9/15/2008

Cost concepts

Cost Sheet
Strategic Cost Management A Rahim

Quick Check
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.

Understanding inventory

Balance Sheet
Merchandiser
Current assets
Cash Receivables Prepaid expenses Merchandise inventory

Balance Sheet
Merchandiser
Current assets
Cash Receivables Prepaid expenses Merchandise inventory Partially complete products some material, labor, or overhead has been added.

Manufacturer
Current Assets

Manufacturer
Current Assets

Cash Receivables Prepaid Expenses Inventories

Raw Materials Work in Process Finished Goods

Cash Receivables Materials waiting to be Prepaid Expenses processed. Inventories

Raw Materials Work in Process Finished Goods

Completed products awaiting sale.

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The Income Statement

Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.
Merchandising Company
Cost of goods sold: Beg. merchandise inventory $ 14,200 + Purchases 234,150 Goods available for sale $ 248,350 - Ending merchandise inventory (12,100) = Cost of goods sold $ 236,250

Manufacturing Cost Flows

Costs
Material Purchases

Balance Sheet Inventories

Raw Materials Work in Process

Income Statement Expenses

Manufacturing Company
Cost of goods sold: Beg. finished goods inv. + Cost of goods manufactured Goods available for sale - Ending finished goods inventory = Cost of goods sold

Direct Labor
$ 14,200 234,150 $248,350

Manufacturing Overhead

Finished Goods

Cost of Goods Sold Selling and Administrative

(12,100) $236,250

Selling and Administrative

Period Costs

Inventory Flows
Beginning balance $$

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? A. $1,000. B. $ 800. C. $1,200. D. $ 200.

+ _

Additions $$$

Available $$$$$

Available $$$$$

Withdrawals $$$

Ending balance $$

Product Costs - A Closer Look

Raw Materials
Beginning raw materials inventory +

Product Costs - A Closer Look

Raw Materials
Beginning raw materials inventory Raw materials purchased Raw materials available for use in production Ending raw materials inventory Raw materials used in production

Manufacturing Costs

Work In Process

Manufacturing Costs
Direct materials

Work In Process

Beginning inventory is the inventory carried over from the prior period.

As items are removed from raw materials inventory and placed into the production process, they are called direct materials.

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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 D. $ 2,000

Product Costs - A Closer Look

Raw Materials
Beginning raw materials inventory + Raw materials purchased = Raw materials available for use in production Ending raw materials inventory = Raw materials used in production

Manufacturing Costs
Direct materials + Direct labor + Mfg. overhead = Total manufacturing costs

Work In Process

Product Costs - A Closer Look

Raw Materials
Beginning raw materials inventory + Raw materials purchased = Raw materials available for use in production Ending raw materials inventory = Raw materials used in production

Quick Check
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.

Manufacturing Costs
Direct materials + Direct labor + Mfg. overhead = Total manufacturing costs

Work In Process

Conversion costs are costs incurred to convert the direct material into a finished product.

Product Costs - A Closer Look

Raw Materials
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

Raw Materials
Beginning raw materials inventory + Raw materials purchased = Raw materials available for use in production

Manufacturing Costs
Direct materials + Direct labor + Mfg. overhead = Total manufacturing costs

Work In Process
Beginning work in process inventory + Total manufacturing costs = Total work in process for the period

Manufacturing Costs
Direct materials + Direct labor + Mfg. overhead = Total manufacturing costs

Work In Process
Beginning work in process inventory Total manufacturing costs Total work in process for the period Ending work in process inventory Cost of goods manufactured.

+ =

+ =

All manufacturing costs incurred during the period are added to the beginning balance of work in process.

Costs associated with the goods that are completed during the period are transferred to finished goods inventory.

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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 D. Cannot be determined.

Product Costs - A Closer Look

Work In Process
Beginning work in process inventory Manufacturing costs for the period Total work in process for the period Ending work in process inventory Cost of goods manufactured

Finished Goods
Beginning finished goods inventory + Cost of goods manufactured = Cost of goods available for sale - Ending finished goods inventory Cost of goods sold

+ = =

Cost centre / unit

Cost Centre a location, person or item of equipment (or group of these) for which costs may be ascertained and used for the purpose of control Cost Unit a Unit of product, service or time in relation to which cost may be ascertained or expressed

Cost Sheet

Assign cost units

Cement Chemicals Bricks Soft drink Nursing Home Flour Shoes Pencils Electricity Transport Automobile Printing Press Cotton Timber Mines Carpets Hotel Gas

Cost sheet
Provides detailed cost for a cost centre or cost unit. It shows not only the total cost but the components of total cost.

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Cost sheet
Opening stock of material

Works Cost or Factory cost

-----------------

+ purchases of materials

+ (Office
--------------------------------------------------------------

and Admn. overheads)

-------------------------------------

closing stock of material

= Direct material (raw materials consumed )

+Direct labour +Direct Mfg. Expenses
Prime cost

Indirect material (for admin) Indirect labour (for admin) Indirect expenses (for admin)

Cost of Production Add Opening stock of finished goods Less Closing stock of finished goods Cost of Goods Sold

------------------------------------------------------------

+ Factory / Mfg. overheads

Indirect materials Indirect labor Indirect expenses Add Opening stock of WIP Deduct Closing stock of WIP Works Cost or Factory cost

-------------------------------------------------------------------

----------------

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+ Selling and distribution expenses

Indirect material (for selling) Indirect labour (for Selling) Indirect expenses (for selling)

Self test on understanding manufacturing costs

---------------------------------Prepare a statement of costs (prime cost, factory cost, Total cost of goods manufactured, cost of finished goods and cost of goods sold ) with given information for the period 01.01.08 to 31.01.08 As on 01.01.08 31.01.08 30,000 25,000 12,000 10,000 80,000 55,000 4,50,000 20,000 2,30,000 1,00,000 30,000 10,00,000
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Cost of Sales Operating Profit Sales

------------------------------------------------------Stock of raw material Stock of work in progress Stock of finished goods

Purchase of raw material during the month Selling and distribution expenses Wages paid Factory overheads Administrative overheads Sales value
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