COST TERMS, CONCEPTS
AND CLASSIFICATION
WEEKS 1 - 2
Manufacturing Costs (Production Costs)
- Manufacturing costs is the sum of three cost
elements.
Direct Material - Direct Labor- Manufacturing
Overhead - Finished Goods
Manufacturing Costs (Production Costs)
Direct Materials - All materials that form an
integral
part of the finished product during the
manufacturing process and can be physically and
directly associated with the product.
Direct Labor - Work of factory employees that
can be physically and directly associated with
converting raw materials into finished goods.
Manufacturing Overhead Costs that are indirectly
associated with manufacturing the finished
product.
Indirect Materials
Insignificant part of finished product in terms of
cost.
its completion.
Indirect Labor
cost of the product,
but must be allocated to the finished goods.
Basic Cost Terminology
Indirect costs cannot be traced
(tracked) explicitly or conveniently
to a particular cost object. Instead
of being traced, these costs are
allocated to a cost object in a
rational and systematic manner.
Direct costs can be conveniently
and distinctly traced (tracked) to a
particular cost object.
Fixed Costs cost that remains
constant in total within a relevant
range of activity. Does not change
in total as business activity
increases or decreases.
Variable costs increase in total
proportionately with an increase
in activity and decreases
proportionately with a decrease in
activity.
Inventoriable costs - product manufacturing costs.
These costs are capitalized as assets (inventory)
until they are sold and transferred to Cost of Goods
Sold.
Period costs—have no future value and are
expensed in the period incurred.
Manufacturing Inventories
Direct materials - resources in-stock
and available for use
Work-in-process – the stage in the
production process where work has
been started but not yet completed.
Finished goods – the stage in the
production process where the products
are fully completed and ready for sale
Schedule 1 – Raw materials used
Raw materials inventory - beginning balance
P40,000
Add: Purchases - raw materials
220,000
Raw materials available for use
260,000
Less: Raw materials inventory - End
(60,000)
Raw materials used
P200,000
AMCAR CORPORATION
Statement of Cost of Goods Manufactured and Sold
December 31, 2019
Beginning work in process
P 150,000
Raw materials used (Sched 1) P200,000
Direct labor
450,000
Variable overhead
115,500
Fixed overhead
95,000
Total manufacturing costs
860.500
Total costs of goods placed in process
1,010,500
Work in process - Eng
(30,500)
Cost of goods manufactured
P 980.000
AMCAR CORPORATION
Statement of Cost of Goods Manufactured and Sold
December 31, 2019
Finished Goods - Beginning
Add: Cost of Goods Manufactured
Cost of Goods Available for Sale
Less: Finished Goods - End
Cost of Goods Sold
AMCAR CORPORATION
Income Statement
December 31, 2019
Sales
Less: Cost of Goods Sold
Gross Profit
Less: Operating Expenses
Income from Operation
P
85,400
980,000
P1,065,400
(91,400)
P1,054,000
P 1,500,000
( 980,000)
520,000
364,000
156,000
Activity-Based Costing Approach
Volume is one major driver, measured either in
output (units produced) or input (labor hours,
machine hours, etc.)
The two other major influences on cost are
complexity and diversity of operations.
Use Activity-Based Costing for
1. Product Variety and Process Complexity
2. Lack of Commonality in Overhead Costs
3. Problems with Current Cost Allocations
4. Changes in Business Environment
1. Identify and classify the activities involved in the
manufacture
of specific products, and allocate overhead to cost pools.
2. Identify the cost driver that has a strong correlation to
the costs
accumulated in the cost pool.
3. Compute the activity-based overhead rate for each
cost driver.
4. Assign overhead costs to products, using the overhead
rates
determined for each cost pool (cost per driver).