ACCOUNTING 2, AA025

KOLEJ MATRIKULASI PERAK

2021/2022

CHAPTER 2: MANUFACTURING COST: CONCEPT AND COMPONENTS

To enable management to carry out these functions in an organization:

IMPORTANCE OF  Planning
COST INFORMATION  Controlling
 Decision making

DIFFERENCE BETWEEN COST AND EXPENSES

Cost Expenses
Sacrifice of resources to acquire products/services which will Sacrifice of resources to obtain benefit in the current period.
Definition
benefit in the future.
Example Cost to acquire machinery Insurance expenses

COST CLASSIFICATION
FUNCTION BEHAVIOUR OTHER
Manufacturing Cost
Non -
@ Product Costs
Manufacturing Variable Cost Fixed Cost Mixed Cost Direct Cost Indirect Cost
@ Inventoriable
Cost
Costs
Direct material Selling expenses Definition: Definition: Definition: Definition: Definition:
Definition: Definition: A cost that varies, A cost that remains Contains both Costs that can Costs that cannot
Raw materials costs Costs to market in total, in direct constant, in total, variable and be traced to an be traced to an
that can be traced to finished products. proportion to regardless of changes fixed cost object cost. object cost.
the finished product. changes in the in the level of activity. elements.
level of activity.
 ACCOUNTING 2 AA025
KOLEJ MATRIKULASI PERAK
2020/2021

Example: Example: Example: Example: Example: Example: Example for

Wood in a table Advertising Direct materials Depreciation on Electricity DM, DL Manufacturing:
making expenses machine MOH

Example for
Non-
manufacturing:
SE + AE
Direct Administration
labor expenses
Definition: Definition:
Labor cost incurred Administrative
in converting raw costs of the
materials into organization that
finished product. cannot be assigned
to either production
Example: or selling.
Assembly-line
workers Example:
Director’s salary
Manufacturing
overhead
Definition:
All manufacturing
costs EXCEPT direct
material and direct
labor.

Example:
Indirect material

1
 ACCOUNTING 2 AA025
KOLEJ MATRIKULASI PERAK
2020/2021

Prime Cost Conversion Cost

Definition Primary costs in manufacturing finished products Costs incurred to convert materials into the finished product
Component DM + DL DL + MOH

EXAMPLE 1: COST CLASSIFICATION

√ THE APPROPRIATE
CALCULATE
COST ITEM
Non-
Manufacturing Cost Manufacturing
DM DL MOH SE AE Cost
Manufacturing Prime Conversion Direct Indirect
RM Cost Cost Cost Cost Cost
Factory equipment rental 60,000 √ 60,000 60,000 60,000
General manager salaries 500,000 √ 500,000
Direct materials 20,000,000 √ 20,000,000 20,000,000 20,000,000
Factory utilities 80,000 √ 80,000 80,000 80,000
Factory line operator 12,000,000 √ 12,000,000 12,000,000 12,000,000 12,000,000
wages
Indirect materials 10,000,000 √ 10,000,000 10,000,000 10,000,000
Office supplies expenses 400,000 √ 400,000
Factory supervisor salaries 1,700,000 √ 1,700,000 1,700,000 1,700,000
Advertising expenses 125,000 √ 125,000
Office worker salaries 800,000 √ 800,000
Depreciation on factory 90,000 √ 90,000,000 90,000,000 90,000,000
building
Depreciation on office 40,000 √ 40,000
equipment
Factory property taxes 7,000 √ 7,000 7,000
TOTAL 133,847,000 32,000,000 113,847,000 32,000,000 101,840,000 1,865,000

2
 ACCOUNTING 2 AA025
KOLEJ MATRIKULASI PERAK
2020/2021

PRODUCT COSTS AND PERIOD COSTS

Product Cost Period Cost
Definition Inventoriable costs and involved in manufacturing finished Non inventoriable costs and do not involve in manufacturing
products. finished products.
Examples DM, DL,MOH SE, AE

STATEMENT OF COST OF GOODS MANUFACTURED AND STATEMENT OF PROFIT OR LOSS

EXAMPLE 2: Gua Tempurung Factory has the following information for the year ended 31 December 2021.

RM RM
Advertising expenses 125,000 Finished goods inventory, beginning 540,000
Depreciation on building (1 : 4, Office: Factory) 100,000 Finished goods inventory, ending 400,000
Depreciation on office equipment 40,000 General manager salaries 500,000
Direct material inventory, ending 700,000 Indirect materials used 10,000,000
Direct materials inventory, beginning 500,000 Office worker salaries 800,000
Direct materials purchased 20,000,000 Sales 100,000,000
Factory equipment rental 60,000 Supplies expenses (Office 1/3, Factory 2/3) 600,000
Factory line operator wages 12,000,000 Utilities (50% Office, 50% Factory) 200,000
Factory property taxes 7,000 Work-in-process inventory, beginning 12,000,000
Factory supervisor salaries 1,700,000 Work-in-process inventory, ending 7,000,000

Prepare the Statement of Cost of Goods Manufactured and the Statement of Profit or Loss for the year ended 31 December 2021.

3
 ACCOUNTING 2 AA025
KOLEJ MATRIKULASI PERAK
2020/2021

Gua Tempurung Factory Gua Tempurung Factory

Statement of Cost of Goods Manufactured Statement of Profit or Loss Statement
for the year ended 31 December 2021 for the year ended 31 December 2021
RM RM 0000 RM RM
Direct Materials: Sales 100,000,000
Direct material inventory, beginning 500,000 (-) Cost of Goods Sold:
+ Direct materials purchased 20,000,000 Finished goods inventory, beginning 540,000
Direct materials available for use 20,500,000 + Cost of Goods Manufactured 49,147,000
(-) Direct materials inventory, ending (700,000) Cost of goods available for sale 49,867,000
Direct Materials Used 19,800,000 (-) Finished goods inventory, ending (400,000)
+ Direct Labor Cost of Goods Sold (49,287,000)
Factory line operator wages 12,000,000 Gross Profit 50,713,000
+ Manufacturing Overhead: (-) Operating Expenses:
Depreciation on building (4/5 x 100,000) 80,000 Advertising expenses 125,000
Factory equipment rental 60,000 Depreciation on building (1/5 x 100,000) 20,000
Factory property taxes 7,000 Depreciation on office equipment 40,000
Factory supervisor salaries 1,700,000 General manager salaries 500,000
Indirect materials used 10,000,000 Office worker salaries 800,000
Supplies expenses (2/3 x 600,0000) 400,000 Supplies expenses (1/3 x 600,0000) 200,000
Utilities (50% x 200,000) 100,000 Utilities (50% x 200,000) 100,000
Total manufacturing overhead 12,347,000 Total operating expenses (1,785,000)
Current Manufacturing Cost 44,147,000 Net profit 48,928,000
+ Work in process, beginning 12,000,000
Total Work in Process 56,147,000
(-) Work in process, ending (7,000,000)
COST OF GOODS MANUFACTURED 49,147,000