
Work in Process
Finished Goods

2-13
 Manufacturing Costs

Direct Direct Manufacturing

Material Labor Overhead

The
Product

2-14
 What are Cost Flow Patterns of Manufacturing,
Merchandising, and Service Organizations?
Manufacturing

Direct Materials
Direct Labor Work-in- Finished
Process Goods Cost of
Manufacturing Goods Sold
Overhead Inventory Inventory

Merchandising

Inventory Purchase Cost Merchandise

Merchandise Cost of
Inventory Shipping Cost Inventory
Inventory Goods Sold

Service
Supplies Work-in-Process
Wages & Salaries Cost of Services
Services
Overhead Sold
 ILLUSTRATE THE FLOW OF
INVENTORIABLE AND PERIOD
COSTS

Interpret a cost of goods

manufactured schedule
and analyze the levels of
raw materials, work-in-
process, and finished
goods inventories in a
manufacturing
organization.
Cost of Goods Manufactured Schedule
 Shows specific costs incurred to manufacture
goods.
 Provides calculations that support flow of
costs.
 Total costs of goods manufactured should
include only those costs that have gone
through work-in-process during the period.
 Analyzing COGS
 COGS is not useful for internal decision making.
 Management wants to determine cost of goods
manufactured
 on a product-by-product basis;
 on a department-by-department basis;
 on a period-by-period basis.

 Other criteria examined besides cost:

 product quality.
 speed of production.
 Direct Material

Cost of raw material that is used to

make, and can be conveniently
traced, to the finished product.
Example:
Example:
Steel
Steel used
usedto
to
manufacture
manufacture
the
theautomobile.
automobile.

2-19
 Direct Labor

Cost of salaries, wages, and fringe

benefits for personnel who work
directly on manufactured products.

Example:
Example:
Wages
Wagespaid
paidto
toan
an
automobile
automobileassembly
assembly
worker.
worker.

2-20
 Manufacturing Overhead
All other manufacturing costs
Indirect Indirect Other
Material Labor Costs

Materials used to support

the production process.
Examples: lubricants and
cleaning supplies used in an
automobile assembly plant.

2-21
 Manufacturing Overhead
All other manufacturing costs
Indirect Indirect Other
Material Labor Costs

Cost of personnel who

do not work directly on
the product. Examples:
maintenance workers,
janitors and security
guards.

2-22
 Manufacturing Overhead
All other manufacturing costs
Indirect Indirect Other
Material Labor Costs

Examples: depreciation
on plant and equipment,
property taxes,
insurance, utilities,
overtime premium, and
unavoidable idle time.

2-23
 Classifications of Costs in
Manufacturing Companies
Manufacturing costs are often
combined as follows:

Direct Direct Manufacturing

Material Labor Overhead

Prime Conversion
Cost Cost

2-24
 Manufacturing Cost Flows
Direct Material
Work in
Direct Labor Process
Inventory

Manufacturing
Overhead

2-25
 Manufacturing Cost Flows
Direct Material
Work in
Direct Labor Process
Inventory
Manufacturing
Overhead
Finished
Goods
Inventory

2-26
 Manufacturing Cost Flows
Direct Material
Work in
Direct Labor Process
Inventory
Manufacturing
Overhead
Finished Cost of
Goods Goods
Inventory Sold

2-27
 Preparing Income Statements
formulas
Direct Materials Used
Beginning Raw Materials Inventory + Raw Material Purchases – Ending Raw
Materials Inventory
Total Manufacturing Cost
Direct Materials + Direct Labor + Overhead applied or
Direct material used + direct labor + M O H
Cost of Goods Manufactured
Total Manufacturing Cost (Direct Materials + Direct Labor + Overhead applied) +
Beginning Work In Process Inventory – Ending Work in Process Inventory
Cost of Goods AVAILABLE FOR SALE
Beginning Finished Goods Inventory
+ Cost of Goods Manufactured
Cost of Goods Sold
Beginning Finished Goods Inventory + Cost of Goods Manufactured – Ending
Finished Goods Inventory

2-28
Preparing Income Statements:
Row materials used
The following information is available for Comet Computer
Corporation c
Raw-material inventory, January 1 $6,000
Raw material inventory, December 31 5,020
Purchases of raw materials 134,000
Step 1
Compute Cost of Raw Material Used?
The cost of direct materials used in production can be derived using
the following formula:

2-29
The cost of direct materials used is calculated
Beginning Raw-material inventory, January 1 $ 6,000
Add: Purchases of raw materials $134,000
Raw material available for use $ 140,000
Deduct: Ending Raw material inventory, December 31 $5,020
Raw material used $134,980
SELF TEST
The following information is available for Hodon
construction company
Raw Materials inventory, March 1....................................................... $ 12,000
Raw materials inventory, March 31........................................................ 10,000
Materials purchased in March ................................................................ 90,000
Compute Cost of Raw Material Used?

2-30
 Preparing Income Statements:
The Total Manufacturing Cost
The direct materials used is then used to calculate the total
manufacturing cost as follows using the following formula:
Direct Materials + Direct Labor + Overhead applied
The following information is available for Comet Computer
Corporation Schedule of the total manufacturing cost
Raw material used $134,980
Direct labor $ 50,000
Total manufacturing overhead
Indirect material $ 10,000
Indirect labor 40,000
Depreciation on factory 90,000
Depreciation on equipment 70,000
Utilities 15,000
Insurance 5,000
Total manufacturing overhead $230,000
Total manufacturing cost $414,980
2-31
 Schedule of Cost of Goods
Manufactured
The direct materials used is then used to calculate the cost of goods
manufactured as follows:
+ Direct materials
+ Direct labor
+ Manufacturing overhead costs
+ Beginning WIP inventory
- Ending WIP inventory
= Cost of goods manufactured
Above the data you have calculated earlier, the company have
the following info:
Work-in-process inventory, January 1 $120
Work-in-process inventory, December 31 $100
compute the cost of goods manufactured ?

2-32
 Schedule of Cost of Goods
Manufactured

Comet Computer Corporation

Schedule of Cost of Goods Manufactured

Raw material used $ 134,980

Direct labor 50,000
Total manufacturing overhead 230,000
Total manufacturing costs $ 414,980
Add: Work-in-process inventory, January 1 120
Subtotal $ 415,100
Deduct: Work-in-process inventory, December 31 100

2-33
 Schedule of Cost of Goods
Manufactured
Include all direct labor
costs incurred during the
Cometcurrent period.
Computer Corporation
Schedule of Cost of Goods Manufactured
Raw material used $ 134,980
Direct labor 50,000
Total manufacturing overhead 230,000
Total manufacturing costs $ 414,980
Add: Work-in-process inventory, January 1 120
Subtotal $ 415,100
Deduct: Work-in-process inventory, December 31 100
Cost of goods manufactured $ 415,000
2-34
 Schedule of Cost of Goods
Manufactured
Beginning work-in-
process inventory is
carried over from the
Comet Computer Corporation
prior period.
Schedule of Cost of Goods Manufactured

Raw material used $ 134,980

Direct labor 50,000
Total manufacturing overhead 230,000
Ending work-in-process
Total manufacturing costs $ 414,980
inventory contains the
Add: Work-in-process cost ofJanuary 1
inventory, 120
unfinished
Subtotal goods, and is $ 415,100
reported in the current inventory,
Deduct: Work-in-process assets December 31 100
section of the
Cost of goods balance sheet.
manufactured $ 415,000

2-35
 Schedule of Cost of Goods sold
Comet Computer Corporation have the
following information with the earlier calculated cost of
good manufactured For the Year Ended December 31,
20X2

Finished-goods inventory, Jan. 1 $200

Cost of goods manufactured $415,000
Finished-goods inventory, Dec. 31 $190

Compute Cost of goods sold?

2-36
 Schedule of Cost of Goods sold
Comet Computer Corporation have the
following information with the earlier calculated cost of
good manufactured For the Year Ended December 31,
20X2

Finished-goods inventory, Jan. 1 $200

Cost of goods manufactured $415,000
Finished-goods inventory, Dec. 31 $190

Compute Cost of goods sold?

Finished-goods inventory, Jan. 1 $200
Add: Cost of goods manufactured $415,000
Cost of goods available for sale $415,200
Deduct Finished-goods inventory, Dec. 31 $190
Cost of goods sold $415,010
2-37
 Income Statement for a
Manufacturer

Comet Computer Corporation

Income Statement
For the Year Ended December 31, 20X2
Sales revenue $ 700,000
Less: Cost of goods sold 415,010
Gross margin $ 284,990
Selling and administrative expenses 174,490
Income before taxes $ 110,500
Income tax expense 30,000
Net income $ 80,500

2-38
 Self test
The following information is available for Barwaaqo manufacturing
company
Raw Materials inventory, Jan 1....................................................... $ 20,000
Raw materials inventory, March 31........................................................ 15000
Materials purchased in March ................................................................ 240,000
Direct labor..............................................................................................$ 190,000
Work-in-process inventory, January 1 $15000
Work-in-process inventory, December 31 $30,000
Finished goods inventory jan 1 $25,000
Finished good inventory March 31 $30,000
Total manufacturing overhead
 Indirect labor $30,000 
Maintenance and repairs expense 40,000 
Factory utilities expense 30,000 
Depreciation expense – factory building 30,000

2-39
 Cont…

Compute raw materials used? 245,000

Compute total manufacturing cost? 565,000
Compute cost of goods manufactured? 550,000
Cost of goods available for sale? 575,000
Compute cost of goods sold? 1,90,0000

2-40
 ASSIGNMENT
Prepare income statement for kaamil manufacturing
company that produce Bedframe and bedroom
furniture
Jan 1 Komosato 200x$5
Jan 1 Gasacado rinji 50x$0.7
Jan 1 Muraayado xirmoyin 0
Jan 1 Boolal iyo sharaxad $600

Feb 1 Komosato 500x$5

Feb 1 Gasacado rinji 100x$0.7
Feb 1 Muraayado xirmoyin jan 1 80x0.7
Feb 1 Boolal iyo sharaxad jan 1 $200

March 31 Komosato 300x$5

March 31 Gasacado rinji 70x$0.7
March 31 Muraayado xirmoyin 20x$0.7
March 31 Boolal iyo sharaxad $50

2-41
On march 31 The company produced 60 Bedframes
Direct labor wages of each bedframe is $ 50
Manufacturing overhead cost for 3 months
 Indirect labor $150
 Hall rent for 3 months $600
 Electric bill for 3 months $150
 Store keeper salary $300
 Other indirect exp $ 100

Jiifka hada shaqada ku socoto march 31---- 15 items

Jiifka horay shaqada ugu socotay jan 1 ----- 5 items
Jiifka dhameystirmay march 31 --------- 60 items
Jiifka dhameystirnaa jan 1 ------------- 10 Items

2-42
According to the above information compute
the following:

Cost of direct raw materials used?

The total manufacturing cost?
The cost of goods manufactured?
The Cost of goods available for sale?
The cost of goods sold?
Find out per unit cost of each bed frame?
Prepare income statement for kaamil manufacturing

2-43
End of Chapter 2

2-44