This document address the basic concepts of cost Accounting in very easy manner with example for the batter understanding of the Researchers.

1. Cost Accounting For
Manufacturing firm
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Development Minhaj University Lahore 1
Fiaz Ahmad, Center for Research
and Development Minhaj University
Lahore

2. OVERVIEW OF COST CATEGORIES
FOR A MANUFACTURING FIRM
 All costs incurred by the firm must be accounted for in its
financial statements
MANUFACTURING COSTS
Direct Labor (DL)
Direct Materials (DM)
Overhead (OH)
Indirect Materials
Indirect Labor
Other
NON-MANUFACTURING COSTS
Marketing or Selling Costs
Administrative Costs
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3. MANUFACTURING COSTS
1. Direct Materials (DM)
 Materials that are consumed in the
manufacturing process and physically
incorporated in the finished product
 Materials whose cost is sufficiently large to
justify the record keeping expenses
necessary to trace the costs to individual
products Fiaz Ahmad, Center for Research and
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4. 2. Direct Labor (DL)
 Labor time that is physically traceable to
the products being manufactured
 Labor time whose cost is sufficiently large
to justify the record keeping expenses
necessary to trace the costs to individual
products
Example:
Direct labor for manufacturing Honda
Accords
 Line workers, robot operators, painters,
assembly workers
Any labor probably not included in direct
labor?
MANUFACTURING COSTS
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5. Key issues in determining direct labor
Is idle time generally considered as direct
labor? Why or why not?
 Usually not. It is not usually due to one
product, hence it is not traceable
What are the typical fringe benefits an
assembly line worker receives?
 Health insurance, pension plan, disability
insurance
Is the cost of fringe benefits for the assembly
line workers generally considered direct
labor?
 Usually yes, the costs can be tracedFiaz Ahmad, Center for Research and
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6. Key issues in determining direct
labor
When an assembly line worker works
overtime, he/she is paid a regular wage plus
an overtime premium. Would most
companies treat his/her regular wage as a
direct labor cost?
 Yes, the amount of time an employee works
can be traced to the products.
What about the overtime premium?
 Treated as OH, cannot be traced to a
specific product.
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7. 3. Manufacturing Overhead (OH)
All of costs of manufacturing excluding direct
materials and direct labor
a. Indirect Materials (IM) – Materials, used in
the manufacturing of products, which are
difficult to trace to particular products in an
economical way
 Glue, nails, cleaning supplies
b. Indirect Labor (IL) – Labor, used in the
manufacturing of products, which is difficult to
trace to particular products in an economical
way
 Wages for maintenance workers, factory
supervisor’s salary, idle time
MANUFACTURING COSTS
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8. MANUFACTURING COSTS
C. All other types of manufacturing
overhead
 Depreciation on machinery,
depreciation on factory building,
factory insurance, utilities for factory
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9. NON-MANUFACTURING COSTS
1. Marketing or Selling Costs – Costs
incurred in securing orders from
customers and providing customers
with the finished product
 Sales commissions, costs of shipping
products to customers, storage of
finished goods, depreciation of selling
equipment (cash register)
2. Administrative Costs – Executive,
organizational, and clerical costs thatFiaz Ahmad, Center for Research and
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10. Classification Exercise
Classify the following cost items
 Depreciation on factory building
 Depreciation on office equipment
 Property tax on finished goods warehouse
 Wages paid to forklift operator in finished
goods warehouse
 Wages paid to forklift operator in factory
 Wages paid to welders when welding
equipment is not working
 Paper used in textbook production
 Paper used in central office computer
 Wages paid to assembly line workers
 Maintenance cost for machines
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11. OTHER COST CONCEPTS
Product Costs or Inventoriable Costs – costs assigned to
products that were either purchased for resale
(merchandising firm or retailer) or manufactured for sale
(manufacturing firm)
 When products are sold, product costs are recognized as
an expense (cost of goods sold or COGS). The costs of
unsold products remain in inventory and are not expensed
(i.e. not deducted from revenue in calculating net income)
Period Costs – costs that are not product costs and that are
associated with the period in which they are incurred
 Period costs such as selling and administrative costs are
expensed (i.e. deducted from revenue in calculating net
income) in the period they are incurred
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12. Product Costs Versus Period
Costs
Expense
Income
Statement
Inventory
Cost of
Goods Sold
Balance
Sheet
Income
Statement
Sale
Product costs include
direct materials, direct
labor, and
manufacturing
overhead.
Period costs are not
included in product
costs. They are
expensed on the
income statement.
Fiaz Ahmad, Center for Research and
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13. Quick Check 
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.
E. Sales commissions. Fiaz Ahmad, Center for Research and
Development Minhaj University Lahore 13

14. Costs Related to Decision Making
Opportunity Costs - costs when taking one
action requires giving up the opportunity to
earn profits from a different action
 Nike Inc. has limited production capacity.
What would be Nike’s opportunity cost of
accepting a special order from the military
for combat boots?
If Nike accepts the special order, they may
not be able to produce enough product forFiaz Ahmad, Center for Research and
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15. Costs Related to Decision Making
Incremental Costs or Differential Costs –
additional costs incurred when choosing a
certain course of action over another (Note
that incremental costs can include
opportunity costs)
 What would be Macy’s incremental costs of
expanding its fragrance department and
shrinking its accessories department?
The costs of stocking and staffing the newFiaz Ahmad, Center for Research and
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16. Costs Related to Decision Making
Incremental Benefits or Differential Benefits – additional benefits
reaped when choosing a certain course of action over another
 What would be Macy’s incremental benefits of expanding its
fragrance department and shrinking its accessories department?
Profits Macy’s expects to earn on the new fragrances it
displays/stocks
Sunk Costs – Costs that have been incurred and that are not
affected by any current/future action
 What would be considered sunk cost if Macy’s decides to expand
its fragrance department and shrink its accessories department?
Depreciation on the building, cost of the building
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17. COST FLOWS IN A MANUFACTURING
COMPANY
3. Inputs such as labor and capital
equipment are also incurred to make
the product. The costs of all the
inputs used in the manufacturing
facilities are recorded in WORK IN
PROCESS INVENTORY
4. As products are finished, they are
moved to finished goods warehouse
and their costs are recorded in
FINISHED GOODS (FG)
INVENTORY
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18. COST FLOWS IN A MANUFACTURING
COMPANY
RAW MATERIALS INVENTORY
Beg. Bal. - RM Materials used in Production (DM)
Materials Purchased
End. Bal. - RM
WORK IN PROCESS INVENTORY
Beg. Bal. - WIP
DM
Cost of Goods Manufactured
(COGM)
DL
OH
End. Bal. - WIP
FINISHED GOODS INVENTORY
Beg. Bal. - FG Cost of Goods Sold (COGS)
COGM
End. Bal. - FG
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19. THE INVENTORY
EQUATION
Beginning Inventory
+
Additions to Inventory
=
Ending Inventory
+
Items Removed from Inventory
 The inventory equation allows us to put together the following schedules:
Schedule of Total Manufacturing Costs
(of the period)
Schedule of Cost of Goods Manufactured
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20. Quick Check 
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.
$1,000 + $100 = $1,100
$1,100 - $300 = $800
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Development Minhaj University Lahore 20

21. 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?
A. $276,000
B. $272,000
C. $280,000 Fiaz Ahmad, Center for Research and
Development Minhaj University Lahore 21

22. 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 Fiaz Ahmad, Center for Research and
Development Minhaj University Lahore 22

23. Variable and Fixed Costs
Activity – a quantitative measure of a firm’s output of goods or
services
 Number of Chrysler vans
 Pairs of Nike shoes
 Tons of cement produced
Variable Costs – costs that change proportionately (in total) with the
activity level within a relevant range of activity
Fixed Costs – costs that do not change in total as activity level
changes within a relevant range of activity
Example: Publishing a magazine
Variable costs Fixed Costs
Cost of paper Rent on building
Cost of ink Salaries to reporters
Sales Commissions Depreciation on printing equipment
Cost of lubricants for machine
Cost of operating press
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24. Total Variable and Fixed
Costs
Total Variable Cost
Number of units Number of units
Total Fixed Cost
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25. Per Unit Variable Cost
Number of units Number of units
Per Unit Fixed Cost
Variable and Fixed Costs Per
Unit
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26. Relevant Range
The range of activity within which the firm’s cost structure (i.e.
variable cost per unit and total fixed cost) remains unchanged
 Publishing a small number of magazines (cost structure of a
small publisher)
Total Variable Cost
Number of units
Total Fixed Cost
Number of unitsRelevant Range Relevant Range
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27. Total Costs
To get total costs you need to add
variable costs and fixed costs
Total Cost
Number of units
Fixed costs
The Slope is the
variable cost per
unit
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Development Minhaj University Lahore 27