Chapter 3 The General

Schedule of costs
Cost classification according to business functions
Manufacturing and non manufacturing costs
The Income Statement
The Schedule of cost of goods manufactured
The begining and ending work in process
The equivalent units of production
 Cost classification according to business
functions.
VALUE CHAIN:

To identify the major business functions that add value a

company’s products or services.
Administration, Procurement
Reseach and Development

Inbound
Operations Outbound Marketing Service
logistics
logistics

These activities are generic.

Each activity includes specific activities that vary by
industry. Which activities are undertaken?
 Cost classification according to business
functions.
VALUE CHAIN:

For an airline...

Administration, Procurement
Reseach and Development

Traffic management Selling

channels
Catering service Claims
Fuel control E-commerce
Luggage
Pricing policy
Marketing
reserach
 Company Classification
MANUFACTURING COMPANIES:
Convert raw materials into a product. The company
sells the producto either to other companies or to
users.
Manufacturing includes restaurants and other “service
type” companies, as well as automobile or clothes
prodution.

MERCHANDISING COMPANIES:
Buy finished productos and resell the products to
customers.

Valuing INVENTORIES is easier in a merch. Company

 Cost classification according to business
functions.

• MANUFACTURING COSTS
• Inbound logistics
• Operations

• NON MANUFACTURING COSTS

• Selling costs
• Marketing costs
• Administrative costs
• Research and Development costs
Manufacturing Costs or industrial cost
Direct Direct Manufacturing
Materials Labor Overhead

The Product
Direct Materials
Those raw materials that become an integral part of
the product and that can be conveniently traced to it.
It does not imply unprocessed natural resources.
The finished product of one company can be the raw
material of another.

Example: A radio installed in an automobile

Direct Labour
Those labour costs can be easily traced to individual
units of product.
In some industries, sophisticated equipment is
replacing direct labor.

Example: automobile assembly workers

Manufacturing Overhead
Manufacturing costs that cannot be traced directly to specific
units produced.
Also called indirect manufacturing cost, factory overhead

Costs Related
Indirect Indirect to the
Materials Labor Manufacturing
Facility

Manufacturing Overhead
Manufacturing Overhead
Materials used to support the production
process.
Indirect Is not worth to trace the work of insignificant
Materials materials to end product (solder, glue…)
Examples: lubricants and cleaning supplies
used in the automobile assembly plant.

Wages paid to employees who are

not directly involved in production
Indirect work.
Labor Examples: maintenance workers,
janitors and security guards.

Costs Related to Costs related to the manufacturing

facility.
the
Manufacturing Examples: property taxes,
Facility depreciation, insurance, repairs.
Classifications of Manufacturing Costs
Manufacturing costs are often
classified as follows:

Direct Direct Manufacturing

Material Labor Overhead

Prime Conversion
Cost Cost
Nonmanufacturing Costs
Marketing and selling costs . . .
 Costs necessary to get the order and deliver the
product. Costs of making sales, cardboard for
magnetic card storage….
Administrative and overhead costs . . .
 All executive, organizational, and clerical costs
that are not classified as production or marketing
costs.
Quick Check 
Which of the following costs would be
considered manufacturing overhead at Boeing?
(More than one answer may be correct.)
A. Depreciation on factory forklift trucks.
B. Sales commissions.
C. The cost of a flight recorder in a Boeing 767.
D. The wages of a production shift supervisor.
Quick Check 
Which of the following costs would be
considered manufacturing overhead at Boeing?
(More than one answer may be correct.)
A. Depreciation on factory forklift trucks.
B. Sales commissions.
C. The cost of a flight recorder in a Boeing 767.
D. The wages of a production shift supervisor.
Concept of Cost: What does cost mean?
It has multiple meanings and different types of
costs are used in different situations.

• Cost classifications for preparing external

financial statements.
• Cost classifications to describe cost
behaviour
• Cost classifications for assigning costs.
• Cost classificaitons for decision making.
Product Costs versus Period Costs
Product costs Period costs

To understand this difference we must go to the accrual and

matching principles.
The accrual concept states that costs should be
considered in the income statement of the period in
which they are incurred.

The mathing principle works in accrual accounting and

states that costs are recognized in the income statement
of the period that benefit from hat cost.

As products will be sold, then the costs should be

recognised as expense only when the sale takes place.
Product Costs versus Period Costs
Product costs are added
to units of product.
They are incurred and
not treated as expenses
until de units are sold.
Inventory Expense
Period costs are not
included in product
costs. They are
expensed on the
income statement.
Expense

Sale
cost of the
good
produced

Income
Balance Income
Statement
Sheet Statement
Product Costs versus Period Costs
Product costs include Period costs are all
direct materials, direct selling and
labor, and administrative costs.
manufacturing
overhead.
Inventory Expense Expense

cost of the Sale

good
produced

Balance Income Income

Sheet Statement Statement
Quick Check 
Which of the following costs would be
considered period cost rather than a product
cost in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
Quick Check 
Which of the following costs would be
considered a period rather than a product cost
in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
Quick Check 
Which of the following transactions would
immediately result in an expense? (There may
be more than one correct answer.)
A. Work in process is completed.
B. Finished goods are sold.
C. Raw materials are placed into production.
D. Administrative salaries are accrued and
paid.
Quick Check 
Which of the following transactions would
immediately result in an expense? (There may
be more than one correct answer.)
A. Work in process is completed.
B. Finished goods are sold.
C. Raw materials are placed into production.
D. Administrative salaries are accrued and
paid.
Balance Sheet = Statement of financial position
Merchandiser Manufacturer
Current assets Current Assets
 Cash  Cash
 Receivables  Receivables
 Prepaid expenses  Prepaid Expenses
 Stocks (Merchandise  Stocks: (Inventories)
inventory) Raw Materials
Work in Process
Finished Goods
Balance Sheet
Merchandiser Manufacturer
Current assets Current Assets
 Cash  Cash
 Receivables  Receivables
 Prepaid expenses  Prepaid Expenses
 Merchandise inventory  Inventories
Raw Materials
Work in Process
Goods purchased
Finished Goods
from suppliers and
awaiting resale to
customers.
Balance Sheet- at a specific date
Merchandiser Manufacturer
Materials waiting to
Current assets Current Assets are
be processed,
 Cash
 Cash used to make a
product
 Receivables  Receivables
 Prepaid expenses  Prepaid Expenses
 Merchandise inventory
Partially complete  Inventories
products – some Raw Materials
material, labor, or Work in Process
overhead has been Finished Goods
added.
Completed products
awaiting sale.
Manufacturing Companies:
Classifications of Inventory

Examples of inventory classifications for production

of a baseball.

Round ball of yarn

Raw hide, yarn, and 2 pieces of
small rubber ball Baseball
raw hide cut into
appropriate shape

Raw Materials Work-in-Process Finished Goods

The Income Statement
Merchandising Company
Sales…………………………
(Cost of goods sold)………..
=Gross margin………………
(Selling and administrative
expenses)
Selling expenses
Administ expenses
=Net Operating income
Manufacturing Company
Sales…………………………
(Cost of goods sold)………..
=Gross margin………………
(Selling and administrative
expenses)
Selling expenses
Administ expenses
=Net Operating income
The Income Statement
Cost of goods sold for manufacturers differs slightly
from cost of goods sold for merchandisers.
Merchandising Company Manufacturing Company
Sales………………………… Sales…………………………
(Cost of goods sold)……….. (Cost of goods sold)………..
=Gross margin……………… =Gross margin………………
(Selling and administrative (Selling and administrative
expenses) expenses)
Selling expenses Selling expenses
Administ expenses Administ expenses
=Net Operating income =Net Operating income
 The Income Statement
Merchandising Company
Cost of goods sold:
Beginning merchandise
inventory $ 14.200
Manufacturing Company
Cost of goods sold:
April, 1
Beginning finished
goods inventory $ 14.200

+ Cost of goods
ADDITIONS manufactured 234.150
+ Purchases 234.150 throughout the month
WITHDRAWALS Goods available
Goods available
throughout the month for sale $ 248.350
for sale $ 248.350

- Ending April, 30 - Ending

merchandise finished goods
inventory (12.100) inventory (12.100)
= Cost of goods = Cost of goods
sold $ 236.250 sold $ 236.250
 Inventory Flows
Beginning Ending
Inventory inventory
(OPENING + ADDITIONS = WITHDRAWALS + (ENDING
STOCKS) STOCKS)

5 baseballs + 15 baseballsor
= 19 baseballs + 1 baseball

Beginning Ending
WITHDRAWALS = Inventory (OS) + ADDITIONS – inventory (ES)

19 baseballs = 5 baseballs + 15 baseballs - 1 baseball

…all inventories follow the same logic

Schedule of Cost of Goods Manufactured
Raw Work In Process Finished goods
Materials

+ Cost Direct materials

+ Costs: Direct labor
+ Cost indirect Manufacturing overheads
Schedule of Cost of
Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process

+ Beginning raw
materials inventory
+ Raw materials
purchased
Beginning inventory
= Raw materials is the inventory
available for use
in production
carried over from
- Ending raw materials the prior period.
inventory
= Raw materials used
in production
Quick Check 
Beginning raw materials inventory was $32,000.
During the month, $276,000 of raw material was
purchased. A count at the end of the month
revealed that $28,000 of raw material was still
present. What is the cost of direct material
used?
A. $276,000
B. $272,000
C. $280,000
D. $ 2,000
Quick Check 
Beginning raw materials inventory was $32,000.
During the month, $276,000 of raw material was
purchased. A count at the end of the month
revealed that $28,000 of raw material was still
present. What is the cost of direct material
used?
A. $276,000
B. $272,000
C. $280,000
D. $ 2,000
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials

materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
– Ending raw materials
inventory
= Raw materials used As items are removed from raw
in production materials inventory and placed into
the production process, they are
called direct materials.
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials

materials inventory + Direct labor
+ Raw materials + Mfg. overhead
purchased = Total manufacturing
= Raw materials costs
available for use
in production
– Ending raw materials
inventory
= Raw materials used
in production
 Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Conversion
Beginning raw Direct materials
materials inventory + Direct labor
costs are costs
+ Raw materials + Mfg. overhead incurred to
purchased = Total manufacturing convert the
= Raw materials costs
available for use
direct material
in production into a finished
– Ending raw materials product.
inventory
= Raw materials used
in production
Quick Check 
Direct materials used in production totaled
$280,000. Direct labor was $375,000 and
factory overhead was $180,000. What were
total manufacturing costs incurred for the
month?
A. $555,000
B. $835,000
C. $655,000
D. Cannot be determined.
Quick Check 
Direct materials used in production totaled
$280,000. Direct labor was $375,000 and
factory overhead was $180,000. What were
total manufacturing costs incurred for the
month?
A. $555,000
B. $835,000
C. $655,000
D. Cannot be determined.
Cost of Goods Manufactured and the
beginning and ending WIP
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in

materials inventory + Direct labor process inventory 2
+ Raw materials + Mfg. overhead + Total manufacturing
purchased = Total manufacturing costs
10
= Raw materials costs = Total work in
10 pencils
available for use process for the
in production period
– Ending raw materials
inventory All manufacturing costs incurred
= Raw materials used during the period are added to the
in production
beginning balance of work in
process.
 Cost of Goods Manufactured and the
beginning and ending WIP
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in +2

materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturing
purchased = Total manufacturing costs +10
= Raw materials costs = Total work in =12
available for use process for the
in production period
– Ending work in
Costs associated with the goods that process inventory -3
= Cost of goods
are completed during the period are =9
manufactured.
transferred to finished goods
inventory.
Quick Check 
Beginning work in process was $125,000.
Manufacturing costs incurred for the month
were $835,000. There were $200,000 of
partially finished goods remaining in work in
process inventory at the end of the month.
What was the cost of goods manufactured
during the month?
A. $1,160,000
B. $ 910,000
C. $ 760,000
D. Cannot be determined.
Quick Check 
Beginning work in process was $125,000.
Manufacturing costs incurred for the month
were $835,000. There were $200,000 of
partially finished goods remaining in work in
process inventory at the end of the month.
What was the cost of goods manufactured
during the month?
A. $1,160,000
B. $ 910,000
C. $ 760,000
D. Cannot be determined.
Cost of Goods Manufactured and the
beginning and ending Work In Process
Work
In Process Finished Goods

Beginning work in Beginning finished +3

process inventory goods inventory
+ Manufacturing costs + Cost of goods
+9
for the period manufactured
= Total work in process = Cost of goods =12
for the period available for sale
– Ending work in - Ending finished
process inventory goods inventory -1
= Cost of goods Cost of goods
manufactured sold
=11
Quick Check 
Beginning finished goods inventory was
$130,000. The cost of goods manufactured for
the month was $760,000. And the ending
finished goods inventory was $150,000. What
was the cost of goods sold for the month?
A. $ 20,000.
B. $740,000.
C. $780,000.
D. $760,000.
Quick Check 
Beginning finished goods inventory was
$130,000. The cost of goods manufactured for
the month was $760,000. And the ending
finished goods inventory was $150,000. What
was the cost of goods sold for the month?
A. $ 20,000.
B. $740,000.
C. $780,000.
D. $760,000.
Manufacturing Cost Flows
Balance Sheet Income Statement
Costs Inventories Expenses
Material Purchases Raw Materials

Direct Labor Work in

Process
Manufacturing
Overhead Cost of
Finished
Goods
Goods
Sold

Selling and Period Costs Selling and

Administrative Administrative
Equivalent Units of Production
Equivalent units are the product of the number of
partially completed units and the percentage
of completion of those units.

We need to calculate equivalent units because a

department usually has some partially completed units
in its beginning and ending inventory.
Equivalent Units of Production
It is the concept of expressing partially completed
products as a smaller number of fully completed
units.

+ =

Two one-half completed products are equivalent to

one completed product. So, 10,000 units 70%
complete are equivalent to 7,000 completed units.
10.000 partially completed products x 0,70 in its degree of progress = 7.000
completed units
Quick Check 

For the current period, Matrix started 15,000

units and completed 10,000 units, leaving
5,000 units at 30 percent of their degree of
completion. How many equivalent units of
production did Matrix have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
Quick Check 

For the current period, Matrix started 15,000

units and completed 10,000 units, leaving
5,000 units in process 30 percent complete.
How many equivalent units of production did
Matrix have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
Equivalent Units of Production

To calculate the cost per

equivalent unit for the period:

Cost per Costs for the period

equivalent = Equivalent units of production
unit for the period
Quick Check 

Now assume that Matrix incurred $27,600 in

production costs for the 11,500 equivalent
units of production. What was Matrix’s
cost per equivalent unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
Quick Check 

Now assume that Matrix incurred $27,600 in

production costs for the 11,500 equivalent
units of production. What was Matrix’s
cost per equivalent unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
 Schedule of Cost of Goods Manufactured
Work In Finished
Process goods

+ Cost Direct 60% 100%

Materials materials

+ Costs: Direct
labor 100%
30%
Conversion
+ Cost indirect
Manufacturing
overheads
Weighted Average Method
Matrix, Inc. (incorporation) reported the following
activity in Mixing Department for the month of april:
Percent Completed
Units Materials Conversion
Work in process, april 1 300 40% 20%

Units started into production in april 6.000

Total units in period 6.300

Units completed and transferred out 5.400 100% 100%

of the Mixing Department during april

Work in process, april 30 900 60% 30%

Weighted Average Method

Equivalent units are calculated as follows:

Materials Conversion
Units completed and transferred
out of Mixing in June 5.400 5.400
equivalent units equivalent units
Weighted Average Method

Equivalent units are calculated as follows:

Materials Conversion
Units completed and transferred
out of Mixing in June 5.400 5.400
Work in process June 30 equivalent units equivalent units
(900 units x 60% complete) 540
equivalent units
Weighted Average Method

Equivalent units are calculated as follows:

Materials Conversion
Units completed and transferred
out of Mixing in June 5.400 5.400
Work in process June 30 equivalent units equivalent units
(900 units x 60% complete) 540 equivalent units
(900 units x 30% complete) equivalent units 270
Equivalent units of production
in the Mixing Deparment 5.940 5.670

equivalent units equivalent units

Weighted Average Method
Equivalent units of production always equals:
Equivalent units are
Units completed calculated
and transferred as follows:
+ Equivalent units remaining in work in process
Materials Conversion
Units completed and transferred
out of Mixing in June 5,400 5,400
Work in process June 30
(900 units x 60% complete) 540
(900 units x 30% complete) 270
Equivalent units of production
in the Mixing Deparment 5,940 5,670
End of Chapter 3