1- The elements of a product (i.e. product cost).
2- Classification of costs.
3- Absorption & Contribution (variable) costing.
1- The elements of a product are:
Direct Materials (D.M)
 Materials
Indirect Materials
Direct Labor (D.L)
 Labor
Indirect Labor
 Factory Overhead :
all indirect costs which can not be traced to
a special product, it includes:
Indirect
Materials
(I.M)
Indirect
Labor
(I.L)
1
Other
Such as: rent
Heat
Light
Insurance
Depreciation
2- Classification of costs
▪In relation to income Costs are classified to
Product costs

All costs incurred in the
Manufacturing of a product
Period costs

Selling & administrative costs
1- Product cost = Direct Materials + Direct Labor + Factory Overhead
D.M
▪In relation to production
Prime costs
D.L
Costs are classified as followed:
costs which are directly related to production
2- Prime cost = Direct Material + Direct Labor
D.M
D.L
Conversion Costs
Costs concerned with transforming direct
Material into finished products
3- Conversion cost = Direct Labor + Factory Overhead
D.L
2
Ex. 1
The following cost information is available for the period ended 31/12/2003:- Material put into production L.E 41,000 (of which L.E 39,000 was
considered direct Materials).
- Labor costs for the period L.E 35,750 (of which L.E 6000 was for
indirect labor).
- Depreciation L.E 25,000.
- Selling and administrative expenses L.E 31,350.
Required:
Compute the following:
1- Prime costs
2- Conversion costs
3- Product costs
4- Period costs
-------------------------------------------------------------------------------------
Solution
Direct materials
 Materials 41000
39000
Indirect materials
 Labor 35750
2000
(41000 – 39000)
Direct labor
29750 (35750 – 6000)
Indirect labor
6000
 Factory overhead = indirect Materials + indirect labor + other
manufacturing expenses (depreciation)
= 2000 + 6000 + 25000 = 33000
1- Prime costs
= Direct Materials + Direct Labor
=
39000
+ 29750
= 68750
2- Conversion costs = Direct Labor + Factory Overhead
3
=
3- Product costs
33000 = 62750
= Direct Materials + Direct Labor + Factory Overhead
=
4- Period costs
29750 +
39000
+
29750
+ 33000 =101750
= selling & administrative expenses
= 31350
Ex. 2
A manufacturing company incurs the following costs in manufacturing wood
tables:
Item
L.E
Factory rent
Glue
Screws
Wood cutters wages
Depreciation of equipment
Supervisors
Wood (Lumber)
Table assemblers wages
Factory utilities
70,000
800
1000
100,000
21,000
20,000
10,000
180,000
20,000
Required
1- Classify the costs according to ability to trace the cost to the end
product(direct materials, direct labor, and factory overhead)
2- Compute prime costs and conversion costs.
4
Solution
Direct
Direct
Factory overhead
Product
Materials
Labor
(I.M +I.L +other)
cost
D.M
D.L
70000
70000
Glue
800
800
Screws
1000
1000
Factory rent
Wood cutters
100000
100000
depreciation
21000
21000
Supervisors
20000
20000
Wood(lumber)
10000
Table assemblers
10000
180000
Factory utilities
20000
20000
132800
422800
Total
10000
▪
= D.M + D.L + Factory overhead
Product cost
280000
180000
= 10,000 + 280,000 + 132,800 = 422800
[1] Prime costs
= D.M + D.L
= 10,000 + 280,000 = 290,000
[2] Conversion costs = D.L + Factory overhead
= 280,000 + 132,800 = 412,800
▪In relation to volume
Variable costs
Costs are classified to
Fixed costs
5
Mixed costs
Ex. 3
 If the variable cost per unit was as follows:
- Direct Materials
6
- Direct labor
4
- Other variable expenses
2
Total
12 L.E
 Fixed costs for the period
- Rent
20,000
- Maintenance
30,000
- Insurance
10,000
Total
60,000 L.E
Required: Calculate total cost for the following units 2000, 6000, 10000.
Solution
Total cost = total variable cost + total fixed cost
= (variable cost / unit x units) + total fixed cost
[1] Total cost = (12 x 2000) + 60000 = 84000
[2] Total cost = (12 x 6000) + 60000 = 132000
[3] Total cost = (12 x 1000) + 60000 = 180000
6