I.

Cost Terminology

A. Two fundamental cost classifications exist within a manufacturing organization:

1. Product Costs (Value-Adding Costs)

2. Period Costs (Non-Value-Adding Costs)

B. Division of Costs in the Income Statement

PRODUCT COSTS

PERIOD COSTS

ELEMENT

Direct Material (DM)

Direct Labor (DL)
Manufacturing Overhead (MOH)
Selling, General and Administrative Expenses (SG&A)

ELEMENT

Direct Material (DM)

Direct Labor (DL)
Manufacturing Overhead (MOH)

II. Manufacturing (or Inventoriable) Costs

A. Direct Material

B. Direct Labor

C. Manufacturing Overhead (Insurance, Utilities, Supervision, Depreciation, Etc.)

ELEMENT

Direct Material (DM)

Direct Labor (DL)
Manufacturing Overhead (MOH)
Selling, General and Administrative Expenses (SG&A)

Variable - The total cost changes with the quantity produced.

Fixed - The total cost remains the same regardless of the quantity produced.

QUANTITY COST PER UNIT

A B=D/A

FIXED

A 100 5,000.00

B 50 10,000.00

PRACTICE QUESTION #1

Indirect labor is a

A. Prime Cost
B. Conversion Cost
C. Period Cost
D. Non-Manufacturing Cost

PRACTICE QUESTION #1

Which of the following is assigned to goods that were either purchased or manufactured for resale?

A. Relevant Cost
B. Period Cost
C. Opportunity Cost
D. Product Cost

III. Overhead Allocation

A. Pre-determined Overhead Application Rate

Overhead Application Rate = Estimated Total Overhead Costs / Estimated Activit

B. Applied Overhead

Work-In-Process
Factory Overhead Applied

Manufacturing Overhead Control

900,000.00 Accounts Payable

Factory Overhead Applied

Manufacturing Overhead Control

Over-Applied Factory Overhead

Factory Overhead Applied

Manufactoring Overhead Control
Cost of Goods Sold

Under-Applied Factory Overhead

Factory Overhead Applied

Cost of Goods Sold
Manufacturing Overhead Control
a manufacturing organization: product costs and period costs.

+ Net Sales
- Cost of Goods Sold
= Gross Profit
- Selling and Administrative Expenses
= Net Profit (Loss)

ELEMENT PRODUCT

P
P
P
ative Expenses (SG&A)

ELEMENT PRIME

P
P

DIRECT COST

DIRECT COST

ervision, Depreciation, Etc.) INDIRECT COST

ELEMENT VARIABLE

P
P
P
ative Expenses (SG&A) P

y produced.
s of the quantity produced.

COST PER UNIT TOTAL COST

C D

VARIABLE FIXED

6,000.00 500,000.00

6,000.00 500,000.00

ufactured for resale?

head Costs / Estimated Activity Volume

xx

xx

xx

xx

xx
xx
PERIOD

CONVERSION

P
P

FIXED
P
P

TOTAL COST
E=A*C

VARIABLE

600,000.00

300,000.00

1,000,000.00
100,000.00 10.00
90,000.00 900,000.00

1,200,000.00
xx

xx

xx

900,000.00
xx
xx

900,000.00
300,000.00
xx
800,000.00
100,000.00

1,200,000.00
I. Inventory Flow and Cost

A. Wholesale and Retail Organizations

B. Manufacturing Organizations

1.
2.
3.

Cost of Goods Sold / Manufactured Statement Format

1.

requisitioned

2.

3.

3.
PRACTICE QUESTION #3

Based on the following data, what is the gross profit of the Company?

BEGINNING ENDING

WIP 500,000.00 400,000.00

FG 100,000.00 500,000.00

Sales 1,000,000.00
Net Purchases of Raw Material 600,000.00
COGM 800,000.00
Marketing and administrative expenses 250,000.00
Indirect manufacturing costs 500,000.00

A. 20,000.00
B. 400,000.00
C. 600,000.00
D. 900,000.00
PRACTICE QUESTION #4

Kingman Enterprises produces custom period furniture for Victorian homes. The following information is avai

BEGINNING ENDING

DM 120,000.00 100,000.00
WIP 180,000.00 120,000.00
FG 250,000.00 350,000.00

Additional information:

Kingman purchased 800,000 of direct materials during the period.

Direct labor for the period was 120,000.
Overhead applied to work-in-process was 700,000.

Given this information, what is the Cost of Goods Manufactured and the Cost of Goods Sold?

COGM COGS

A. 1,700,000.00 1,800,000.00
B. 1,200,000.00 1,600,000.00
C. 1,800,000.00 1,500,000.00
D. 1,700,000.00 1,600,000.00

II. Scrap, Spoilage, and Rework

SCRAP
Normal: Uncontrollable ; unavoidable ; expected
Abnormal: Not expected ; sometimes avoidable

Accounting Treatment

IS THE SCRAP SALABLE? IF YES:

Scrap value is recognized at the time of production.
Cost of the main product is reduced by the NRV of the scrap, ev
NRV of the scrap is kept in ending inventory until sold.
At sale of scrap, ending inventory is reduced; there is no gain/lo

IS THE SCRAP SALABLE? IF MAYBE:

Scrap value is recognized at the time of the sale.
Cost of the main product is not reduced by the NRV of the scrap
No need to keep NRV of the scrap in ending inventory until sold
At sale of scrap, either Other Income is recorded or Cost of Goo

SPOILAGE

Normal: Uncontrollable ; unavoidable ; expected

Abnormal: Not expected ; sometimes avoidable

Accounting Treatment

TYPE

Normal spoilage arising from requirements of specific product

Normal spoilage occuring periodically as regular part of all manufacturing
Abnormal spoilage

Normal Spoilage

Cost per Unit

Cost of Good Units Alone

Cost to Rework the products

Cost of Good Units Completed

Spoilage Rate

Abnormal Spoilage Cost

REWORK

TYPE

Rework for defects arising from requirements of specific product

Rework for defects occuring periodically during normal production
Rework for abnormal defects
ale and Retail Organizations

+ Beginning Inventory
+ Purchases
= Goods Available for Sale
- Ending Inventory
= Cost of Goods Sold

cturing Organizations

Direct Materials / Raw Materials

Work-In-Process
Finished Goods

Goods Sold / Manufactured Statement Format

+ Beginning Direct Materials 120,000

+ Direct Materials Purchased 50,000
= Direct Materials Available 170,000
- Ending Direct Materials 40,000
= Direct Materials Used 130,000

+ Direct Materials Used 130,000.00

+ Direct Labor 30,000.00
+ Manufacturing Overhead 50,000.00
= Total Manufactoring Costs 210,000.00

+ Beginning Work-In-Process 60,000.00

+ Total Manufacturing Costs 210,000.00
= Work-In-Process Available 270,000.00
- Ending Work-In-Process 50,000.00
= Cost of Goods Manufactured 220,000.00

+ Beginning Finished Goods 70,000.00

+ Cost of Goods Manufactured 220,000.00
= Goods Available for Sale 290,000.00
- Ending Finished Goods 80,000.00
= Cost of Goods Sold 210,000.00

DIRECT MATERIAL (DM)

Beginning DM
DM Purchased
DM Used
Ending DM

f the Company?

400,000.00 600,000.00

DIRECT MATERIAL (DM)

e for Victorian homes. The following information is available concerning Kingman's production activities during the past quarte

the period.

ufactured and the Cost of Goods Sold?

DIRECT MATERIAL (DM)

120,000.00
800,000.00
820,000.00
100,000.00
ollable ; unavoidable ; expected
ected ; sometimes avoidable

alue is recognized at the time of production.

the main product is reduced by the NRV of the scrap, even if the scrap is not yet sold.
he scrap is kept in ending inventory until sold.
of scrap, ending inventory is reduced; there is no gain/loss on sale.

alue is recognized at the time of the sale.

the main product is not reduced by the NRV of the scrap.
d to keep NRV of the scrap in ending inventory until sold.
of scrap, either Other Income is recorded or Cost of Goods Sold is reduced.

ollable ; unavoidable ; expected

ected ; sometimes avoidable

TYPE TREATMENT

quirements of specific product Charge to individual product

dically as regular part of all manufacturing Charge to overhead
Charge to separate loss account

615,000.00 20,500.00

600,000.00 20,000.00
12,000.00 400.00
612,000.00 20,400.00

612,000.00 20,000.00

3,000.00 100.00
615,000.00

TYPE TREATMENT

requirements of specific product Charge to individual product

iodically during normal production Charge to overhead
Charge to separate loss account
WORK-IN-PROCESS (WIP)
Beginning WIP
DM Used
DL
MOH Applied
COGM
Ending WIP

WORK-IN-PROCESS (WIP)
tivities during the past quarter.

WORK-IN-PROCESS (WIP)
180,000.00
820,000.00
120,000.00
700,000.00
1,700,000.00
120,000.00

Finished Goods
Scraps

Finished Goods

30.00

30.00
30.00

30.60

30.00
FINISHED GOODS (FG)
Beginning FG
COGM
COGS
Ending FG

FINISHED GOODS (FG)

100,000.00
800,000.00
400,000.00
500,000.00

FINISHED GOODS (FG)

250,000.00
1,700,000.00
1,600,000.00
350,000.00