CMA

PGP 23- Sec DEF

Pankaj Baag
Faculty Block 01, Room No 21

Mob: 8943716269
Ph (O): 0495-2809121
Ext. 121
Email: baagpankaj@iimk.ac.in

1
 Different Types of Firms
Cost accounting is used for all types of firms
• Manufacturing-sector companies purchase materials and components
and convert them into finished products.

• Merchandising-sector companies purchase and then sell tangible

products without changing their basic form.

• Service-sector companies provide services (intangible products) like legal

advice or audits.

2
Point no 7
 Types of inventory
Manufacturing-sector companies purchase materials and components and convert them into finished goods.

These companies typically have one or more of the following three types of inventory:

• Direct materials—resources in-stock and available for

use
• Work-in-process (or progress)—products started but not
yet completed, often abbreviated as WIP
• Finished goods—products completed and ready for sale

• Note: Merchandising-sector companies hold only one

type of inventory: merchandise inventory
3
Point no 8
Commonly used classifications of manufacturing costs
Three terms are commonly used when describing manufacturing costs.

These terms build on the direct versus indirect cost distinctions we discussed earlier.

• Also known as inventoriable costs

• Direct materials —acquisition costs of all materials that will
become part of the cost object.
• Direct labor —compensation of all manufacturing labor that
can be traced to the cost object.
• Indirect manufacturing —factory costs that are not traceable
to the product in an economically feasible way. Examples
include lubricants, indirect manufacturing labor, utilities, and
supplies.

4
Point no 9
Raw material that is consumed in the
The cost of salaries, wages, and fringe benefits for personnel
manufacturing process, is physically
who work directly on the manufactured products is classified as
incorporated in the finished product, and can
direct-labor cost.
be traced to products conveniently is called
direct material.
Direct Labor
Direct Material

Cost of salaries, wages, and fringe

Cost of raw material that is used to benefits for personnel who work
make, and can be conveniently directly on manufactured products.
traced, to the finished product.
Example:
Steel used to
manufacture Example:
the automobile. Wages paid to an
automobile assembly
worker.
2-5
 Manufacturing Overhead
All other manufacturing costs

Indirect Indirect Other

Material Labor
Materials used to support the
production process. Examples:
lubricants and cleaning supplies
used in an automobile assembly
plant.
Costs
All other costs of manufacturing are classified
as manufacturing overhead, which includes
three types of costs: indirect material,
indirect labor, and other manufacturing
costs.
The cost of materials that are required for the
production process but do not become an integral
part of the finished product are classified as
indirect material costs.
Materials that do become an integral part of the
finished product but are insignificant in cost are
also often classified as indirect material.
2-6
 Manufacturing Overhead
The costs of
personnel who do All other manufacturing costs
not work directly on
the product, but
whose services are Indirect Indirect Other
necessary for the
manufacturing
Material Labor Costs
process, are classified
as indirect labor.

Cost of personnel who do

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

2-7
Manufacturing Overhead
All other manufacturing costs

Indirect Indirect Other

Material Labor Costs

All other manufacturing costs that are Examples: depreciation on

neither material nor labor costs are
classified as manufacturing overhead.
plant and equipment,
property taxes, insurance,
utilities, overtime premium,
and unavoidable idle time.

2-8
 Nonmanufacturing Costs

Selling
Administrative Costs
Costs

Costs necessary to secure the All executive, organizational,

order and deliver the product. and clerical costs.

Point no 10
Classifications of Costs in
Manufacturing Companies Two issues in cost measurement that require special
attention are idle time and overtime premium.
Direct material Manufacturing costs are often Idle time is wage paid for unproductive time caused by
and direct
labor are often combined as follows: lack of orders, machine breakdowns, or other reasons.
Overtime premium is the wage rate paid to workers in
referred to as
excess of their regular straight-time wage rate.
prime costs.
Both of these are considered as overhead rather than
Direct labor and direct labor costs.
overhead are often
called conversion Direct Direct Manufacturing
costs, since they Material Labor Overhead
are the costs of
“converting” raw
material into
finished products.

Prime Conversion
Cost Cost

Point no 11 2-10
Inventoriable costs vs. period costs
Inventoriable costs are all costs of a product that are considered assets in a
company’s balance sheet when the costs are incurred and that are expensed as
cost of goods sold only when the product is sold.
For manufacturing companies, all manufacturing costs are inventoriable costs.

Period costs are all costs in the income statement other than cost of goods sold.
They are treated as expenses of the accounting period in which they are
incurred.

2- 11
Point no 12
Product Costs Versus Period Costs

Product costs include direct Period costs include all selling

materials, direct labor, and costs and administrative costs.
manufacturing overhead.

Inventory Cost of Good Sold Expense

Sale

Balance Income Income

Sheet Statement Statement
 Cost Flows
• The Cost of Goods Manufactured and the Cost of Goods Sold section
of the Income Statement are accounting representations of the actual
flow of costs through a production system.
• Note how inventoriable costs to through the balance sheet accounts of work-
in-process and finished goods inventory before entering the cost of goods
sold in the income statement.

Costs will flow from the balance sheet to the income statement or will originate on the income statement

13
Point no 13
 Here, we see the flow of costs
through the balance sheet

Cost flows illustrated accounts (for inventoriable costs

only)

and into the income statement

for both inventoriable and
period costs.

14
Manufacturing Cost Flows
Direct Material
Work in
Direct Labor Process
Inventory

Manufacturing
As direct material is consumed in
Overhead production, its cost is added to work-in-
process inventory.
Similarly, the costs of direct labor and
manufacturing overhead are accumulated
in work in process.

2-15
Manufacturing Cost Flows
When products are
finished, their costs
Direct Material are transferred from
work-in-process
Work in inventory to
Direct Labor Process finished-goods
Inventory inventory.

Manufacturing The total cost of

direct material,
Overhead
direct labor, and
Finished manufacturing
Goods overhead
transferred from
Inventory
work-in-process
inventory to
finished-goods
inventory is called
the cost of goods
manufactured.
2-16
 Manufacturing Cost Flows
Direct Material
Work in
Direct Labor Process
Inventory
Manufacturing
Overhead
Finished Cost of
Goods Goods
Inventory Sold

•The costs then are stored in finished goods until the time period when the products are sold.
•At that time, the product costs are transferred from finished goods to cost of goods sold,
which is an expense of the period when the sale is made.
2-17
Other Cost Considerations
Two additional terms we use to describe cost classifications in manufacturing costing systems are:

• Prime cost is a term referring to all direct manufacturing

costs (materials and labor).
• Conversion cost is a term referring to direct labor and
indirect manufacturing costs.
• Overtime labor costs are considered part of indirect
overhead costs.

18
2-
 Cost of sales
A B C D E F G
1
2 Materials consumed
3 Opening stock xxxx
4 add: purchases xxxx
5 Less: closing stock xxxx
6
Direct
7 Materials D3+D4-D5
8 Direct Wages (including accruals) xxxx
Direct
9 Expenses xxxx
10 Prime cost E7+E8+E9 PC
11 Production overhead (absorbed)
or Factory overhead
or Works overhead xxxx
12 Factory cost (gross) F10+E11 FCG
13 Adjustment for WIP
14 Add: Opening stock
15 Less: Closing Stock
xxxx
xxxx xxxx
OR
16 Factory cost (net) F12+E15 FCN
17 Administration/office overhead xxxx
18 Cost of production
18 or Cost of goods manufactured F16+ E17 COGM
19 Adjustment for FG
20 Add: Opening stock xxxx
21 Less: Closing Stock xxxx xxxx
22 Cost of goods sold F18+E21 COGS
23 Marketing overhead** xxxx
24 Cost of sales F22+E23 COS
25 Profit F26-F24

26 Sales F24+F25
• Look at Problem set 1: problem 1
• And its solution
Step 1 Add non-
add Factory OH manufacturing
calculate Prime
cost actual + administration
OH
IL accrued 19200
HLP(1/10*65000
(Materials Purchased + Freight - Returns) + add op. stock - Super 10000 ) 6500
R&U 14000
DM Closing stock R&T(1/3*6300) 2100
(8/10)*6500
HLP 0 52000 OS&E 8600

320000 R&T (2/3)*6300 4200

Dep Build(0.04*200000)*1/10

16000 ME 18700 800

4800 plant OA(0.05*17500) 875

(0.10*46050 Total 18875
new cost of materials DEP: 0) 46050
added Build(0.04*200000*8/
140000 10) S&D oh
6400 HLP(1/10*65000
180000 ) 6500
Factory OH 170550
291200 SC 33600
Work Cost (PC+F ST 11000
gross OH) SP 22500
679750
DL actual + accrued DS&E 18000
do adj for
inventory Dep: Build(0.04*200000)*1/10
160000 (add:opening WIP ; less: Closing 800
WIP)
8000 8000
Total 92400

168000
Total Non- manuf OH 111275
Work Cost Net 687750
DE actual
Cost of Cost of sales 764025
Production 687750
50000
Sales 768000
do adj for FG
inventory less returns 14000
50000
net
add opening 80000 sales 754000
PC DM+DL+DE COG AFS 767750 less cost of sales 764025
less closing 115000 profit/loss -10025
COGS 652750
509200