Direct cost:
Direct material (DM):
Raw material that become an integral part of the product and that can be conveniently
traced directly to it.
Direct labor (DL):
Those labor costs that can be easily traced to individual units of product
Indirect cost:
Manufacturing Overhead (MOH)
All other manufacturing costs, they cannot be easily traced directly to specific units
produced.
-
Indirect materials: Wages paid to employees who are not directly involved in production
work.
-
Indirect labor: Materials used to support the production process
-
Other MOH
Example: depreciation of factory equipment, machine maintenance cost, factory utilities,
rent on the factory
Prime cost = DM + DL
Conversion cost= DL + MOH
Manufacturing cost = DM + DL + MOH
Cost classification (Financial reporting purposes):
-
Manufacturing cost (Product cost): DM. DL, MOH
-
Non-Manufacturing cost (Period cost) = Selling cost + Administrative cost
Selling cost: cost of selling the product
Ex. Advertisement cost, Shipping cost, Sales commission
Administrative cost: include all executives, organizations and clecal costs associated with
the general management of an organization rather than making or selling the product.
Ex. CEO salary, expenses of human resource department.
Decision making
-
Differential cost: a different cost between two alternatives
For example, two data plans.
1. You pay 60 per month for any usage below 15 GB.
2. You pay 10 per GB per month.
Which option in better.
If I only use the data on the phone occasionally for emergency purposes and will only use
data below one GB per month, then cost option 1 is $60, while the cost of option 2 is $10.
Differential cost = 60 – 10 = 50/month
-
Opportunity cost: the benefit that is sacrificed when one alternative is chosen over
another.
You could have earned $15,000 a year if you do not attend University, so the opportunity
cost of attending university is $15,000 a year.
-
Sunk cost: Costs that have been incurred in the past and cannot be changed by any
decision made now or in the future.
For example, suppose you had purchased gold when it was worth $400 an ounce and that
it is now worth only $250 an ounce. Should you wait until after the gold gets back above
$400 before selling?
The original cost $400 is a sunk cost and should be completely ignored. In deciding
whether to sell the gold you should consider whether you need the cash now and the
returns you expect to earn in the future from holding the gold as opposed to holding some
other investment.
Company Inc.
Schedule of cost of goods manufactured
For the year ended
Direct material
Beginning raw material inventory
Add: Raw material purchases
Raw material available for use
Deduct: Ending raw material inventory
Direct labor
Manufacturing overhead
Company Inc.
Income statement
For the year ended
Sales
Cost of goods sold
Beginning finished goods inventory
Add: Cost of goods manufactured
Goods available for sale
Deduct: Ending finished goods inventory
Gross margin
Less operating expense:
Selling expenses
Administrative expense
Operating income
Sales – COGS = Gross margin
Gross margin – selling and administrative expenses = operating income
Direct material (DM)
Beg. Purchased
End
DM used
Ending Bal. of Raw marterial = Beginning Bal. of Raw material + Purchase of RM – RM
used
Work-in-process (WIP)
Beg. DM used
COGM
DL
MOH
End
Ending Bal. of WIP = Beginning Bal. of WIP + DM used + DL + MOH
COGM = Beginning Bal. of WIP + DM + DL + MOH – Ending Bal. of WIP
Finished goods (FG)
Beg. COGM
COGS
End
Ending Bal. of finished good = Beginning cost of finished good + COGM – COGS
COGS = Beginning cost of finished good + COGM - Ending Bal. of finished good