SEMINAR 2 & 3

Cost Concepts, Analysis and

Accumulation
 Process
Process of
of Management
Management
Strategy Planning
Formulation

Managers need cost information to

perform each of these functions.

Control Directing
Decision
2
Making
WHAT DO WE
MEAN BY A
COST?

A cost
is the measure of
resources given
up to achieve a
particular purpose.
3
Attempt to classify and categorize cost is
to help with understanding the costs and
to manage and controlling costs

Cost information and classification is

necessary for:
• Determining product cost
• Predicting future costs
• To make various business decisions

4
Cost
Cost Accounting
Accounting Concepts
Concepts

Behavior
Traceability
Controllability
Relevance
Function
Classification
Classification by
by Behavior
Behavior
Cost behavior means
how a cost will react to
changes in the level of
business activity.
 Total fixed costs do
not change when
activity changes.
 Total variable costs
change in proportion
to activity changes.
 Classification
Classification by
by Behavior
Behavior
Cost behavior means
how a cost will react to
Cost

changes in the level of

business activity.
Activity  Total fixed costs do
not change when
activity changes.
 Total variable costs
Cost

change in proportion
to activity changes.

Activity
 Classification
Classification by
by Traceability
Traceability
Direct costs Indirect costs
 Costs that can be  Costs that must be
easily and conveniently allocated to a unit of
traced to a unit of product or other cost
product or other cost objective.
objective.
 Examples: direct  Example:
material and direct labor manufacturing
overhead
 Classification
Classification by
by Traceability
Traceability

Direct Trace
material d di r
spec ectly
i fi c c to on
ost o e
bject A product, process,
department, or
customer to which
o n e
t o costs are assigned.
ct l y t
d i r e j ec
ce d s t ob
Direct Tra c co
ec ifi
labor sp
 Classification
Classification by
by Controllability
Controllability
The degree of control depends on the
level of management in the organization.

M
or
ol

e
ntr

Co
Co

nt
ro
re

l
Mo

Very little control

 Classification
Classification by
by Relevance:
Relevance:
Opportunity
Opportunity Costs
Costs
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
$15,000 per year.
Your opportunity cost
of attending college for
one year is $15,000.
 Classification
Classification by
by Relevance:
Relevance:
Sunk
Sunk Costs
Costs
All costs incurred in the past that cannot be changed
by any decision made now or in the future.

Sunk costs should not be considered in decisions.

Example: You bought an automobile that cost $10,000

two years ago. The $10,000 cost is sunk because
whether you drive it, park it, trade it, or sell it, you
cannot change the $10,000 cost.
 Classification
Classification by
by Function:
Function:
Product
Product Costs
Costs

Direct Direct Manufacturing

Labor Material Overhead

The
Product
 Classification
Classification by
by Function:
Function:
Period
Period Costs
Costs
Period costs are expenses
not charged to the product.

Administrative Costs
Selling Costs
Nonmanufacturing costs
Costs incurred to obtain
of staff support and
customer orders and to
administrative functions –
deliver finished goods
accounting, data processing,
to customers –
personnel, research
advertising and shipping.
and development.
 Exh.

Period
Period and
and Product
Product Costs
Costs in
19-13

in
Financial
Financial Statements
Statements
1998 Income
Statement
Period Costs Operating
(Expenses) Expenses

1998 Costs Cost of

Incurred Goods Sold
Inventory
Sold in 1998
Product Costs 1998 Balance 1999 Income
(Inventory) Sheet Statement
Raw Materials
Inventory not Cost of
Goods in Process
Sold in 1998 Goods Sold
Finished Goods
 Question
Question

The
The primary
primary distinction
distinction between
between product product
and
and period
period costs
costs is
is .. .. ..

a.
a. Product
Product costs
costs are
are expensed
expensed in in the
the
period
period
incurred.
incurred.
b.
b. Product
Product costs
costs are
are directly
directly traceable
traceable to
to
product
product units.
units.
c.
c. Product
Product costs
costs are
are inventoriable.
inventoriable.
d.
d. Period
Period costs
costs are
are inventoriable.
inventoriable.
 Question
Question

The
The primary
primary distinction
distinction between
between product product
and
and period
period costs
costs is
is .. .. ..

a.
a. Product
Product costs
costs are
are expensed
expensed in in the
the
period
period
incurred.
incurred.
b.
b. Product
Product costs
costs are
are directly
directly traceable
traceable to
to
product
product units.
units.
c.
c. Product
Product costs
costs are
are inventoriable.
inventoriable.
d.
d. Period
Period costs
costs are
are inventoriable.
inventoriable.
 Exh.

Potential
Potential Multiple
19-14

Multiple
Cost
Cost Classifications
Classifications

Cost Item Behavior Traceability Function

Material Variable Direct Product
Assembly Wages Variable Direct Product
Advertising Fixed Indirect Period
Production Manager's Salary Fixed Indirect Product

Office Depreciation Fixed Indirect Period

Cost
Cost Concepts
Concepts for
for
Service
Service Companies
Companies

I suppose these same

cost concepts apply to
service companies.
 Exh.

Manufacturing
Manufacturing Management
19-15

Management
Principles
Principles

Customer
Orientation
in a Global
Economy
 Total
Total Quality
Quality Management
Management

Quality throughout Rewards for employees

the production process. who find defects.

on

Employees encouraged Company emphasizes

to try new methods value of quality through
to improve quality. quality awards.
 Just-In-Time
Just-In-Time (JIT)
(JIT) Manufacturing
Manufacturing

Receive
customer Complete products
orders. just in time to
ship customers.

Schedule
production.

Receive materials Complete parts

just in time for just in time for
production. assembly into products.
 Theory
Theory of
of Constraints
Constraints

A sequential process of identifying and

removing constraints in a system.

Restrictions or barriers that impede

progress toward an objective.
Continuous
Continuous Improvement
Improvement

New ways to
improve
operations
 Implications
Implications of
of Manufacturing
Manufacturing
Management
Management Principles
Principles
Increase

Use of Fixed
Technology Costs Automation Overhead

Labor Variable
Costs Costs

Decrease
 Unit
Unit Contribution
Contribution Margin
Margin

Total Per Unit Percent

Sales (500 units) $ 250,000 $ 500 100%
Less: variable expenses 150,000 300 60%
Contribution margin $ 100,000 $ 200 40%
Less: fixed expenses 80,000
Net income $ 20,000

Contribution margin contributes to covering

fixed costs and generating profits.
 Unit
Unit Contribution
Contribution Margin
Margin

Total Per Unit Percent

Sales (500 units) $ 250,000 $ 500 100%
Less: variable expenses 150,000 300 60%
Contribution margin $ 100,000 $ 200 40%
Less: fixed expenses 80,000
Net income $ 20,000

Contribution margin ratio is the portion

of each sales dollar remaining after
deducting total unit variable cost.
Weston
WestonPark,
Park,Sheffield
Sheffield
 Cost
Cost Drivers
Drivers
Activities that cause costs to be incurred are called COST DRIVERS:

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 2-30
McGraw-Hill Education.
Cost
Cost Classifications
Classifications for
for predicting
predicting cost
cost
behaviour
behaviour
Cost behavior means how a cost will
react to changes in the level of
business activity.
 Total variable costs change
when activity changes.
 Total fixed costs remain
unchanged when activity
changes.
 Mixed costs- a combination of
both

After identifying costs and cost drivers, management should examine the
relationship of various costs to the activities performed. Such a relationship
is referred to as cost behavior.
 Costs
Costs Example
Example
 Consider Grand Canyon Railway.
 The cost of purchasing the trains and building
infrastructure are fixed.
 Assume that breakfast costs Grand Canyon Railway
$3 per person.
 If the railroad carries 2,000 passengers, it will
spend $6,000 for breakfast services.
 Types
Types of
of Fixed
Fixed Costs
Costs

Committed
Committed Discretionary
Discretionary
Long-term,
Long-term, cannot
cannot bebe May
May be
be altered
altered in
in the
the
significantly
significantly reduced
reduced short-term
short-term byby current
current
in
in the
the short
short term.
term. managerial
managerial decisions
decisions

Examples Examples
Examples
Depreciation on Advertising
Advertising and
and
Equipment and Research
Research and
and
Real Estate Taxes Development
Development
33
 Other
Other Examples
Examples of
of Variable
Variable Costs
Costs
1. Merchandising companies – cost of goods sold.
2. Manufacturing companies – direct materials, direct
labor, and variable overhead.
3. Merchandising and manufacturing companies –
commissions, shipping costs, and clerical costs such as
invoicing.
4. Service companies – supplies, travel, and clerical.

34
 Total
Total Variable
Variable Cost
Cost
Total variable costs change
when activity changes.
Total Long Distance
Telephone Bill

Your total long distance

telephone bill is based
on how many minutes
Minutes you talk.
Talked
 Variable
Variable Cost
Cost Per
Per Unit
Unit

Variable costs per unit do not change

as activity increases.

Telephone Charge
The cost per long distance Per Minute
minute talked is constant.
For example, 10
cents per minute. Minutes Talked
 Total
Total Fixed
Fixed Cost
Cost

Total fixed costs remain unchanged

when activity changes.
Monthly Basic
Telephone Bill

Your monthly basic

telephone bill probably
does not change when
Number of Local Calls you make more local calls.
 Fixed
Fixed Cost
Cost Per
Per Unit
Unit
Fixed costs per unit decline
as activity increases.

Monthly Basic Telephone

Bill per Local Call
Your average cost per
local call decreases as
more local calls are made. Number of Local
Calls
 Cost
Cost Behaviour
Behaviour Summary
Summary

Summary of Variable and Fixed Cost Behavior

Cost In Total Per Unit

Changes as activity level Remains the same over wide

Variable
changes. ranges of activity.
Remains the same even Dereases as activity level
Fixed
when activity level changes. increases.
 Relevant
Relevant Range...
Range...

Relevant range is a band of volume in which a specific

relationship exists between cost and volume.
 Outside the relevant range, the cost either increases or
decreases.
 A fixed cost is fixed only within a given relevant range
and a given time span.
 Relevant
Relevant Range
Range

$160,000 –
Fixed Costs

$120,000 –
Relevant Range
$80,000 –

$40,000
–

–
0 5,000 10,000 15,000 20,000 25,000
Volume in Units
 Mixed
Mixed Costs
Costs

Mixed costs contain a fixed portion that is incurred

even when facility is unused, and a variable portion
that increases with usage.
Example: monthly electric utility charge
 Fixed service fee
 Variable charge per
kilowatt hour used
 Mixed
Mixed Costs
Costs Example
Example

 A mixed cost is part variable and part fixed.

 Assume a department of a company has fixed
costs of $50 per month ($600 per year).
 There are also variable costs of $3 per hour.
 Mixed
Mixed Costs
Costs
Total Utility Cost

ost
d c Variable
m ixe
t al Utility Charge
To

Fixed Monthly
Utility Charge
Activity (Kilowatt Hours)
Two
Two Approaches
Approaches to
to Compute
Compute Profits
Profits

Conventional
Conventional income
income statement
statement

Contribution
Contribution margin
margin income
income statement
statement
 Conventional
Conventional Income
Income
Statement
Statement

Cost of Gross
Sales – =
Goods Sold Margin

Gross Operating Net

– =
Margin Expenses Income
 Contribution
Contribution Margin
Margin
Income
Income Statement
Statement

Variable Contribution
Sales – =
Expenses Margin

Contribution Fixed Net

– =
Margin Expenses Income
 Contribution
Contribution Margin
Margin
Total Unit
Sales Revenue (2,000 units) $ 100,000 $ 50
Less: Variable costs 60,000 30
Contribution margin $ 40,000 $ 20
Less: Fixed costs 30,000
Net income $ 10,000

Contribution margin is amount by which revenue

exceeds the variable costs of producing the revenue.
 Unit
Unit Contribution
Contribution Margin
Margin

Total Per Unit Percent

Sales (500 units) $ 250,000 $ 500 100%
Less: variable expenses 150,000 300 60%
Contribution margin $ 100,000 $ 200 40%
Less: fixed expenses 80,000
Net income $ 20,000

Contribution margin contributes to covering

fixed costs and generating profits.
 Unit
Unit Contribution
Contribution Margin
Margin

Total Per Unit Percent

Sales (500 units) $ 250,000 $ 500 100%
Less: variable expenses 150,000 300 60%
Contribution margin $ 100,000 $ 200 40%
Less: fixed expenses 80,000
Net income $ 20,000

Contribution margin ratio is the portion

of each sales dollar remaining after
deducting total unit variable cost.
 Break
Break Even
Even Point
Point
The break-even point (expressed in units of product or
dollars of sales) is the unique sales level at which a
company earns neither a profit nor incurs a loss.
 Computing
Computing Break-Even
Break-Even Point
Point
Finding the Break-Even Point
Total Unit
Sales Revenue (2,000 units) $ 100,000 $ 50
Less: Variable costs 60,000 30
Contribution margin $ 40,000 $ 20
Less: Fixed costs 30,000
Net income $ 10,000

How much contribution margin must this company

have to cover its fixed costs (break even)?
 Computing
Computing Break-Even
Break-Even Point
Point
Finding the Break-Even Point
Total Unit
Sales Revenue (2,000 units) $ 100,000 $ 50
Less: Variable costs 60,000 30
Contribution margin $ 40,000 $ 20
Less: Fixed costs 30,000
Net income $ 10,000

How many units must this company sell to cover its

fixed costs (break even)?
 Computing
Computing Break-Even
Break-Even Point
Point
Finding the Break-Even Point
Total Unit
Sales Revenue (2,000 units) $ 100,000 $ 50
Less: Variable costs 60,000 30
Contribution margin $ 40,000 $ 20
Less: Fixed costs 30,000
Net income $ 10,000

How many units must this company sell to cover its

fixed costs (break even)?
Answer: $30,000 ÷ $20 per unit = 1,500 units
 Differentiate

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 57

purpose of generating revenue.
58
COST CLASSIFICATIONS ON FINANCIAL
STATEMENTS – INCOME STATEMENT

Product Costs Period Costs

Cost of goods sold Operating expenses

59
Comparing Merchandising
and Manufacturing
Activities

60
COST CLASSIFICATIONS ON FINANCIAL
STATEMENTS – BALANCE SHEET

Merchandiser Manufacturer
Current Assets Current Assets
 Cash  Cash
 Receivables  Receivables
 PrepaidExpenses  Prepaid Expenses
 Merchandise Inventory  Inventories
Raw Materials
Work in Process
Finished Goods
61
COST CLASSIFICATIONS ON FINANCIAL
STATEMENTS – BALANCE SHEET

Merchandiser Manufacturer
Current Assets Current Assets
 Cash Those
 Cash materials
 Receivables
waiting to be
 Receivables

 Prepaid
processed.
Expenses  Prepaid Expenses
 Merchandise Inventory  Inventories

Raw Materials
Work in Process
Finished Goods
62
COST CLASSIFICATIONS ON FINANCIAL
STATEMENTS – BALANCE SHEET

Merchandiser Manufacturer
PartiallyAssets
Current completed
Current Assets products – material to
 Cash
 Cash which some labor
 Receivables
and/or overhead has
 Receivables
 PrepaidExpenses been added.
 Prepaid Expenses
 Merchandise Inventory  Inventories

Raw Materials
Work in Process
Finished Goods
63
COST CLASSIFICATIONS ON FINANCIAL
STATEMENTS – BALANCE SHEET

Merchandiser Manufacturer
Current Assets Current Assets
 Cash  Cash
 Receivables  Receivables
Completed products
 PrepaidExpenses  awaiting sale.
Prepaid Expenses
 Merchandise Inventory  Inventories

Raw Materials
Work in Process
Finished Goods
64
 The Income Statement
Cost of goods sold for manufacturers differs only slightly
from cost of goods sold for merchandisers.
Merchandising Company Manufacturing Company
Cost of goods sold: Cost of goods sold:
Beg. merchandise Beg. finished
inventory $ 14,200 goods inv. $ 14,200
+ Purchases 234,150 + Cost of goods
Goods available
manufactured 234,150
for sale $ 248,350
Goods available
- Ending
for sale $248,350
merchandise
- Ending
inventory (12,100)
finished goods
= Cost of goods
sold $ 236,250
inventory (12,100)
= Cost of goods
sold $236,250

65
QUICK FORMULA: INVENTORY FLOWS

Available
Available
= $$$$$
$$$$$

Available
Available _ Withdrawals
Withdrawals
Ending
Ending
$$$$$
$$$$$ $$$
$$$
= balance
balance
$$
$$

66
 Question
If your inventory balance at the beginning of
the month was $1,000, you bought $100 during
the month, and sold $300 during the month,
what would be the balance at the end of the
month?
A. $1,000.
B. $ 800.
C. $1,200.
D. $ 200.

67
 Question
If your inventory balance at the beginning of the
month was $1,000, you bought $100 during the
month, and sold $300 during the month, what
would be the balance at the end of the month?
A. $1,000.
$1,000 + $100 = $1,100
B. $ 800. $1,100 - $300 = $800
C. $1,200.
D. $ 200.

68
 Schedule of Cost of Goods
Manufactured

Calculates the cost of raw

material, direct labor and
manufacturing overhead used in
production.

Calculates the manufacturing

costs associated with goods that
were finished during the period.

69
 Product Cost Flows
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials

materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
– Ending raw materials
inventory
= Raw materials used As
Asitems
itemsare
areremoved
removedfrom
from raw
raw
in production materials
materialsinventory
inventoryand
andplaced
placedinto
into
the
theproduction
productionprocess,
process, they
theyare
are
called
calleddirect
direct materials.
materials.
70
 Product Cost Flows
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Conversion

Conversion
materials inventory + Direct labor
+ Raw materials + Mfg. overhead costs
costsare
arecosts
costs
purchased = Total manufacturing incurred
incurredtoto
= Raw materials costs convert
convert the
the
available for use
in production
direct
directmaterial
material
– Ending raw materials into
intoaafinished
finished
inventory product.
product.
= Raw materials used
in production

71
 Product Cost Flows
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in

materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending raw materials
inventory All
All manufacturing
manufacturingcosts
costsincurred
incurred
= Raw materials used during
duringthe
theperiod
periodare
areadded
addedtotothe
the
in production
beginning
beginningbalance
balanceof
of work
workin
in
process.
process.
72
 Product Cost Flows
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in

materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending work in
process inventory
Costs
Costsassociated
associatedwith
withthe
thegoods
goodsthat
that = Cost of goods
are
arecompleted
completedduring
duringthe
theperiod
periodare
are manufactured
transferred
transferredto
tofinished
finishedgoods
goods
inventory.
inventory.
73
 Product Cost Flows
Work
In Process Finished Goods

Beginning work in Beginning finished

process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
– Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold

74
 Question
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?
A. $276,000
B. $272,000
C. $280,000
D. $ 2,000

75
 Question
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?
A. $276,000
B. $272,000 ++ Beg.
Beg. raw
Raw
raw materials
materials
Raw materials
materials
$
$ 32,000
32,000

C. $280,000 == Raw purchased

purchased
Raw materials
materials available
available
276,000
276,000

for
for use
use in
in production
production $$ 308,000
D. $ 2,000 –– Ending
Ending raw
raw materials
materials
308,000

inventory
inventory 28,000
28,000
=
= Raw
Raw materials
materials used
used
in
in production
production $
$ 280,000
280,000
76
 Question
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.
77
 Question
Direct materials used in production totaled
$280,000. Direct labor was $375,000 and
factory overhead was $180,000. What were
total manufacturing costs
Direct
incurred
Direct Materials
Materials
for $$the
280,000
280,000
month? +
+ Direct
+
Direct Labor
+ Mfg.
Labor
Mfg. Overhead
Overhead
375,000
375,000
180,000
180,000
A. $555,000 == Mfg.
Mfg. Costs
Costs Incurred
for
for the
Incurred
the Month
Month $$835,000
835,000

B. $835,000
C. $655,000
D. Cannot be determined.
78
 Question
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.
79
 Question
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
Beginning work in
process inventory $ 125,000

goods manufactured during the month?

+ Mfg. costs incurred
for the period 835,000
= Total work in process
A. $1,160,000 –
during the period
Ending work in
$ 960,000

B. $ 910,000 =
process inventory
Cost of goods
200,000

C. $ 760,000 manufactured $ 760,000

D. Cannot be determined.
80
 Question
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.
81
 Question
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.
82
MANUFACTURER AND PRODUCTION PROCESSES

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 2-83
McGraw-Hill Education.
MANUFACTURING COSTS

Direct Direct Manufacturing

Material Labor Overhead

The
Product
84
1) 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.

85
2) 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.

86
 3) 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.
87
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. 88
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.
89
CLASSIFICATIONS OF COSTS IN
MANUFACTURING COMPANIES

Manufacturing costs are often

combined as follows:

Direct Direct Manufacturing

Material Labor Overhead

Prime Conversion
Cost Cost
90
MANUFACTURING COST FLOWS
Direct Material
Work in
Direct Labor Process
Inventory

Manufacturing
Overhead

91
MANUFACTURING COST FLOWS
Direct Material
Work in
Direct Labor Process
Inventory
Manufacturing
Overhead
Finished
Goods
Inventory

92
MANUFACTURING COST FLOWS
Direct Material
Work in
Direct Labor Process
Inventory
Manufacturing
Overhead
Finished Cost of
Goods Goods
Inventory Sold

93
 overall

Manufacturing Cost Flows

Balance Sheet Income
Costs Inventories Statement
Expenses
Material Purchases Raw Materials

Direct Labor Work in

Process
Manufacturing
Overhead Cost of
Finished
Goods
Goods
Sold

Selling and Period Costs Selling and

Administrative Administrative
94
 Manufacturing Cost Flows

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 2-95
McGraw-Hill Education.
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
Cost of goods manufactured $ 415,000

96
SCHEDULE OF COSTofOF
Computation GOODS
Cost of Raw Material Used

MANUFACTURED
Raw-material inventory, January 1 $ 6,000
Add: Purchases of raw materials 134,000
Raw material available for use 140,000
Deduct: Raw material inventory, December 31 5,020
Raw material used $ 134,980
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
Cost of goods manufactured $ 415,000
97
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
98
 Computation of Total Manufacturing Overhead
Indirect material $ 10,000
Indirect labor 40,000
Depreciation on factory 90,000
Depreciation on equipment 70,000
Comet Computer Corporation
Utilities 15,000
Insuranceof Cost of Goods Manufactured
Schedule 5,000
Total manufacturing overhead $ 230,000
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
99
Q1 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 themanufactured
Cost of goods balance sheet. $ 415,000
100
 Comet Computer Corporation Q2
Schedule of Cost of Goods Sold
For the Year Ended December 31, 20X2
Finished-goods inventory, Jan. 1 $ 200
Add: Cost of goods manufactured 415,000
Cost of goods available for sale 415,200
Comet Computer Corporation
Deduct Finished-goods inventory, Dec. 31 190
Income Statement
Cost of goods sold $ 415,010
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
101
Q3:
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
102
DIRECT AND INDIRECT COSTS
Direct costs Indirect costs
 Costs that can be  Costs that must be allocated
easily and conveniently in order to be assigned to a
traced to a product or product or department.
department.  Example: cost of national
 Example: cost of paint in the advertising for an airline is
paint department of an indirect to a particular flight.
automobile assembly plant.

103
CONTROLLABLE AND UNCONTROLLABLE
COSTS
A cost that can be significantly influenced by a manager is a
controllable cost.

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 2-104
McGraw-Hill Education.
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
$30,000 per year.
Your opportunity cost
of attending college for one year is
$30,000.
 OUT-OF-POCKET COSTS

 Those costs that require the payment of

cash or other assets as a result of its
incurrence.
 These costs should be considered when
making decisions.

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 2-106
McGraw-Hill Education.
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 $22,000 two years ago.
The $22,000 cost is sunk because whether you drive it, park it, trade it,
or sell it, you cannot change the $22,000 cost.

107
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

Only those costs and benefits that differ between

alternatives are relevant in a decision. All other costs 108
and benefits can and should be ignored.
Differential Costs and Revenues
Costs and revenues that differ among
alternatives.
Example: You have a job paying $1,500 per month in
your hometown. You have a job offer in a neighboring
city that pays $2,000 per month. The commuting cost
to the city is $300 per month.

Differential revenue is:

$2,000 – $1,500 = $500

Differential cost is:

$300
109
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. 110
COSTS AND BENEFITS OF INFORMATION

Costs Benefits

More information does not mean more

benefits if information overload results. 111