Lecture (2)

Cost Accounting

Fall Semester 2022 / 2023

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 An Introduction to Cost
Accounting and Classifications
Chapter 1 - Continue

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:Learning objectives
1) Difference between Prime Cost and
Conversion Cost
2) Difference between Inventorial Cost and
Period Cost
3) Calculating Cost of Goods Sold(C.G.s)
4) Calculating Operating Net Income

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1.Prime Cost and Conversion Cost

 Prime Costs : a term referring to all direct

manufacturing costs ( materials and labors).
 Conversion Costs: a term referring to direct
labor and Factory overhead costs.

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 Prime Costs

Direct Prime
+ Labor = Costs

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 Conversion Costs

+ Manufacturing
Overhead =

Indirect
Labor utilities
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 Inventorial Costs and Period Costs.2

 Inventorial Costs: product manufacturing cost

which capitalized as assets ( Inventory) until
they are sold and transferred to cost of good
sold.
 Period Costs: have no future value , expensed
as incurred and not directly tied to the
production process (SG&A)

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 Calculating Cost of Goods Sold .3
Cost Statement
Direct Material xxx

Direct Labor)+( xxx

Indirect Manufacturing Overhead )+( xxx
Total Manufacturing Costs .1 xxxxx
beginning W.I.P )+( xxx
Ending W.I.P) -( )xXx(
Cost of Manufactured goods .2 xxxxx
beginning F.G )+( xxx
Ending F.G )-( )xxx(
3. Cost of goods Sold (C.G.S) xxxxxx
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:N.B
• to calculate Direct material:
Beginning Inventory
(+) purchases
(-) Ending Inventory

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 Calculate Operating Net Income -4
Income statement
Sales Revenues (sold units x price xxx
per unit)
Cost of goods sold - )xxx(
Gross profit .1 xxx
- Operating Costs )xxx(
2. Operating Net Income xxxxx

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 :Example
•Evans Inc., had the following activities during 2022:

Beginning inventory $40,000

Purchases $123,200
Ending inventory $ 20,800
Direct manufacturing labor $ 32,000
Manufacturing overhead $24,000
Beginning work-in-process inventory $1,600
Ending work-in-process inventory $8,000
Beginning finished goods inventory $48,000
Ending finished goods inventory $32,000

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:Required
1. What is the cost of direct materials used during
2022?
2. What is cost of goods manufactured for 2022?
3. What is cost of goods sold for 2022?
4. What amount of prime costs was added to
production during 2022?

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:Solution
1. Direct material = beg .Inventory+ Purchases– Ending
Inventory
Direct material = $40,000 + $123,200 - $20,800=$142,400
2. Cost of Manufactured goods:
Direct material $142,400
(+)Direct labor $32,000
Manufacturing overhead $24,000)+(
=Total Manufacturing cost $ 198,400
(+) Beginning W.I.P $1600
(-) Ending W.I.P ($8000)
Cost of Manufactured goods = $ 192,000

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3. Cost of goods sold:
Cost of Manufactured goods $ 192,000
(+) Beginning F.G $ 48,000
(-)Ending F.G ($32,000)
Cost of goods sold = $208,000

4. Prime Cost =Direct material + Direct labor

Prime Cost = $142,400 + $32,000= $174,400

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:Example
• Lewisburg Manufacturing reported the following:
Revenues $420,000
Beginning inventory of direct materials, January 1 $22,000
Purchases of direct materials $146,000
Ending inventory of direct materials, December 31 $16,000
Direct manufacturing labor $18,000
Indirect manufacturing costs $40,000
Beginning inventory of finished goods, January 1 $35,000
Cost of goods manufactured $104,000
Ending inventory of finished goods, December 31 $36,000
Operating costs $140,000

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:Required
1. What was Lewisburg's cost of goods sold?
2. What was Lewisburg's gross profit?
3. What was Lewisburg's operating income?
4. What was Lewisburg's cost of direct materials used?

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 :Solution
1. cost of goods sold:
Cost of goods manufactured $104,000
(+) Beginning F.G $35,000
(-) Ending F.G ($ 36,000)
cost of goods sold = $103,000

2. Gross Profit = Revenues – Cost of goods sold

Gross profit = $420,000 - $103,000= $317,000

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3. operating income= Gross profit – Operating Costs
operating income = $317,000 - $140,000 = $177,000

4. Direct material= beg. Inventory+ Purchases– Ending

Inventory
Direct material= $22,000 + $146,000 - $16,000
=$152,000.

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