Controllership

WEEK 3
(Class 5)

Prof. Bianca Quirantes Checon

CLASS 5 (AUG 16)
Birthday celebration
Direct materials (part I)
What do you remember from our past class?
What is ABSORPTION COSTING?

Costs are added to Direct materials

the product as it is
manufactured!

PRODUCT
(or service)

Direct labor Indirect costs

What is ABSORPTION COSTING?

Direct materials

THE
PRODUCTION
PRODUCT
(or service)
FLOW!
Direct labor Manufacturing
overhead
The production flow

• Raw materials inventory

• Manufacturing overhead *
• Work in process inventory
• Finished goods inventory e.g. the brigadeiro
production flow!
• Total manufacturing costs
• Cost of goods manufactured
• Cost of goods sold
The production flow

(1) Total manufacturing costs = Direct materials + Direct

labor + Manufacturing overhead

(2) Cost of goods manufactured = Total manufacturing costs +

+ Beginning work in process inventory (-) Ending work in process
inventory

(3) Cost of goods sold = Beginning finished goods inventory + cost

of goods manufactured (-) Ending finished goods inventory
Company A (Exercise 3)

From Company A accounting books, we can extract the following

information:

• Raw materials purchased at the month: $500,000

• Return, at the same month, of 20% of raw materials purchase
• Direct labor: $600,000
• Manufacturing overhead: $300,000

Required:
Estimate the amounts for: Total manufacturing costs, Cost of goods
manufactured, and Cost of Goods Sold, for each one of the
following assumptions.
Absorption costing
Direct materials and cummulative/non-cummulative taxes (part I).
 Production flow and cost assigning
(absorption costing*)

Work in process
inventory (production ends)
Direct materials +
(inventories)
+ + Finished Goods inventory
Direct labor

Manufacturing overhead (goods are sold)

Cost of Goods Sold

(I/S)
 Production flow and cost assigning
(absorption costing*)

Work in process
inventory (production ends)
Direct materials +
(inventories)
+ + Finished Goods inventory
Direct labor

Manufacturing overhead (goods are sold)

Cost of Goods Sold

(I/S)
Direct materials inventory: acquisition costs

Unknown author; picture licensed under

CC BY-NC-ND.
Direct materials inventory: acquisition costs

Which are the

‘acquisition costs’ for
the direct materials
inventory?
Direct materials inventory: acquisition costs

Acquisition cost (“how much you have paid”) may include:

+ ‘Net price’ (the direct material production cost + mark up)

+ Freight charges (& import duties, if applied)

+ Insurance (if applied)

+ Handling (if applied)

+ Taxes
Direct materials inventory: acquisition costs

Acquisition cost (“purchase price”) may include:

+ ‘Net price’ (the direct material production cost + a mark up)

+ Freight charges (& import duties, if applied)

+ Insurance (if applied)

+ Handling (if applied)

+ Taxes
Direct materials inventory: non-cumulative taxes

• IPI: taxes over manufactured products (“Imposto sobre Produtos

Industrializados”)

→ Federal tax.

→ Due to sold manufactured goods (i.e., transformed goods)

and imported goods.

(For IPI tax rates, please check https://www.gov.br/receitafederal/pt-br/acesso-a-

informacao/legislacao/documentos-e-arquivos/tipi.pdf)
Direct materials inventory: non-cumulative taxes

• IPI: taxes over manufactured products (“Imposto sobre Produtos

Industrializados”)

→ Non-cumulative tax (when considering a manufacturing chain)

→ Usual rate: 10%*

→Tax base (“basis of calculation”): final selling price (110%)
(“out of the price”)
Direct materials inventory: non-cumulative taxes

• IPI: taxes over manufactured products (“Imposto sobre Produtos

Industrializados”)

→ e.g., cake (selling price: $110)

How much is the due IPI? (tax rate: 10%)

$110 → 110%
$X → 100%
X = (110 x 100) / 110
X = $100 → IPI = $110 (selling price) (-) $100 (‘net price’) = $10.
Direct materials inventory: non-cumulative taxes

• ICMS: taxes over goods and services transit (“Imposto sobre

Circulação de Mercadorias e Serviços”)

→ State tax, due to all goods transit (i.e., ‘possession transference’),

transportation and communication services.
→ Due also for imported goods and service provision outside Brazil (or provision started
outside Brazil).
→ Due for transit between states, and between cities from the same state.

→ Usually, tax is due to the “state of origin” of the transaction

(when it involves 2+ states).
Direct materials inventory: non-cumulative taxes

• ICMS: taxes over goods and services transit (“Imposto sobre

Circulação de Mercadorias e Serviços”)

→ Non-cumulative tax (when considering a manufacturing chain)

→ Usual rate: 18%

→Tax base (“basis of calculation”): final selling price without
the ICMS tax (82%) (“inside the price”)
Fun fact:
interstate tax
rates.
Between states from the
same group, the tax rate is
12%.

Remember: each state has

also its own tax rate (e.g.,
18%: São Paulo, 17%: Acre)
See
https://www.taxgroup.com.br
/tabela-icms-2020-
atualizada/.

Differences in tax rates

between origin and Source: Vettori (2016), ICMS class PowerPoint slides (adapted)
destination states are also
calculated..
Direct materials inventory: non-cumulative taxes

• ICMS: taxes over goods and services transit (“Imposto sobre

Circulação de Mercadorias e Serviços”)

→ e.g., cake (selling price without IPI: $100)

How much is the due ICMS? (tax rate: 18%)

$100 → 100%
$X → 82% (100%-18%)
X = (100 x 82) / 100
X = $82 → ICMS = $100 (selling price without IPI) (-) $82 (‘net price’ without ICMS) = $18.
Exercise 8 (2)

Suppose that Product J transformation uses direct material X. At a specific

month, the beginning balance of X was zero. At the same month, 500 kg
of the direct material X was purchased for $100,00/kg (the price includes
an ICMS tax rate of 18%).

4/5 of the total purchase of direct materials was used to produce 20 units
of Product J. The direct labor and the manufacturing overhead for Product
J were, altogether, $37,200.00 in total. 15 units of Product J were sold for
$5,000.00 each, including an ICMS tax rate of 18%.

(Adapted from Megliorini, 2001, p. 41, q. 6.20)

Exercise 8 (2)

Required:

a) Calculate how much are: (I) the entry value, (II) the direct materials
inventory consumption during the month and (III) the tax amount to be
recovered.
b) Calculate the total manufacturing costs for all the 20 units of Product
J.
c) Calculate how much is the gross profit for the month.
d) Calculate how much is the ICMS payable, and much is the cash
expenditure of ICMS.
For the next class (Aug 18)

• Bring an invoice for any goods your purchased or services

you hired

• Problems
– #8.2 (c&d), #8.1

• Reading - Direct materials:

– EM, Chapter 10 (translation to English available on e-class).
Any questions?
 Thank you!
bianca.checon@fgv.br