Ch. 14 Cont - Managerial Cost Concepts

Ch. 14 cont.
- Managerial Cost Concepts

Learning Objectives:
1. Describe the three classes of manufacturing cost.
2. Differentiate between product costs and period costs.
3. Compute cost of goods manufactured and prepare
financial statements for a manufacturer.
3 Classes of Manufacturing Costs
Manufacturing consists of activities and processes that convert raw
materials into finished goods.
2
Direct Materials
Basic materials used in manufacturing process.
Direct Materials
Raw materials that are p_________ and d________
associated with the finished product during the manufacturing
process.
Indirect Materials
1. Not physically part of the finished product OR
2. They are impractical to trace to the finished product

because their physical association with the finished
product is too small in terms of cost.
3
Considered part of manufacturing overhead.
Direct Labor
Direct labor
Work of factory employees that can be
p_____________ and d____________
associated with converting raw materials into
finished goods.
Indirect Labor
Wages of maintenance workers, security guards,
supervisors (employees with no physical association with the
finished product or for which it is impractical to trace costs to
the goods produced.)
4
Manufacturing Overhead
 Costs that are i_____________ associated with

manufacturing the finished product.
 Includes all manufacturing costs except direct materials
and direct labor.
 Also called factory overhead, indirect manufacturing
costs, or burden.
 Examples include:
Indirect materials
Indirect labour
Amortization on factory buildings, Insurance and
5 maintenance on factory facilities LO 2
Product Versus Period Costs
6
Product Versus Period Costs
Product Costs
 Costs that are an integral part of producing the product.
 Recorded in “i_______________” account.
 Not an expense (COGS) until the goods are sold.
Period Costs
 Non-manufacturing costs.
 Charged to e_______________ as incurred.
 Includes all selling & administrative costs
7
Classify these costs:
-------------------------- Product Costs ---------------------- Period Cost
Direct Materials Direct Labor Mfg Overhead Period Costs

Material cost ($25) per board
Labor cost ($37) per board
Depreciation on factory
equipment ($25,000) per year.
Property taxes on factory

building ($15,000) per year
Advertising costs ($45,000) per

year
Sales commissions ($20) per
board
Factory maintenance salaries
($45,000)
Salary of plant manager
($70,000) per year
Cost of shipping boards ($8 per
board)
8
Prime Costs and Conversion Costs
• Prime costs are the sum of all direct

m________ costs and direct l________ costs.
These are all direct manufacturing costs.
• Conversion costs are the sum of all direct
l______ costs and manufacturing overhead
costs, which together are the costs of
converting raw materials into a final product.
Prime Costs and Conversion Costs
Prime costs and conversion costs

Manufacturing Costs in
Financial Statements
Income Statement
• The income statement for a manufacturer is
similar to that of a merchandiser except for the
cost of goods sold section
Cost of Goods Sold – “COGS”
Recall: How do you calculate the cost of the goods sold

during the year using a periodic inventory system?
COGS is an e___________ of making the sale.
12 LO 3
How do you calculate COGS?
Cost of Goods Sold Components

Merchandiser versus Manufacturer
Costs of goods sold components

Income Statement
COGS sections of merchandising and manufacturing income statements.
.
Cost of Goods Manufactured
For a business that manufactures its inventory, you can see that
the costs to make inventory must be tracked because at year-
end there may be some products still in process.
- The cost of goods being manufactured is tracked through a an
account called W_________ I___ P______________
WIP
15 LO 3
Cost of Goods Manufactured Schedule
16
Balance Sheet
Inventory accounts for a manufacturer

- typically 3 types of inventory
The balance sheet for a merchandising company shows just

one category of inventory.
17 LO 3
Balance Sheet
Current assets sections of merchandising and manufacturing balance
sheets
18
Balance Sheet: Inventories
• Manufacturing companies may have 3 inventory accounts:
1. Raw materials inventory – shows the cost of raw

materials on hand
2. Work in process inventory – shows the cost applicable
to units on which production has started
but is only partially complete
3. Finished goods inventory – shows the cost of completed
goods on hand
• Merchandising companies have only one category of

inventory: Merchandise inventory
2023
20
.
21
Let’s Review
What amount is given by the sum of direct materials,

direct labour, and manufacturing overhead incurred?
a. Total cost of work in process

b. Cost of goods available for sale
c. Total manufacturing costs
d. Cost of goods manufactured
Let’s Review
In a manufacturer’s balance sheet, three inventories

may be reported: (1) raw materials, (2) work in
process, and (3) finished goods. In what sequence do
theses inventories generally appear on a balance
sheet?
a. (1), (2), (3)
b. (2), (3), (1)
c. (3), (1), (2)
d. (3), (2), (1)

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Ch. 14 cont.

- Managerial Cost Concepts

Basic materials used in manufacturing process.

2. They are impractical to trace to the finished product

 Costs that are i_____________ associated with

Direct Materials Direct Labor Mfg Overhead Period Costs

Labor cost ($37) per board

Property taxes on factory

Advertising costs ($45,000) per

• Prime costs are the sum of all direct

Prime costs and conversion costs

Recall: How do you calculate the cost of the goods sold

COGS is an e___________ of making the sale.

Cost of Goods Sold Components

Costs of goods sold components

Inventory accounts for a manufacturer

The balance sheet for a merchandising company shows just

1. Raw materials inventory – shows the cost of raw

• Merchandising companies have only one category of

What amount is given by the sum of direct materials,

a. Total cost of work in process

In a manufacturer’s balance sheet, three inventories

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