Cost of manufacturing Cost of goods sold Calculate cost of sales

1. ACCOUNTING
and COST
CONCEPTS: AN
OVERVIEW
1

2. MANAGERIAL ACCOUNTING AND FINANCIAL
ACCOUNTING
accounting provides
Managerial
information
organization
for managers of an
who direct and
control its operations.
accounting provides
Financial
information to stockholders,
creditors and others who are
outside the organization.
2

3. WORK OF MANAGEMENT
Planning
Controlling
3
Directing and
Motivating

4. PLANNING AND CONTROL CYCLE
Formulating Long-
and
Short-Term Plans
(Planning)
Measuring
Performance
(Controlling)
Comparing Actual
to
Planned
Performance
(Controlling)
Implementing
the Plans
(Directing and
Motivating)
Begin
Decision
Making
4

5. DIFFERENCES BETWEEN FINANCIAL AND
MANAGERIAL ACCOUNTING
Financial
Acco u n tin g
5
Managerial
Acco u n tin g
1. Users
2 . T i m e focus
3. Verifiability
versus r e l e va n c e
4. Precision versus
timeliness
5 . S u b j e c t
6 . R e q u i r e m e n t s
External persons w h o
m a k e financial decisions
M a n a g e r s w h o p l a n for
a n d control a n or ga niza t ion
Historical perspective Future e m p h a s i s
E m pha s is o n
verifiability
E m pha s is o n r e l e va n c e
for p l a n n i n g a n d control
E m pha s is o n
precision
E m pha s is o n
timeliness
P r i m a r y focus is o n
the w h o l e or ganiz at ion
Focuses o n s e g m e n t s
of a n or ga niz a t ion
Must follow G AAP
a n d prescribed formats
N e e d not follow G A AP
or a n y prescribed f or m at

6. Definitions of Important terms in Cost
Accounting
Costing: Costing is defined as “the technique and process of determining
costs”. It provides the information that management needs to plan and control
the organization’s activities and to make decisions about the future.
Cost Accounting: “Accounting for costs classification and analysis of
expenditure as will enable the total cost of any particular unit of production to be
ascertained with reasonable degree of accuracy
Cost Object: Cost object is anything for which a separate measurement of cost
is required. Cost object may be a product, a service, a project, a customer, a
brand category, an activity, a department or a programme

7. Definitions of Important terms in Cost
Accounting
Cost Unit: The term cost unit is defined as a unit of quantity of product, service
or time (or a combination of these) in relation to which costs may be ascertained
or expressed. It can be for a job, batch, or product group.
Conversion cost: It is the cost incurred to convert raw materials into finished
goods. It is the sum of direct wages, direct expenses and manufacturing
overheads
Explicit costs: These costs are also known as out-of-pocket costs. They refer to
those costs which involves immediate payment of cash

8. Definitions of Important terms in Cost
Accounting
Product Costs: Product costs are those which are traceable to the product and
included in inventory values. In a manufacturing concern it comprises the cost of
direct materials, direct labour and manufacturing overheads. Product cost is a full
factory cost.
Period costs: are incurred on the basis of time such as rent, salaries, etc.,
include many selling and administrative costs essential to keep the business
running. Though they are necessary to generate revenue, they are not
associated with production, therefore, they cannot be assigned to a product.

9. Merchandisers . . .
• Buy finished goods.
• Sell finished goods.
MegaLoMart
Manufacturers . . .
• Buy raw materials.
• Produce and sell finished goods.
9
COMPARING MERCHANDISING AND
MANUFACTURING ACTIVITIES

10. Manufacturing costs are often
classified as follows:
CLASSIFICATIONS OF COSTS
Direct
Material
Direct
Labor
Manufacturing
Overhead
Prime
Cost
10
Conversion
Cost

11. The Product
Direct
Materials
Direct
Labor
Manufacturing
Overhead
11
MANUFACTURING COSTS

12. DIRECT MATERIALS
Example: A radio installed in an automobile
Those materials that become an integral part of the product and that can be
conveniently traced directly to it.
12

13. DIRECT LABOR
Example: Wages paid to automobile assembly workers
13
Those labor costs that can be easily traced to individual units of product.

14. MANUFACTURING OVERHEAD
Wages paid to employees
who are not directly
involved in production
work.
Examples: maintenance
workers, janitors and
security guards.
Materials used to support
the production process.
Examples: lubricants and
cleaning supplies used in the
automobile assembly plant.
14
Manufacturing costs that cannot be traced directly to specific units
produced.
Examples: Indirect labor and indirect materials

15. • Marketing and selling costs . . .
Costs necessary to get the order and deliver the product.
• Administrative costs . . .
All executive, organizational, and clerical costs.
NONMANUFACTURING COSTS
15

16. Which of the following costs would be considered manufacturing overhead at
Boeing? (More than one answer may be correct.)
A. Depreciation on factory forklift trucks.
B. Sales commissions.
C. The cost of a flight recorder in a Boeing 767.
D. The wages of a production shift supervisor.
16
QUICK CHECK 

17. Which of the following costs would be considered manufacturing overhead at
Boeing? (More than one answer may be correct.)
A. Depreciation on factory forklift trucks.
B. Sales commissions.
C. The cost of a flight recorder in a Boeing 767.
D. The wages of a production shift supervisor.
QUICK CHECK 
17

18. PRODUCT COSTS VERSUS PERIOD COSTS
Inventory Cost of Good Sold
Balance
Sheet
Income
Statement
Sal
e
Expense
Income
Statement
Product costs include direct materials,
direct labor, and manufacturing
overhead.
18
Period costs are not included in
product costs. They are expensed on
the income statement.

19. Which of the following costs would be considered a period rather than a
product cost in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production facility.
19
QUICK CHECK 

20. Which of the following costs would be considered a period rather than a
product cost in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production facility.
QUICK CHECK 
20

21. Merchandiser
Current assets
• Cash
• Receivables
• Prepaid expenses
• Merchandise inventory
BALANCE SHEET
Manufacturer
Current Assets
• Cash
• Receivables
• Prepaid Expenses
• Inventories
Raw Materials
Work in Process
Finished Goods
Partially complete products –
some material, labor, or
overhead has been added.
Materials
waiting to be
processed.
Completed products
awaiting sale.
21

22. THE INCOME STATEMENT
M a n u f a c t u r i n g C o m p a n y
C o s t o f g o o d s s o l d :
B e g . f i n i s h e d
g o o d s inv.
+ C o s t o f g o o d s
m a n u fa c t u r e d
$ 1 4 , 2 0 0
2 3 4 , 1 5 0
M e r c h a n d i s i n g C o m p a n y
C o s t o f g o o d s s o l d :
B e g . m e r c h a n d i s e
$ 1 4 , 2 0 0
2 3 4 , 1 5 0
i n v e n t o r y
+ P u r c h a s e s
G o o d s a v a i l a b l e
f o r s a l e $ 2 4 8 , 3 5 0 G o o d s a va i l a b l e
- E n d i n g
m e r c h a n d i s e
f o r s a l e
- E n d i n g
$ 2 4 8 , 3 5 0
i n v e n t o r y ( 1 2 , 1 0 0 ) f i n i s h e d g o o d s
= C o s t o f g o o d s i n v e n t o r y ( 1 2 , 1 0 0 )
s o l d $ 2 3 6 , 2 5 0 = C o s t o f g o o d s
s o l d $ 2 3 6 , 2 5 0
Cost of goods sold for manufacturers differs only slightly from cost
of goods sold for merchandisers.
22

23. Selling and
Administrative
Period Costs
MANUFACTURING COST FLOWS
Finished
Goods
Cost of
Goods
Sold
Selling and
Administrative
Manufacturing
Overhead
Work in
Process
Direct Labor
Balance Sheet
Inventories
Costs
Income
Statement
Expenses
Material Purchases
23
Raw Materials

24. Which of the following transactions would immediately result in an expense?
(There may be more than one correct answer.)
A. Work in process is completed.
B. Finished goods are sold.
C. Raw materials are placed into production.
D. Administrative salaries are accrued and paid.
24
QUICK CHECK 

25. Which of the following transactions would immediately result in an expense?
(There may be more than one correct answer.)
A. Work in process is completed.
B. Finished goods are sold.
C. Raw materials are placed into production.
D. Administrative salaries are accrued and paid.
QUICK CHECK 
25

26. INVENTORY FLOWS
Beginning
balance
$$
Additions
$$$
+ Available
$$$$$
=
Ending
balance
$$
=
_ Withdrawals
$$$
Available
$$$$$
26

27. If your bank balance at the beginning of the month was $1,000, you deposited
$100 during the month, and withdrew $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.
27
QUICK CHECK 

28. A. $1,000.
B. $ 800.
C. $1,200.
D. $ 200.
QUICK CHECK 
If your bank balance at the beginning of the month was $1,000, you deposited
$100 during the month, and withdrew $300 during the month, what would be
the balance at the end of the month?
$1,000 + $100 = $1,100
28
$1,100 - $300 = $800

29. Ra w Materials
Manufacturing
Costs
Work
In Process
Beginning raw
materials inventory
PRODUCT COSTS - A CLOSER LOOK
29
Beginning inventory is the
inventory carried over from the
prior period.

30. R a w Materials
M an u factu rin g
Costs
Work
In Process
Direct materials
Beginning r a w
materials inventory
+ R a w materials
purchased
= R a w materials
available for use
in production
– Ending r a w materials
inventory
= R a w materials used
in production
As items are removed from raw
materials inventory and placed into
the production process, they are
called direct materials.
PRODUCT COSTS - A CLOSER LOOK
30

31. 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
31
QUICK CHECK 

32. 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
QUICK CHECK 
$ 32,000
Beg. raw materials
+ Raw materials
purchased
= Raw materials available
for use in production
– Ending raw materials
inventory
= Raw materials used
in production
276,000
$ 308,000
28,000
$ 280,000
32

33. Ra w Materials
Manufacturing
Costs
Work
In Process
Direct materials
+ Direct labor
+ Mfg. overhead
Beginning raw
materials inventory
+ Raw materials
purchased = Total manufacturing
costs
= Raw materials
available for use
in production
– Ending raw materials
inventory
= Raw materials used
in production
33
PRODUCT COSTS - A CLOSER LOOK

34. Ra w Materials
Manufacturing
Costs
Work
In Process
Direct materials
+ Direct labor
+ Mfg. overhead
= Total manufacturing
costs
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
– Ending raw materials
inventory
= Raw materials used
in production
PRODUCT COSTS - A CLOSER LOOK
Conversion
costs are costs
incurred to
convert the
direct material
into a finished
product.
34

35. 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.
35
QUICK CHECK 

36. 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.
QUICK CHECK 
Direct Materials
+ Direct Labor
$280,000
375,000
+ Mfg. Overhead 180,000
= Mfg. Costs Incurred
for the Month $835,000
36

37. Ra w Materials
Manufacturing
Costs
Work
In Process
Direct materials
+ Direct labor
+ Mfg. overhead
Beginning raw
materials inventory
+ Raw materials
purchased
Beginning w ork in
process inventory
+ Total manufacturing
costs
= Total manufacturing
costs = Total w ork in
process for the
period
= Raw materials
available for use
in production
– Ending raw materials
inventory
= Raw materials used
in production
PRODUCT COSTS - A CLOSER LOOK
37
All manufacturing costs incurred
during the period are added to the
beginning balance of work in
process.

38. Ra w Materials
Manufacturing
Costs
Work
In Process
Direct materials
+ Direct labor
+ Mfg. overhead
Beginning raw
materials inventory
+ Raw materials
purchased
Beginning w ork in
process inventory
+ Total manufacturing
costs
= Total manufacturing
costs
= Raw materials
available for use
in production
= Total w ork in
process for the
period
– Ending w ork in
process inventory
= Cost of goods
manufactured.
PRODUCT COSTS - A CLOSER LOOK
Costs associated with the goods that
are completed during the period are
transferred to finished goods
inventory.
38

39. 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.
39
QUICK CHECK 

40. 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.
QUICK CHECK 
$125,000
Beginning work in
process inventory
+ Mfg. costs incurred
for the period
= Total work in process
during the period
– Ending work in
process inventory
= Cost ofgoods
manufactured
835,000
$960,000
200,000
$760,000
40

41. W o r k
I n P r o c e s s F i n i s h e d G o o d s
B e g i n n i n g w o r k i n B e g i n n i n g f i n i s h e d
p r o c e s s i n v e n t o r y g o o d s i n v e n t o r y
+ M a n u f a c t u r i n g c o s t s + C o s t o f g o o d s
f o r t h e p e r i o d m a n u f a c t u r e d
= T o t a l w o r k i n p r o c e s s = C o s t o f g o o d s
f o r t h e p e r i o d a v a i l a b l e f o r s a l e
– E n d i n g w o r k i n - E n d i n g f i n i s h e d
p r o c e s s i n v e n t o r y g o o d s i n v e n t o r y
= C o s t o f g o o d s
m a n u f a c t u r e d
C o s t o f g o o d s
s o l d
PRODUCT COSTS - A CLOSER LOOK
41

42. 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.
42
QUICK CHECK 

43. Beginning finished goods inventory was $130,000. The cost of goods
A. $ 20,000.
B. $740,000.
C. $780,000.
D. $760,000.
QUICK CHECK 
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?
$130,000 + $760,000 = $890,000
43
$890,000 - $150,000 = $740,000

44. How a cost will react to changes
in the level of business activity.
• T
otal variable costs change
when activity changes.
costs
when
remain
activity
• T
otal fixed
unchanged
changes.
COST CLASSIFICATIONS FOR PREDICTING COST
BEHAVIOR
44

45. Your total long distance telephone bill is based on how many minutes you talk.
TOTAL VARIABLE COST
Minutes Talked
45
Total
Long
Distance
Telephone
Bill

46. The cost per long distance minute talked is constant. For example, 10 cents
per minute.
VARIABLE COST PER UNIT
Minutes Talked
Per
Minute
Telephone
Charge
46

47. Your monthly basic telephone bill probably does not change when you make
more local calls.
TOTAL FIXED COST
Number of Local Calls
Monthly
Basic
Telephone
Bill
47

48. The average cost per local call decreases as more local calls are made.
FIXED COST PER UNIT
Number of Local Calls
Monthly
Basic
Telephone
Bill
per
Local
Call
48

49. COST CLASSIFICATIONS FOR PREDICTING COST
BEHAVIOR
Cost
Behavior of Cost (within the relevant range)
In Total Per Unit
Variable Total variable cost changes
as activity level changes.
Variable cost per unit remains
the same over wide ranges
of activity.
Fixed Fixed cost per unit goes
down as activity level goes up.
Total fixed cost remains
the same even when the
activity level changes.
49

50. Which of the following costs would be variable with respect to the number of
cones sold at a Baskins & Robbins shop? (There may be more than one
correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
50
QUICK CHECK 

51. Which of the following costs would be variable with respect to the number of
cones sold at a Baskins & Robbins shop? (There may be more than one
correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
QUICK CHECK 
51

52. Which of the following costs would be variable with respect to the number of
people who buy a ticket for a show at a movie theater? (There may be more
than one correct answer.)
A. The cost of renting the film.
B. Royalties on ticket sales.
C. Wage and salary costs of theater employees.
D. The cost of cleaning up after the show.
52
QUICK CHECK 

53. Which of the following costs would be variable with respect to the number of
people who buy a ticket for a show at a movie theater? (There may be more
than one correct answer.)
A. The cost of renting the film.
B. Royalties on ticket sales.
C. Wage and salary costs of theater employees.
D. The cost of cleaning up after the show.
QUICK CHECK 
53

54. Direct costs
• Costs that can be easily and
conveniently traced to a unit of
product or other cost objective.
• Examples: direct material and direct
labor
Indirect costs
• Costs cannot be easily and
conveniently traced to a unit of
product or other cost object.
• Example: manufacturing overhead
DIRECT COSTS AND INDIRECT COSTS
54

55. 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.
55
Differential revenue is:
$2,000 – $1,500 = $500
Differential cost is:
$300

56. Suppose you are trying to decide whether to drive or take the train to Portland
to attend a concert. You have ample cash to do either, but you don’t want to
waste money needlessly. Is the cost of the pizza you ate last night relevant in
this decision? In other words, should the cost of the pizza affect the decision of
whether you drive or take the train to Portland?
A. Yes, the cost of the pizza is relevant.
B. No, the cost of the pizza is not relevant.
56
QUICK CHECK 

57. Suppose you are trying to decide whether to drive or take the train to Portland
to attend a concert. You have ample cash to do either, but you don’t want to
waste money needlessly. Is the cost of the pizza you ate last night relevant in
this decision? In other words, should the cost of the pizza affect the decision of
whether you drive or take the train to Portland?
A. Yes, the cost of the pizza is relevant.
B. No, the cost of the pizza is not relevant.
QUICK CHECK 
57

58. Suppose you are trying to decide whether to drive or take the train to Portland
to attend a concert. You have ample cash to do either, but you don’t want to
waste money needlessly. Is the cost of the train ticket relevant in this decision?
In other words, should the cost of the train ticket affect the decision of whether
you drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.
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59. Suppose you are trying to decide whether to drive or take the train to Portland
to attend a concert. You have ample cash to do either, but you don’t want to
waste money needlessly. Is the cost of the train ticket relevant in this decision?
In other words, should the cost of the train ticket affect the decision of whether
you drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.
QUICK CHECK 
59

60. • Every decision involves a choice from among at least two alternatives.
• Only those costs and benefits that differ between alternatives (i.e.,
Differential costs and benefits) are relevant in a decision. All other costs and
benefits can and should be ignored.
NOTE
60

61. Suppose you are trying to decide whether to drive or take the train to Portland
to attend a concert. You have ample cash to do either, but you don’t want to
waste money needlessly. Is the annual cost of licensing your car relevant in this
decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
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62. Suppose you are trying to decide whether to drive or take the train to Portland
to attend a concert. You have ample cash to do either, but you don’t want to
waste money needlessly. Is the annual cost of licensing your car relevant in this
decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
QUICK CHECK 
62

63. Suppose you are trying to decide whether to drive or take the
train to Portland to attend a concert. You have ample cash to do
either, but you don’t want to waste money needlessly. Is the
depreciation on your car relevant in this decision?
A.Yes, the depreciation is relevant.
B.No, the depreciation is not relevant.
63
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64. relevant in this decision?
A.Yes, the depreciation is relevant.
B.No, the depreciation is not
relevant.
QUICK CHECK 
Suppose you are trying to decide whether to drive or take the
train to Portland to attend a concert. You have
amDpeleprceacsihatitoondtohaetither
,but you don’t want to waste money
needlessly. Is ti
s
ha
ef
du
en
pc
rt
i
eo
cn
iao
tf
iom
ni
l
e
os
nd
yr
oi
v
ue
rn
car
would be relevant.
Depreciation that is a
function of the passage of
time would not be relevant.
64

65. OPPORTUNITY 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.
65

66. SUNK COSTS
Sunk costs cannot be changed by any decision. They are not differential costs
and should be ignored when making 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.
66

67. Suppose that your car could be sold now for $5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
67
QUICK CHECK 

68. Suppose that your car could be sold now for $5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
QUICK CHECK 
68