FINANCIAL STATEMENTS :

THE BASES FOR PLANNING

AND CONTROL

Lecture # 3
REQUIREMENT IN COST
ACCOUNTING

A Manufacturing A/C Is
Prepared In Addition To
The Trading And Income
Statement Accounts
COMPARING MERCHANDISING AND
MANUFACTURING ACTIVITIES

Merchandisers . . . Manufacturers . . .
 Buy finished  Buy raw
goods. materials.
 Sell finished  Produce and sell
goods. finished goods.
MegaLoMart
MANUFACTURING COST CONCEPTS

Financial
Accounting Managerial
Cost is a measure of Accounting
resources used or Product costs are the
given up to achieve a costs a company
stated purpose. assigns to units
produced.
 MANAGERIAL
COST CONCEPTS

 Manufacturing consists of activities and

processes that convert raw materials into
finished goods.
 DIRECT COSTS AND INDIRECT COSTS
Direct costs
 Costs that can be
easily and conveniently
traced to a unit of product
or other cost objective.
 Examples:
 Direct material
 Direct labor
Indirect costs
 Costs cannot be easily and
conveniently traced to a
unit of product or other
cost object.
 Example: Manufacturing
overhead
MANUFACTURING COSTS
 Manufacturing costs are usually classified as
follows:
1. Direct materials,
2. Direct labor, and
3. Manufacturing overhead.
 COST OF GOODS SOLD
COMPONENTS

 Under a periodic inventory system, the

income statements of a merchandiser and a
manufacturer differ in the cost of goods sold
section.
 ILLUSTRATION
COST OF GOODS SOLD
COMPONENTS

Merchandiser

Beginning Ending
Merchandise + Cost of Goods - Merchandise =
Inventory Purchased Inventory
Manufacturer Cost of
Goods Sold
Beginning Ending
Finished Goods + Cost of Goods - Finished Goods =
Manufactured
Inventory Inventory
INVENTORIES
 Most manufacturers maintain a perpetual inventory
system that uses FIFO, LIFO, or moving average
methods of costing.
 An inventory ledger is maintained to provide support
for the control accounts.
 Some manufacturers may use a factory ledger, which
contain all of the accounts relating to manufacturing.
INVENTORIES

Merchandiser Manufacturer
Current assets:
Current assets:
Cash
Cash Accounts receivable
Inventories:
Accounts receivable
Finished goods
Merchandise Work in process
inventory Materials
 PRODUCT COSTS

Costs that are a necessary and integral part of

producing the finished product.
include each of the manufacturing cost elements

(direct materials, direct labor, and

manufacturing overhead)
These costs are not expensed to cost of goods

sold under the matching principle until the

finished goods inventory is sold.
PERIOD COSTS

a) are identifiable with a specific time period,

b) relates to nonmanufacturing

non-inventoriable costs, and

c) include selling and administrative expenses.
 ILLUSTRATION:
PRODUCT VERSUS PERIOD COSTS
Product Costs

Direct Materials
{ Prime
Costs
Manufacturing
Direct Labor {
Costs
Conversion
Manufacturing Costs
Overhead

Period Costs

Selling Expenses
Nonmanufacturing
Costs Administrative
Expenses
NONMANUFACTURING COSTS

a) Administration / Operating costs

b) Marketing and selling costs

ADMINISTRATION EXPENSES

 All executive, organizational,

and clerical costs.
 Examples:
- managers’ salaries
- legal and accountancy
charges
- depreciation of accounting
machinery & secretarial
salaries
SELLING AND DISTRIBUTION
EXPENSES

Costs necessary to get

the order and deliver the
product.
Examples:
- Sales staff’s
- Salaries & commission
- Carriage outwards
- Depreciation of
delivery vans
- Advertising expenses
 COST OF GOODS SOLD STATEMENT

 Direct materials:
 Beginning Materials inventory xxx
 Purchases xxx
 less purchases returns and allowancesxxx xxx
 Materials available for use xxx
 less ending materials inventory xxx
 direct materials consumed xxx
 Direct labor xxx

 Factory overhead
 Indirect labor xxx
 Salaries xxx
 Payroll taxes xxx
 Power xxx
 Heat xxx
 Light xxx

 Factory supplies xxx

 Depreciation-factory building xxx
 Depreciation – machinery xxx
 Repairs and maintenance xxx
 Patent xxx
 Tools and dies used xxx
 Insurance xxx
 Total factory overhead cost xxx
 Total manufacturing cost xxx
 Total manufacturing cost xxx
 Add beginning work in process inventory xxx
 xxx
 less ending work in process inventory xxx
 Cost of goods manufactured xxx
 Add beginning finished goods inventory xxx
 Cost of goods available for sale xxx
 less ending finished goods inventory xxx
 Cost of goods sold xxx
STATEMENT OF COST OF GOODS SOLD

Pure-Ice
Pure-Ice Inc.
Inc. had
had $52,000
$52,000 ofof inventory
inventory inin
direct
direct materials
materials inventory
inventory onon January
January 1,1,
2005.
2005. During
During the
the year,
year, Pure-Ice
Pure-Ice
purchased
purchased $586,000
$586,000 of
of additional
additional direct
direct
materials.
materials. At At December
December 31,31, 2005,
2005, $78,000
$78,000
of
of the
the direct
direct materials
materials were
were still
still on
on hand.
hand.
STATEMENT OF COST OF GOODS SOLD

In
In addition
addition toto the
the direct
direct materials,
materials, Pure-
Pure-
Ice
Ice incurred
incurred $306,000
$306,000 ofof direct
direct labor
labor cost
cost
during
during 2005.
2005. Manufacturing
Manufacturing overhead
overhead for
for
2005
2005 was
was $724,000.
$724,000.
Pure-Ice
Pure-Ice started
started 2005
2005 with
with $132,000
$132,000 in
in
work
work inin process.
process. During
During 2005,
2005, units
units
costing
costing $1,480,000
$1,480,000 were
were transferred
transferred to
to
finished
finished goods
goods inventory.
inventory.
STATEMENT OF COST OF GOODS SOLD

Pure-Ice
Pure-Ice Inc.
Inc. had
had $300,000
$300,000 of
of inventory
inventory in
in
Finished
Finished Goods
Goods inventory
inventory on
on January
January 1,
1,
2005.
2005. AtAt December
December 31,
31, 2005,
2005, $350,000
$350,000 of
of
the
the Finished
Finished Goods
Goods were
were still
still on
on hand.
hand.