Cost Concept

Group 1
Objectives

I Three Basic Manufacturing Cost

II Understanding Cost and Classifications:

Product Cost and Period Cost
III Method

IV The Cost of Goods Manufactured

Schedule

V Quick Check

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 2022 April 24
I THREE BASIC MANUFACTURING
COST

Direct Direct Manufacturing

Materials Labor Overhead

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3
 2022 April 24
I THREE BASIC MANUFACTURING
COST

Direct
Materials
• raw materials that become an integral part of the
product that can be conveniently traced directly
to it.
• the cost of direct materials which can be easily
identified with the unit of production.

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3
 2022 April 24
I THREE BASIC MANUFACTURING

Manufacturing
COST

Overhead
• costs that cannot be traced directly to specific
units produced.
• It generally applies to indirect labor and indirect
cost.

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3
 2022 April 24
I THREE BASIC MANUFACTURING
COST

Direct
Labor
• those labor costs that can be easily traced to
individual units of product.
• is production or services labor that is assigned to
a specific product, cost center, or work order.

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3
 1
2
Product costs
Period costs
include direct materials,
include all
direct labor, and
selling costs and
manufacturing
administrative costs.
overhead
 Learning Objective #2

Understanding cost
classifications: Product
cost and Period cost
 Classification of Costs
Direct Direct Manufacturing
Material Labor Overhead

Prime Cost Conversion Cost

Comparing Merchandising and
Manufacturing Companies

Merchandisers: Manufacturing:
• Buy finished • Buy raw
goods materials
• Sell finished • Produce and sell
goods finished goods
 Balance sheet
Merchandiser Manufacturer
Current Asset
Current Asset - Cash
- Cash - Receivables
- Receivables - Inventory
- Merchandise ⚬ Raw Materials
Inventory ⚬ Work In Process
⚬ Finished Goods

Inventories
Raw Materials
- Raw materials are the input goods or
inventory that a company needs to
manufacture its products. Examples of raw
materials include steel, oil, corn, grain,
gasoline, lumber, forest resources, plastic,
natural gas, coal, and minerals.
- Materials waiting to be processed.
Work In process
- Products that are partially completed.
- The cost of unfinished goods in the manufacturing
process including labor, raw materials, and overhead.
WIPs are considered to be a current asset on the
balance sheet.
Finished Goods
Finished goods are a category of inventory
unique to manufacturing businesses. They are
products that have completed the
manufacturing process but have not yet been
sold or distributed to vendors or retailers.
 learning Objective #3

Methodology
The Income Statement
Cost of goods sold for manufacturers differs only slightly from
cost of goods sold for merchandise

Merchandising Company Manufacturing Company

Cost of goods sold: Cost of goods sold:
Beg. Beg. finished
merchandise 14,200 goods inv. 14,200
inventory
+ Purchases 234,150 + Cost of goods
manufactured 234,150
Goods availalble
for sale 248,350 Goods availalble
for sale 248,350
-Ending
merchandise -Ending
inventory (12,100) finished goods
inventory (12,100)
= Cost of
goods 236,250
= Cost of
sold goods 236,250
sold
Basic Equation for Inventory Accounts

Beginning Additions Ending Withdrawals

from
balance to inventory balance inventory
Example
If your inventory balance at the beginning of the month was
1,000, you bought 100 during the month, and sold 300 during
the month, what would be the balance at the end of the
month?

Solution
1000 + 100 = 1, 100
1, 100 - 300 = 800

Answer: 800
 learning Objective #4

The Cost of Goods

Manufactured Schedule
Schedule of Cost of Goods
manufactured
• calculates the cost of raw material, direct labor, and
manufacturing overhead used in the production
• calculates the manufacturing costs that are
associated with the goods that were finished during
the period
Flow of Product Costs
• As materials are withdrawn from
the raw materials inventory and use
it for the production process, it is
now called as direct materials
Flow of Product Costs

Conversion costs
are the expenses of
converting raw
materials into
finished goods.
Flow of Product Costs

the total manufacturing cost incurred

in the period are added to the work in
process beginning balance.
Flow of Product Costs

All expenses related with

completed
/goods/items throughout the
period
Flow of Product Costs
Manufacturing Cost Flows
Quick Check
The Direct materials Mr. Reyes used in their production totaled
P95,000, Direct labor was P135,000 and the factory overhead was
P60,000. what were the total manufacturing costs incurred for the
month?

a. P290,000
b. P230,000
c. 155,000
d. none of the above
Quick Check
The Direct materials Mr. Reyes used in their production totaled
P95,000, Direct labor was P135,000 and the factory overhead was
P60,000. what were the total manufacturing costs incurred for the
month?
SOLUTION:
a. P290,000 Direct Mat. P95,000
b. P230,000 +Direct lab. P135,000
c. 155,000 +MFG. Overhead P60,000
d. none of the above =Mfg. costs incurred P290,000
for the month
Quick Check
Beginning finished goods inventory of Ms. dela Cruz was
P180,000. The cost of goods manufactured for the month was
P525,000. And the ending finished goods inventory was
P150,000. What was the cost of goods sold for the month?
SOLUTION:
a. P675,000 Direct Mat. P95,000
b. none of the above +Direct lab. P135,000
c. P555,000 +MFG. Overhead P60,000
d.P705,000 =Mfg. costs incurred P290,000
for the month
Quick Check
Beginning finished goods inventory of Ms. dela Cruz was
P180,000. The cost of goods manufactured for the month was
P525,000. And the ending finished goods inventory was
P150,000. What was the cost of goods sold for the month?

a. P675,000
b. none of the above
c. P555,000
d.P705,000 SOLUTION:
P180,000 + P525,000= 705,000
P705,000 - P150,000= P555,000