2.

Direct Labor – represents compensation

Manufacturing paid for workers directly involved in
making the product. (Ex. wages for
MANUFACTURING shoemakers, cutters, assemblers)
3. Manufacturing expenses or factory
➢ A manufacturing business buys raw overhead - represents the expenses
materials and changes these into incurred in the factory other than for the
finished products to make them ready for direct materials and direct labor. (Ex.
sale. indirect materials, supplies, power,
Manufacturer water, indirect labor, repairs and
maintenance, depreciation, insurance,
1. Buys raw materials rent, and supervision.)
2. Changes the form
3. Sells this as a finished product

A manufacturing business maintains four kinds PRIME COSTS

of inventory:

a. Finished Goods Inventory Direct Direct

➢ Represents the finished product Materials Labor
ready for sale to wholesalers and
retailers.
b. Work in Process Inventory
➢ Represents goods still in the process CONVERSION COSTS
of manufacturing.
c. Raw Materials Inventory Direct Factory
➢ Represents the material needed to Labor Overhead
make the product.
d. Factory Supplies Inventory
➢ Consists of materials use in the Product Cost may be calculated by adding
factory but not necessarily forming an prime costs to the Factory Head or adding
integral part of the finished product. conversion costs to Direct Materials.
(ex. detergents, oil, varnish, grease,
sandpaper)
PERIOD COSTS

A manufacturing company must also incur

PRODUCT COST
distribution and administrative expenses. These
The cost to manufacture a product will include are incurred based on the passage of time rather
three cost elements: than based on the manufacturing activity of the
firm.
1. Direct Materials – represents the
material that forms an integral part of the
product. (Ex. leather for shoes and bags;
wood in making furniture)
Distribution costs and expenses such as COMMON COSTS
freight, advertising, sales salaries, sales
➢ Also called indirect costs or
commission, depreciation of delivery trucks,
allocated costs. These are costs
repairs and maintenance of delivery trucks, and
which cannot be identified or traced
store supplies are necessary to promote and
to a particular department such as
distribute the products.
rent, utilities, building depreciation.
Administrative expenses such as office
salaries, insurance, taxes and licenses,
depreciation of office equipment, repairs and Raw materials Inventory, beg. xx
maintenance of office equipment are necessary
for the general administration of the firm. Add: Net purchases xx

Total Goods Available for Sale xx

Period costs are recognized in the income Less: Raw materials Inventory, end. (xx)
statement while product costs are presented in Raw materials used xx
the statement of financial position.
Direct Labor xx

Manufacturing Overhead xx
SALES PRICE
Total manufacturing costs xx
To arrive at the sales price, a certain mark-up is
added. Be sure that the mark-up is large enough Add: Work in Process, beg. xx
to absorb the operating expenses and earn Total work put into process xx
enough profit.
Less: WIP, ending (xx)
✓ Mark-up is represented by the gross
income or gross profit. However, the Cost of Goods Manufactured xx
markup is also the net income if all the
Add: Finished Goods, beg. xx
units are sold.
✓ Sales price may be computed based on Total goods available for sale xx
total cost. This is called the Full Cost
Less: Finished Goods, end. (xx)
Pricing method.
Cost of Goods Sold xx

Unit Cost = Total Production Cost / Total no.

of units produced Sales xx
o Total production cost = DM + DL + FOH Less: Cost of Goods Sold (xx)
Unit Sales Price = Total Sales / Total no. of Gross Income xx
units produced
Other expenses (xx)
o Total cost = product cost + selling and
Net Income xx
administrative expenses
o Total sales = Total cost + Markup
EXAMPLES NO. 1
EXAMPLE NO. 2