Prime Cost=Raw Materials+Direct Labor

Conversion – Labor + FO

If unit hinahanap divide on the Unit produced.

Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a
company. This amount includes the cost of the materials and labor directly used to create the
good. It excludes indirect expenses, such as distribution costs and sales force costs.

You have $19,500 in cost of goods sold, an amount that goes right to the income statement.
To figure out the cost per unit, divide the total cost by the 4,200 units sold: $3.64 ($19,500 ÷
4,200 gallons). As you may know from your financial accounting course, retailers use this
same formula.

Sales – Cost of Goods Sold = Gross Profit

What Is Included in
Operating Income?
GROSS INCOME
Gross income, also known as gross profit, is the amount of money that the business has
left to fund its operating expenses after the cost of producing products is deducted. It’s
calculated by subtracting the cost of goods sold from the revenue.

Gross Income = Revenue – COGS

The business revenue does not include any extraordinary gains.

OPERATING EXPENSES
Operating expenses include the costs of running the core business activities. Some
examples of operating costs are utilities, rent, wages, commissions, insurance, supplies
expenses etc.

COST OF GOODS SOLD

It refers to the direct costs attributable to the production of the goods sold in a company
including direct labor costs used to produce the product, allocated overhead and the
cost of materials used.

The operating income excludes non-operating income, taxes and capital structure
expenses
Inventoriable costs, also known as product costs,
refer to the direct costs associated with the
manufacturing of products for revenue generation.
Often, inventoriable costs include direct labor,
direct materials, factory overhead, and freight-in.
Example of Product Costs

Company A is a manufacturer of tables. Its product costs may include:

 Direct material: The cost of wood used to create the tables.

 Direct labor: The cost of wages and benefits for the carpenters to
create the tables.
 Manufacturing overhead (indirect material): The cost of nails used to
hold the tables together.
 Manufacturing overhead (indirect labor): The cost of wages and
benefits for the security guards to overlook the manufacturing facility
 Manufacturing overhead (other): The cost of factory utilities.

Period costs are all costs not included in product costs. Period costs are

not directly tied to the production process. Overhead or sales, general, and
administrative (SG&A) costs are considered period costs.

Variable costs vary based on the amount of output produced. Variable

costs may include labor, commissions, and raw materials.

 Fixed costs remain the same regardless of production output. Fixed

costs may include lease and rental payments, insurance, and interest
payments.