Chapter 2

MANUFACTURING COST: AA025
CONCEPT AND COMPONENT CHAPTER 2
2.1 THE IMPORTANCE OF COST INFORMATION TO

MANAGEMENT.
To enable management to carry out these functions in an
organization:
⮚ Planning
Process of setting up objectives/goals to achieve. Selecting of
Strategies/ Methods to achieve goals
e.g.: Preparing Company’s budget (Cost Information)
⮚ Controlling-compare actual result with budget. To make sure:

● Planned strategy on the right track.
● Objectives achieved based on current performance evaluation
● Correction made if needed
⮚ Decision making
● Selecting best alternative after Cost and Revenue Analysis
done
2.2 DIFFERENCE BETWEEN COSTS AND EXPENSES

COST EXPENSE
Sacrifice of resources to Sacrifice of

acquire resources to obtain
products/services which benefit in current
will benefit in the future. period.
e.g.: Paid building e.g.: Insurance

expense charged in
insurance for 12 months
the current month.
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2.3 COST CLASSIFICATION

Classification of costs according to:
Other
Function Cost Behaviour
Classification
Manufacturing Fixed cost Direct cost
Non-manufacturing Variable cost Indirect cost

(selling and admin)
Mixed cost
COST FUNCTION
Manufacturing
Non-Manufacturing
Cost
Cost
1 2 3 1 2
Direct Direct Selling Admin

Manufacturing
Material Labor Overhead Costs Costs
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2.3 COST CLASSIFICATION

(i) Function
MANUFACTURING COST
● Manufacturing Cost
⮚ Direct Material - Raw materials costs that can be traced to

the finished product. E.g.: Wood in a table, customs duty,
freight-in etc.
⮚ Direct Labor - Labor Cost incurred in converting raw

materials into finished product. All other costs related to
direct labor fall under Manufacturing Overhead. E.g.: Factory
operator/ Assembly line wages ONLY.
⮚ Manufacturing Overhead - All manufacturing costs except

direct material and direct labor. Also known as indirect
manufacturing cost. E.g.: indirect material, direct labor perks,
direct labor overtime cost, factory utility cost, depreciation on
factory equipment etc.
NON-MANUFACTURING COST
● Non-Manufacturing Cost
⮚ Selling expenses - Costs to market finished products.

Example: Advertising expenses, sales commissions, freight-
out etc.
⮚ Administrative expenses - Administration cost of the

organization that cannot be assigned to either production or
selling. Example: Director and admin staff salary, admin
utility cost, research & development cost, legal cost, office
supplies etc.
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PRIME COST
Direct Primary costs in
Material manufacturing
finished products
MANUFACTURING
COSTS
@ Product Costs Direct
Labor
@ Inventoried
Costs CONVERSION
COST
Manufacturing
Costs incurred
Overhead to convert
materials into
the finished
product
2.3 (ii) Cost Behaviour

1 2 3
VARIABLE COST FIXED COST MIXED COST

A cost that A cost that Contains
VARIES in total, remains both variable
in direct CONSTANT in and fixed
proportion to total, regardless of cost
changes in the changes in the elements.
level of activity. level of activity. Example:
Example: Direct Example: Machine Electricity
materials
2.3 (iii) Other Cl depreciation
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DIRECT COST AND INDIRECT COST
DIRECT COST INDIRECT COST
Costs that can be traced Costs that cannot be traced to

to the finished product. the finished product.
Example: Example: Manufacturing

overhead
Direct material
Direct labour
2.4 CALCULATION OF MANUFACTURING COST

Calculation of manufacturing cost, direct material, direct labor and
overhead: prime cost and conversion cost.:
Practice 1:
Elektrika Sdn Bhd produced 1,000 refrigerators a month. The costs and
expenses incurred are as belows:
ITEM RM
Factory equipment rent 1,500
Factory building insurance 500
Raw materials 200,000
Factory utilities 800
Office supplies 400
Assembly line wages 70,000
Depreciation on office equipment 400
Indirect materials 10,000
Factory property taxes 125
Factory supervisory salaries 1,700
Advertising 1,250
Sales commission 80,000
Depreciation on factory building 900
Requirement:
1. Classify the above items into product cost, period cost, prime cost
and conversion cost.
Product Cost
Direct Period Prime
Cost Item Direct Factory Conversion
Material Costs Costs
Labor Overhead Cost
s
Factory
equipment
rent
Factory
building
insurance
Raw materials
Factory
utilities
Office
supplies
Assembly line
wages
Depreciation
on office
equipment
Indirect
materials
Factory
property taxes
Factory
supervisory
salaries
Advertising
Sales
commission
Depreciation
on factory
building
2. Determine the total amount of manufacturing costs, product costs,

non-manufacturing costs and period costs.
3. Determine the total amount of prime costs and conversion costs.

4. Determine the total amount of direct costs and indirect
manufacturing costs.
MANUFACTURING COSTS = PRODUCT COST

RM
Direct Materials:
Direct Labour:
Manufacturing Overhead:
MANUFACTURING COSTS 285,525
2.5 CALCULATION NON-MANUFACTURING COSTS = PERIOD

COST
RM
Office supplies 400
Depreciation on office equipment 400
Advertising 1,250
Sales commissions 80,000
NON-MANUFACTURING COSTS 82,050
PRIME COSTS
RM
Direct Materials:
Direct Labour:

PRIME COSTS 270,000
CONVERSION COSTS
RM
Direct Labour:
CONVERSION COSTS 85,525
2.6 CALCULATION OF DIRECT COSTS

RM
Direct Materials:
Direct Labor:
DIRECT COSTS 270,000
2.7 CALCULATION OF INDIRECT MANUFACTURING COSTS

RM

INDIRECT MANUFACTURING COSTS 15,525
2.8 PRODUCT COST AND PERIOD COST
PRODUCT PERIOD
COST COST
Inventoried cost and Non-inventoried cost and

involved in does NOT involve in
manufacturing finished manufacturing finished
products. products.
Example: Example: Selling and
administrative expenses
-Direct material
-Direct labor
-Manufacturing
Overhead
2.9 STATEMENT OF COST GOODS MANUFACTURED &

INCOME STATEMENT
STATEMENT OF COST OF GOODS MANUFACTURED
1. Direct Materials used

2. Direct Labor
3. Manufacturing Overhead
Current Manufacturing Cost
+ Work in Process, beginning
- Work in Process, ending
COST OF GOODS MANUFACTURED
INCOME STATEMENT (partial)
COST OF GOODS SOLD

Beginning Finished Goods Inventory
+ Cost of Goods Manufactured
Cost of Goods available for sale
- Ending Finished Goods Inventory
COST OF GOODS SOLD
Name of company
Statement of Cost of Goods Manufactured
for the period ended …
Direct Materials:
Beginning inventory of Raw materials, XX
+ Purchased of Raw materials XX
Raw materials available for use XX
(-) Ending inventory of Raw materials, (XX)
1. Direct Materials Used XXX
2. Direct Labor:
Assembly line wages XXX
3. Manufacturing Overhead:
Indirect Labor XX
Indirect Materials XX
Factory manager’s salary XX
Total manufacturing overhead XXX
Total current manufacturing costs XXX
(+) Beginning Work in process XX
Total cost of work in process XXX

(-) Ending Work in process (XX)
*COST OF GOODS MANUFACTURED XXX
Name of company
Income Statement for the period ended …
Sales (net) XXX

(-) COST OF GOODS SOLD:
Finished goods inventory, beginning XX
(+) Cost of goods manufactured * XX
Cost of goods available for sale XX
(-) Finished goods inventory, ending (XX)
Cost of goods sold (XXX)
Gross profit XXX
(-) Operating expenses:
Sales expenses XX
Administrative expenses XX (XXX)
Net Income XXX
EXERCISES
CHAPTER 2: CONCEPTS AND COMPONENTS OF MANUFACTURING COST
Question 1
Below is a list of costs for a cloth production factory. Based on the items, categorize
all the costs according to the given classification by marking (x) in the provided table.
Product Cost
Period Prime
Cost Item Direct Direct Factory Conversion
Costs Costs
Materials Labor Overhead Cost
Advertisement
Plant Repairs
Plant
Insurance
Plant
Depreciation
Office
Equipment
Depreciation
Factory
manager
salary
Factory
supervisor
salary
Cotton Cloth
Indirect Raw
Materials
Sales
Commission
Wages for
production
line
Factory
equipment
rental
QUESTION 2
Bukit Yatim Sdn. Bhd. (BYSB) manufactured a set of home furniture and office
furniture. Part of the cost incurred by BYSB for living room furniture sets are as follows:
1. The cost of wood is RM1,000 per set.
2. The cost of wages is RM400 per set.
3. Factory supervisor salary is RM25,000 a year.
4. The electricity cost is at RM 2 per hour machine. Each set requires 8 hours of
machine.
5. The machine cost of depreciation is RM20,000 a year.
6. The administrative manager salary is RM150,000 per annum
7. Advertising expenditure is RM300,000 per annum.
8. Salesman commission is RM300 for each set sold.
9. Factory insurance is RM10,000 a year.
REQUIRED:
Classify the above costs according to categories showed in the following table. Mark
"X" in the right category regardless of the amount of costs.
Cost Behaviour Period Cost Product Cost

Costs Variable Fixed Sales Admin Direct Direct Factory
costs costs Expenses Expenses materials labour Overhead
Ex : 1 X X
Question 3
Below are the expenses involved for a manufacturing operation.
RM
Direct Materials 70,000
Direct Labour 50,000
Indirect Materials 67,800

Indirect labour 45,000
Depreciation Expenses :
-Factory Machines 5,000
-Vehicles 7,600
Water and electric 4,500
expenses(factory 80%)
Telephone expenses(factory 70%) 3,200
Salesman Commissions 6,000
Research expenses 5,400
REQUIREMENT:
Calculate prime costs, product costs and the conversion costs.
Question 4
Cahaya company is a factory manufactures electric equipment. Below is the

information of costs for the month of September 2021.
RM
Direct materials used 50,000
Salaries:
Factory supervisor 10,000
Director manager 20,500
Office staffs 45,000
Factory manager 15,000
Production operators 30,000
Sales commission 15,600
Rent : 30% factory , 70% office 40,000
Utilities: 60% factory, 40% office 45,500
Insurance:75% factory, 25% office 20,000
Advertising and marketing 16,000
Factory machines depreciation 35,000
Beginning work in process 24,000
Ending work in process 16,800
Office Equipments depreciation 10,000
Factory maintenance 18,500
Calculate:
a. Manufacturing costs
b. Prime costs
c. Conversion costs
d. Period costs
QUESTION 5
Salaklabu Sdn. Bhd. (SSB) issued the greeting cards for various events and
celebrations. The following information is the SSB costs for the year ended December
31st, 2021.
Items RM
Factory maintenance expenses 50,000
Direct labour 290,000
Indirect labour 85,000
Production supervisor salary 27,000
Direct labor Overtime 47,500
Administrative expenses 75,000
Office space rental 7,500
Product promotion expenses 5,000
Purchase of direct materials 549,000
Advertising expenses 49,500
Depreciation of factory building 57,500
Opening inventory of direct materials 75,000
Closing Inventory Direct materials 43,000
Work in process-opening 13,000
Work in process-ending 25,000
Closing Inventories - finished goods 57,500
REQUIREMENT:
Calculate the total cost for the year ended December 31st, 2021:
i) Production Cost
ii) Production Overhead
iii) Prime costs
iv) Conversion costs
v) The Period costs
Question 6
Below is a record for Salman Prakas Company(SPC) for the period ended 31st
December 2021.
Items/Item RM
Sales (13 000 units) 97,500
Direct materials purchase 25,000
Beginning inventory :
Work in progress 7,500
Direct labour 65,000
Factory Manager Salary 30,000
Depreciation Expenses-Factory Machine 5,000
Indirect Labour 7,600
Factory Utilities 15,000
Factory Rental 10,000
Sales Expenses 69,500
Administrative and sales expenses 15,700
Ending Inventory:
Work in progress 4,600
Finished goods Inventory (units):

Beginning inventory 3,200 units
Ending inventory 850 units
REQUIREMENT:
a. Prepare Cost of Goods Manufactured Statement for the year ended

December 31st 2021.
b. Calculate the manufacturing cost per unit
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QUESTION 7
Tugu Sdn Bhd (TSB) was established in early 2019. Below are the TSB Statement of
Comprehensive Income for the month ended January 31st, 2021.
Tugu Sdn Bhd

Statement of Comprehensive Income
For the month ended 31st January 2021
RM RM
Sales 675,000
Less: Operating Expenses
Indirect labor costs 18,000
Utilities expenses 22,500
Direct labor costs 105,000
Factory equipment depreciation expenses 31,500
Sales equipment depreciation expenses 27,000
Direct materials purchases 247,500
Insurance expenses 6,000
Rental expenses 75,000
Selling and administrative expenses 48,000
Advertising expenses 112,500 (693,000)
Loss (18,000)
However, after an investigation, the income statement is not in the correct format.
Additional information is as follows:
1. 60% of the utility expenses and 75% of the insurance expenses are for the
plant operation while the balance is for sales and administration activities.
2. Inventories for January are as follows:
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1st January 31st January

(RM) (RM)
Direct materials 12,000 19,500
Work in process 24,000 31,500
Finished goods 60,000 90,000
3. 80% of the rental expense is for the factory and the balance us for the sales
and administration.
REQUIREMENT:
i) Prepare a statement of cost of goods manufactured for the month ended
January 31, 2021.
ii) Calculate the prime cost and the cost of conversion.
iii) Explain the difference between the product cost and period cost.
Give two (2) examples each.
Question 8
Hasni Company(HC) manufactures high-tech LED bulb. Below are the costs and
sales information for the year 2021.
Item RM
Opening inventory direct materials 10,000
Direct materials purchase 70,000
Return on direct materials purchase 10,000
Closing inventory direct materials 20,000
Salary:
Factory Supervisor 10,000
Director Manager 20,500
Office Staffs 45,000
Production Manager 15,000
Production Operator 30,000
Production operator overtime cost 5,000
Cost of idle time 2,000
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Salesman Commissions 50,000

Production operator medical cost 3,000
Rent:30% factory, 70% office 40,000
Utility: 60% factory, 40% office 45,500
Insurance: 75% factory,25% office 20,000
Advertisement 16,000
Factory Machine Depreciation 35,000
Direct Material Import duty 1,500
Indirect Material Import duty 500
Wages paid on direct material purchase 500
Transport charges on direct materials
1,000
purchase
Transport out 800
Beginning WIP (work in Process) Inventory 24,000
Ending WIP Inventory 1,000
Beginning Finished Goods inventory 100,000
Ending finished goods inventory 120,000
Sales 500,000
Sales discount 40,000
Return on sales 30,000
Prepare:
a. Cost of Goods Manufactured Statements for the year ended
December 31st, 2021
b. Income Statement for the year ended December 31st, 2021
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QUESTION 9
Miss Rania Emas, an accountant at Angsana Sdn Bhd (ASB) is preparing the financial
statements for the year ended December 31st, 2020. The following information is
required for the preparation of manufactured goods cost:
1. Inventories
Inventories 1 Jan 2020 31 Dec 2020
(RM) (RM)
Finished goods 469,800 444,100
2. The other information related to the costs and expenses as at December 31st,
2020:
Costs and Expenses items RM

Advertisement 24,000
Administration 12,000
Depreciation of factory equipment -?-
Depreciation of factory building 28,000
Depreciation of office buildings 18,500
Depreciation of office equipment 11,800
Direct labour -?-
Indirect labour -?-
Insurance 56,400
Direct materials purchases 34,000
Factory buildings maintenance 146,000
Administrative salaries 39,000
Factory tax 44,500
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3. Additional information:
i. Direct labor is 60% of the total labor cost RM460,000
ii. Total depreciation expense for equipment is RM37,800
iii. 60% of the insurance expenses is for factory and the rest is for the
administration.
iv. Utilities expenses that have not been recorded amounted to RM25,000
of which 70% is for the factory and the rest is for administration.
v. Sales for 2020 is RM2,912,500 and the return on sales is RM75,000
REQUIREMENT:
i) Prepare a statement of cost of goods manufactured for the year ended December
31st, 2020
ii) Calculate the cost of goods sold for the year ended December 31 st,2020.
Question 10
Shahjahan Manufacturing Berhad (SMB) involves in a production of dates juice. Below

are the account balances taken from the account record ended on 30 June 2020.
RM
Direct materials purchase ?
Advertisement expenses 537,500
Factory equipment insurance 20,000
Factory building rental 225,000
Sales equipment depreciation 100,000
Factory utilities 130,000
Factory properties taxes 15,000
Administrative and sales salary 212,500
Factory equipment depreciation 275,000
Factory maintenance 185,000
Direct labour ?
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Information regarding begining and ending inventory balance are as belows:

1st July2019 30th June 2020
RM RM
By the end of the period, June 30, 2020, PSB has produced 270 000 bottles of dates
juice. The direct materials price is RM5 per kilogram and a bottle of dates juice
requires 0.5 kilograms of direct materials. The total manufacturing cost for the period
is RM1,687,500.
REQUIREMENT:
a. Calculate the total of direct materials purchase in RM for the period

ended June 30, 2020.
b. Prepare Cost of Goods Manufactured Statements for the period ended
June 30, 2020.
c. If the PSB sets the selling price based on 180% of the production costs,
calculate the selling price for a bottle of the date juice.
d. From the list of the items above, gives three examples for:
i. Period costs
ii. Fixed costs
QUESTION 11
Karenbunaie Sdn. Bhd. (KSB) has commenced a business on January 1st, 2020. KSB
manufactures and sells agriculture based products. Here is the balance sheet as at
December 31st, 2020:
Items Debit Credit

(RM) (RM)
Cash 46,025
Accounts Receivable 120,500
Factory Insurance 10,800
Factory Machine 540,200
Office Equipment 110,374
Capital 497,000
Accounts Payable 80,650
Sales 975,550
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Direct Materials Purchases 183,450

Direct Labour 252,740
Factory Supervisor Salary 48,750
Indirect Labour 25,500
Factory utilities expenses 50,346
Machine Maintenance Expenses 13,800
Factory General expenses 30,000
Adminstration Salary 35,450
Advertising Expenditure 10,200
General Office Expenses 15,065
Depreciation Expenses 67,690
Supply Expenses 60,000
Accumulated Depreciation 67,690
1,620,890 1,620,890
Additional information
1. Inventories as at December 31st, 2020
Direct Materials RM 26,700
Work in Process RM 9,600
Finished Goods RM 34,800
2. 90% of depreciation expense is for factory machine and the rest is for office
equipment.
3. 20% of the supply expenses is for factory supplies and the rest is office
supplies.
REQUIREMENT:
i) Prepare the Cost of Goods Manufactured Statements for the year ended
December 31st, 2020.
ii) Calculate prime cost and conversion cost.
iii) Prepare a Statement of Comprehensive Income for the year ended December 31,
2020.
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MANUFACTURING COST: AA025

CONCEPT AND COMPONENT CHAPTER 2

2.1 THE IMPORTANCE OF COST INFORMATION TO

⮚ Controlling-compare actual result with budget. To make sure:

2.2 DIFFERENCE BETWEEN COSTS AND EXPENSES

Sacrifice of resources to Sacrifice of

e.g.: Paid building e.g.: Insurance

2.3 COST CLASSIFICATION

Manufacturing Fixed cost Direct cost

Non-manufacturing Variable cost Indirect cost

Direct Direct Selling Admin

2.3 COST CLASSIFICATION

⮚ Direct Material - Raw materials costs that can be traced to

⮚ Direct Labor - Labor Cost incurred in converting raw

⮚ Manufacturing Overhead - All manufacturing costs except

⮚ Selling expenses - Costs to market finished products.

⮚ Administrative expenses - Administration cost of the

2.3 (ii) Cost Behaviour

VARIABLE COST FIXED COST MIXED COST

DIRECT COST AND INDIRECT COST

DIRECT COST INDIRECT COST

Costs that can be traced Costs that cannot be traced to

Example: Example: Manufacturing

2.4 CALCULATION OF MANUFACTURING COST

2. Determine the total amount of manufacturing costs, product costs,

3. Determine the total amount of prime costs and conversion costs.

MANUFACTURING COSTS = PRODUCT COST

2.5 CALCULATION NON-MANUFACTURING COSTS = PERIOD

Assembly line wages 70,000

2.6 CALCULATION OF DIRECT COSTS

2.7 CALCULATION OF INDIRECT MANUFACTURING COSTS

Depreciation on factory building 900

2.8 PRODUCT COST AND PERIOD COST

Inventoried cost and Non-inventoried cost and

2.9 STATEMENT OF COST GOODS MANUFACTURED &

STATEMENT OF COST OF GOODS MANUFACTURED

1. Direct Materials used

COST OF GOODS SOLD

Total cost of work in process XXX

Sales (net) XXX

Cost Behaviour Period Cost Product Cost

Below are the expenses involved for a manufacturing operation.

Indirect Materials 67,800

Cahaya company is a factory manufactures electric equipment. Below is the

Direct labour 290,000

Indirect labour 85,000

Production supervisor salary 27,000

Direct labor Overtime 47,500

Administrative expenses 75,000

Office space rental 7,500

Sales commissions 2,500

Product promotion expenses 5,000

Purchase of direct materials 549,000

Advertising expenses 49,500

Depreciation of factory building 57,500

Opening inventory of direct materials 75,000

Closing Inventory Direct materials 43,000

Work in process-opening 13,000

Work in process-ending 25,000

Closing Inventories - finished goods 57,500

Finished goods Inventory (units):

a. Prepare Cost of Goods Manufactured Statement for the year ended

Tugu Sdn Bhd