Financial Statements: The Bases For Planning and Control: Lecture # 3

FINANCIAL STATEMENTS :
THE BASES FOR PLANNING

AND CONTROL
Lecture # 3
REQUIREMENT IN COST
ACCOUNTING
A Manufacturing A/C Is
Prepared In Addition To
The Trading And Income
Statement Accounts
COMPARING MERCHANDISING AND
MANUFACTURING ACTIVITIES
Merchandisers . . . Manufacturers . . .
 Buy finished  Buy raw
goods. materials.
 Sell finished  Produce and sell
goods. finished goods.
MegaLoMart
MANUFACTURING COST CONCEPTS
Financial
Accounting Managerial
Cost is a measure of Accounting
resources used or Product costs are the
given up to achieve a costs a company
stated purpose. assigns to units
produced.
MANAGERIAL
COST CONCEPTS
 Manufacturing consists of activities and

processes that convert raw materials into
finished goods.
DIRECT COSTS AND INDIRECT COSTS
Direct costs Indirect costs

 Costs that can be  Costs cannot be easily and
easily and conveniently conveniently traced to a
traced to a unit of product unit of product or other
cost object.
or other cost objective.
 Example: Manufacturing
 Examples: overhead
 Direct material
 Direct labor
MANUFACTURING COSTS
 Manufacturing costs are usually classified as
follows:
1. Direct materials,
2. Direct labor, and
3. Manufacturing overhead.
COST OF GOODS SOLD
COMPONENTS
 Under a periodic inventory system, the

income statements of a merchandiser and a
manufacturer differ in the cost of goods sold
section.
ILLUSTRATION
COST OF GOODS SOLD
COMPONENTS
Merchandiser
Beginning Ending
Merchandise + Cost of Goods - Merchandise =
Inventory Purchased Inventory
Manufacturer Cost of
Goods Sold
Beginning Ending
Finished Goods + Cost of Goods - Finished Goods =
Manufactured
Inventory Inventory
INVENTORIES
 Most manufacturers maintain a perpetual inventory
system that uses FIFO, LIFO, or moving average
methods of costing.
 An inventory ledger is maintained to provide support
for the control accounts.
 Some manufacturers may use a factory ledger, which
contain all of the accounts relating to manufacturing.
INVENTORIES
Merchandiser Manufacturer
Current assets:
Current assets:
Cash
Cash Accounts receivable
Inventories:
Accounts receivable
Finished goods
Merchandise Work in process
inventory Materials
PRODUCT COSTS
Costs that are a necessary and integral part of

producing the finished product.
include each of the manufacturing cost elements
(direct materials, direct labor, and

manufacturing overhead)
These costs are not expensed to cost of goods
sold under the matching principle until the

finished goods inventory is sold.
PERIOD COSTS
a) are identifiable with a specific time period,

b) relates to nonmanufacturing
non-inventoriable costs, and

c) include selling and administrative expenses.
ILLUSTRATION:
PRODUCT VERSUS PERIOD COSTS
Product Costs
Direct Materials
{ Prime
Costs
Manufacturing
Direct Labor {
Costs
Conversion
Manufacturing Costs
Overhead
Period Costs
Selling Expenses
Nonmanufacturing
Costs Administrative
Expenses
NONMANUFACTURING COSTS
a) Administration / Operating costs
b) Marketing and selling costs

ADMINISTRATION EXPENSES
 All executive, organizational,

and clerical costs.
 Examples:
- managers’ salaries
- legal and accountancy
charges
- depreciation of accounting
machinery & secretarial
salaries
SELLING AND DISTRIBUTION
EXPENSES
Costs necessary to get

the order and deliver the
product.
Examples:
- Sales staff’s
- Salaries & commission
- Carriage outwards
- Depreciation of
delivery vans
- Advertising expenses
COST OF GOODS SOLD STATEMENT
 Direct materials:
 Beginning Materials inventory xxx
 Purchases xxx
 less purchases returns and allowancesxxx xxx
 Materials available for use xxx
 less ending materials inventory xxx
 direct materials consumed xxx
 Direct labor xxx
 Factory overhead
 Indirect labor xxx
 Salaries xxx
 Payroll taxes xxx
 Power xxx
 Heat xxx
 Light xxx
 Factory supplies xxx

 Depreciation-factory building xxx
 Depreciation – machinery xxx
 Repairs and maintenance xxx
 Patent xxx
 Tools and dies used xxx
 Insurance xxx
 Total factory overhead cost xxx
 Total manufacturing cost xxx
 Total manufacturing cost xxx
 Add beginning work in process inventory xxx
 xxx
 less ending work in process inventory xxx
 Cost of goods manufactured xxx
 Add beginning finished goods inventory xxx
 Cost of goods available for sale xxx
 less ending finished goods inventory xxx
 Cost of goods sold xxx
STATEMENT OF COST OF GOODS SOLD
Pure-Ice
Pure-Ice Inc.
Inc. had
had $52,000
$52,000 ofof inventory
inventory inin
direct
direct materials
materials inventory
inventory onon January
January 1,1,
2005.
2005. During
During the
the year,
year, Pure-Ice
Pure-Ice
purchased
purchased $586,000
$586,000 of
of additional
additional direct
direct
materials.
materials. At At December
December 31,31, 2005,
2005, $78,000
$78,000
of
of the
the direct
direct materials
materials were
were still
still on
on hand.
hand.
In
In addition
addition toto the
the direct
direct materials,
materials, Pure-
Pure-
Ice
Ice incurred
incurred $306,000
$306,000 ofof direct
direct labor
labor cost
cost
during
during 2005.
2005. Manufacturing
Manufacturing overhead
overhead for
for
2005
2005 was
was $724,000.
$724,000.
Pure-Ice
Pure-Ice started
started 2005
2005 with
with $132,000
$132,000 in
in
work
work inin process.
process. During
During 2005,
2005, units
units
costing
costing $1,480,000
$1,480,000 were
were transferred
transferred to
to
finished
finished goods
goods inventory.
inventory.
Pure-Ice
Pure-Ice Inc.
Inc. had
had $300,000
$300,000 of
of inventory
inventory in
in
Finished
Finished Goods
Goods inventory
inventory on
on January
January 1,
1,
2005.
2005. AtAt December
December 31,
31, 2005,
2005, $350,000
$350,000 of
of
the
the Finished
Finished Goods
Goods were
were still
still on
on hand.
hand.

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FINANCIAL STATEMENTS :

THE BASES FOR PLANNING

 Manufacturing consists of activities and

Direct costs Indirect costs

 Under a periodic inventory system, the

Costs that are a necessary and integral part of

(direct materials, direct labor, and

sold under the matching principle until the

a) are identifiable with a specific time period,

non-inventoriable costs, and

a) Administration / Operating costs

b) Marketing and selling costs

 All executive, organizational,

Costs necessary to get

 Factory supplies xxx

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