ACCT 1003_ Cost Classification _I

Fields of Accounting

Financial Accounting
External Users

Management Accounting
Internal Users
Prepared by Joan Thomas-Stone

Types of Business Organizations

Differences Between FA & MA
❑ Service Organizations
Financial Accounting Management Accounting – Offer an intangible service
External users (Decisions Internal users(Decisions for – Labour intensive (labour - greatest % of cost)
about entity) entity)
– No inventory
Monetary events Monetary & non-monetary events
e.g. law firms, accounting firms, hospitals, barbers,
GAAP (Objective) Non-GAAP (Subjective) hairdressers etc.
For specific period On demand
Independent audit (Verify
Inventory includes assets of a business that are:
No independent audit
financial information) Purchased for resale/produced for sale
Uses historical data Uses historical & projected data In the process of being produced for sale
(Backward looking) (Forward looking) Purchased to be used in producing items
Wholistic view Departments or centres to be sold
Cost, revenue, profit, investment
in the ordinary course of business.
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ACCT 1003_ Cost Classification _I

Types of Business Organizations Types of Business Organizations

❑Manufacturing Businesses
❑Merchandising Businesses o Buy raw material
o Use labour & machinery to convert the raw
– Buy finished products and resell them at a material into FG
mark-up
o 3 inventories – FG, WIP & RM
– One inventory (Finished Goods or Merchandise e.g. garment industry, food/beverage industry,
Inventory) furniture making industry etc.
e.g. supermarkets, wholesales, department
stores, jewelry stores Purchased for resale/produced for sale -FG
In the process of being produced for sale -WIP
Purchased to be used in producing items to be resold - RM
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Balance Sheet Calculating COGS _ Equation Method

Merchandising Business Manufacturing Business For a merchandiser:
Current Assets: Current Assets: COGS = Beginning FG Inventory + Purchases – Ending FG Inventory
✓ Cash ✓ Cash
✓ Accounts Receivable ✓ Accounts Receivable
For a manufacturer:
✓ Prepaid Expenses ✓ Prepaid Expenses
COGS = Beginning FG Inventory + COGM – Ending FG Inventory
✓ Finished Goods Inventory ✓ Inventories:
Finished Goods
✓ COGM for the manufacturer is equivalent to
Work in Process
Purchases for the merchandiser.
Raw Materials

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ACCT 1003_ Cost Classification _I

Calculating COGS- Statement Method

Manufacturing Business-COGM
Merchandising Business
Beginning Finished Goods Inventory XXXXXX
+ Purchases XXXXXX ✓COGM = Beg. WIP + Total Manufacturing
Cost of Goods Available For Sale XXXXXX Costs (TMC) – End. WIP.
- Ending Finished Goods Inventory XXXXXX
= Cost Of Goods Sold XXXXXX
What is TMC?
Manufacturing Business
Beginning Finished Goods Inventory XXXXX
+ Cost of Goods Manufactured XXXXX
Cost of Goods Available For Sale XXXXX
- Ending Finished Goods Inventory XXXXX
= Cost of Goods Sold XXXXX

Cost Classification 1. Classification Based on Function

1) Function ✓ ❑Functional Costs
Product Costs
2) Product ✓ Production/Manufacturing ✓ Expensed when units are
sold (COGS) - IS
3) Production Volume/Activity Level ✓ Administrative ✓ Unsold units - BS

4) Degree of Control Selling

5) Extent of Relevance Distribution
R&D Period Costs
✓ Expensed in period incurred- IS

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ACCT 1003_ Cost Classification _I

Production/Product Costs
2. Classification Based on Product 1. Direct Material – Major part of the finished product e.g. leather
for shoes, sheet metal for car, flour for bread
❑ Production/Product/Manufacturing Costs
2. Direct Labour – wages of persons who work on raw material
1) Direct
2) Indirect 3. Manufacturing O/H– All costs other than DM & DL

❑Whether a cost is direct or indirect has to do with ▪ Indirect Material – Not major part of finished product e.g. oils &
its traceability. grease (production machinery), glue, nails , washers & screws

❑The main elements of production cost are: ▪ Indirect Labour –e.g. wages for plant supervisors, plant janitors
Direct Material /Raw Material Direct Expenses ▪ Other
Direct Labour ✓Hiring of Special Equipment ✓Depreciation , insurance & repairs of Factory Building & Equipment
✓Special Design Costs
Manufacturing Overhead ✓Royalties ✓Plant Utilities

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Calculating Production Costs SUMMARY DM

Direct + PC
(1) Production Costs = DM + DL + Manuf. O/H Production
DL
✓ The sum of all direct costs is equal to the Prime Indirect (Production O/Hs)

Cost of the product.

Prime Cost = DM + DL
(2) Production Costs = Prime Cost + Manuf. O/H TC Administrative

Conversion Costs = DL + Manufacturing O/H Selling Non-Production O/Hs

(3) Production Costs = DM + Conversion Costs

Distribution
DL + Production O/Hs = Conversion Costs (CC)
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ACCT 1003_ Cost Classification _I

Cost Summary Calculating COGM _ Equation Method

TMC to Account For
Direct Material Used XXXXX
Direct Labour XXXXX
*Direct Expense XXXXX
(1) COGM = Beg. WIP Inventory + TMC – End. WIP Inventory
PRIME COST XXXXX
OR
Production/Manufacturing O/Hs XXXXX
COGM = TMC + Beg. WIP Inventory – End. WIP Inventory
PRODUCTION COST XXXXX
Non-Production O/Hs: If Beg WIP = 0, TMC = Total Manufacturing Cost to A/C For
Selling XXXXX
(2) TMC = DM Used + DL Incurred + Manufacturing O/H
Distribution XXXXX
Administrative XXXXX XXXXX
(3) DM Used =Beg. DM Inventory + DM Purchased – End. DM Inventory
TOTAL COST XXXXX

Production = Manufacturing = Factory

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Calculating COGM _ Statement Method Manufacturer

Schedule of COGM Income Statement
Beginning WIP Inventory XXXXX
Sales Revenue XXXXX
Direct /Raw Material Used:
Less COGS:
Beginning RM Inventory XXXXX
Beginning FG Inventory XXXXX
RM Purchased XXXXX
COGM XXXXX
RM Available for Usage XXXXX
Cost of Goods Available For Sale XXXXX
Ending RM Inventory (XXXXX) XXXXX
Ending FG Inventory (XXXXX) (XXXXX)
Direct Labour XXXXX
GROSS PROFIT XXXXX
Manufacturing Overhead XXXXX
Less Non-Production O/Hs:
Total Manufacturing Costs Incurred XXXXX
Selling XXXXX
Total Manufacturing Costs To Account For XXXXX
Distribution XXXXX
Ending WIP Inventory (XXXXX)
Administrative XXXXX (XXXXX)
Cost of Goods Manufactured XXXXX
NET PROFIT XXXXX

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