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Review based on Managerial Accounting, 8 Canadian Edition by Garrison, Noreen, et al

Chapter 2: Cost Terms, Concepts, and Classifications

Materials that become

Direct Materials part of a finished
product

Factory labour costs that

Manufacturing Costs can be traced to
Direct Labour
(Product Costs) individual units of a
product

All costs related to

Manufacturing manufacturing except
Overhead direct materials and
direct labour

Non-Manufacturing Costs (Period Costs)

1. Marketing or Selling Costs – Costs necessary to secure customer orders and get finished product into the
hands of a customer
2. Administrative Costs – All executive, organizational and clerical costs associated with general
management of an organization

Direct Costs – A cost that can easily be traced to the particular cost object.

Indirect Costs – A cost that cannot easily be traced to a particular product. (i.e. factory manager’s salary)

Opportunity Cost – A potential benefit that is given up when one alternative is selected over another. (i.e. A
salary of a full-time job is given up if one decides to enroll in school for full time studies.)

Sunk Cost – Any cost that has already been incurred and that cannot be changed by any decision made now or in
the future

Related Exercises: E2- 1, 2, 4, 5, 7, 8, 10, 12; P2- 20, 26, 29

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Review based on Managerial Accounting, 8 Canadian Edition by Garrison, Noreen, et al

Schedule of Cost of Goods Manufactured

DIRECT MATERIALS:
Raw Materials, Beginning 7,000
Step
add: Raw Materials, Purchases 60,000
1
Raw materials available for use 67,000
less: Raw Materials, Ending 17,000
Raw materials used in production 50,000
Step
2 DIRECT LABOUR 60,000

MANUFACTURING OVERHEAD:
Step
Overhead Applied 90,000
3
Total manufacturing costs 200,000

add: Work in Process, Beginning 30,000

Step
less: Work in Process, Ending 72,000
4
Cost of goods manufactured 158,000

Cost of Goods Sold

Finished Goods, Beginning 10,000
add: Cost of Goods Manufactured 158,000
Goods available for sale 168,000
less: Finished Goods, Ending 49,500
Unadjusted cost of goods sold 118,500
add: Underapplied Overhead 5,000
Adjusted cost of goods sold 123,500

Income Statement
Sales 225,000
Step
less: Cost of Goods Sold 123,500
1
Gross profit 101,500

Selling and Admin Expenses:

Depreciation Expense 7,000
Step
Advertisement Expense 42,000
2
Salaries Expense 30,000
Other Expenses 8,000
Total selling and admin expenses 87,000
Step
3 Operating Income (net) 14,500