Manufacturing Cost Terms, Concepts, and Classifications

review of background concepts previously covered in ACCTG 222 or the equivalent.

(a(((A

The Income Statement

Merchandising and manufacturing firms use a classified income statement format: Sales Cost of goods sold Gross margin Selling and administrative expenses Operating income

The Income Statement

Merchandising and manufacturing firms use a classified income statement format: Sales Cost of goods sold Gross margin Selling and administrative expenses Operating income
Note that the expenses are grouped into product costs and period costs.

The Income Statement

Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.
Merchandising Company
Cost of goods sold: Beg. merchandise inventory + Purchases Goods available for sale - Ending merchandise inventory = Cost of goods sold

$ 14,200 234,150 $248,350

(12,100) $236,250

The Income Statement

Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.
Merchandising Company
Cost of goods sold: Beg. merchandise inventory + Purchases Goods available for sale - Ending merchandise inventory = Cost of goods sold

Manufacturing Company
Cost of goods sold: Beg. finished goods inv. + Cost of goods manufactured Goods available for sale - Ending finished goods inventory = Cost of goods sold

$ 14,200 234,150 $248,350

$ 14,200 234,150 $248,350

(12,100) $236,250

(12,100) $236,250

Classifications of Costs
Manufacturing costs are often classified as follows:
Direct Material Direct Labor Manufacturing Overhead

Prime Cost

Conversion Cost

Manufacturing Cost Flows

Costs
Material Purchases Direct Labor Manufacturing Overhead

Balance Sheet Inventories

Raw Materials Work in Process

Income Statement Expenses

Finished Goods

Cost of Goods Sold

Selling and Administrative

Selling and Administrative

Period Costs

Work in Process: A Closer Look

Raw Materials Direct materials used

Work in Process
Cost of goods Completed, to Finished Goods inventory

Payroll
Direct labor costs incurred

Factory Overhead
Manufacturing overhead applied

Manufacturing Overhead: A closer look Manufacturing Overhead

Applied to Work in Process, Based on a pre-determined Overhead rate.

Actual Overhead Costs incurred

Overhead Applied to Production

Pre-determined overhead Rate: Budgeted total manufacturing OH Budgeted driver level (e.g., DLH) = Overhead applied per driver unit

Any difference represents over- or underApplied overhead

Cost of Goods Sold, Manufacturing Firm

Direct materials used Direct labor cost Overhead applied

$ 1,000 2,000 4,000

Total manufacturing costs Add: Beginning work-in-process Less: Ending work-in-process

Add: Beginning finished goods Less: Ending finished goods Cost of goods sold

$ 7,000 2,500 1,500

3,000 2,000 $ 9,000

Cost of goods manufactured (completed) $ 8,000

Operating Income Statement, Manufacturing Firm

Sales revenues Less: Cost of goods sold Gross Margin

$ 15,000 9,000 $ 6,000

Less: Selling and administrative expenses

Operating income (pre-tax) Gross margin %: $6,000/$15,000 = 40%

3,000
$ 3,000

Return on sales %: $3,000/$15,000 = 20%

Cost terminology:
Product (inventoriable) vs. period costs

Fixed vs. variable costs

Gross margin vs. contribution margin

Direct vs. indirect costs

Differential costs (and benefits) Sunk costs Opportunity costs

Opportunity Costs
The potential benefit that is given up when one alternative is selected over another.

Example: If you were not attending college, you could be earning $65,000 per year. Your opportunity cost of attending college for one year is $65,000.

The End

Handout 1 (a): Cost flows In manufacturing

Handout 1(a) Manufacturing cost flows; disposition of over/under applied overhead Speedy Company provides the following information for October: Beginning inventories: Materials Work-in-Process Finished Goods Materials purchased Materials used Direct manufacturing labor Cost of goods manufactured (completed)* Cost of Goods Sold* Actual manufacturing overhead $ 2,000 $ 4,000 $ 6,000 $12,000 $10,000 $12,000 $ 38,000 $ 40,000 $ 25,200

In addition, you learn that the direct labor wage rate is $30 per hour, and that manufacturing overhead is allocated at $50 per direct labor hour. * These costs are measured before any adjustment for over- or under-allocated manufacturing overhead.

Required: Determine the following amounts: (a) Direct labor hours during October __________

(b) Manufacturing overhead allocated to production during October (before any adjustment for over- or under-allocated overhead) $ __________

(c) Under- or over-allocated manufacturing overhead during October $ __________ (d) Speedys Cost of Goods Sold for October, if the under- (over-) allocated overhead is written-off to Cost of Goods Sold $ __________

(e) Speedys Cost of Goods Sold for October, if the under- (over-) allocated overhead is prorated based on the ending balances in Work-in-Process, Finished Goods, and Cost of Goods Sold

(d) Speedys Cost of Goods Sold for October, if the under- (over-) allocated overhead is written-off to Cost of Goods Sold $ 40,000 + $5,200 = $ 45,200 (e) Speedys Cost of Goods Sold for October, if the under- (over-) allocated overhead is prorated based on the ending balances in Work-in-Process, Finished Goods, and Cost of Goods Sold $ __________

Account: Work in process Finished goods Cost of sales Total

Ending balance $ 8,000 $ 4,000 $40,000 $52,000

Proportion 8/52 4/52 40/52 52/52

Allocation $ 800 $ 400 $ 4,000 $ 5,200

(d) Speedys Cost of Goods Sold for October, if the under- (over-) allocated overhead is written-off to Cost of Goods Sold $ 40,000 + $5,200 = $ 45,200 (e) Speedys Cost of Goods Sold for October, if the under- (over-) allocated overhead is prorated based on the ending balances in Work-in-Process, Finished Goods, and Cost of Goods Sold $ __________

Account: Work in process Finished goods Cost of sales Total

Ending balance $ 8,000 $ 4,000 $40,000 $52,000

Proportion 8/52 4/52 40/52 52/52

Allocation $ 800 $ 400 $ 4,000 $ 5,200

Provide journal entries to record the disposition of the under-allocated overhead for cases (d) and (e) above.

Handout 1 (b): Income Statement format for manufacturing firms

Handout 1(b) Manufacturing cost flows; inventory changes and percentage relations Prepare a Statement of Cost of Goods Manufactured (Completed) and a Classified Income Statement based upon the following information: Return on sales Operating income Gross margin percent Cost of goods completed Finished goods ending inventory Change in work-in-process inventory (increase) Direct materials used Factory overhead (applied at 200% of direct labor) Materials purchased Materials ending inventory Work-in-process ending inventory 20% $40,000 40% $150,000 $70,000 $50,000 $20,000 $120,000 $25,000 $30,000 $65,000

Return on sales Operating income Gross margin percent Cost of goods completed Finished goods ending inventory Change in work-in-process inventory (increase) Direct materials used Factory overhead (applied at 200% of direct labor) Materials purchased Materials ending inventory Work-in-process ending inventory

20% $40,000 40% $150,000 $70,000 $50,000 $20,000 $120,000 $25,000 $30,000 $65,000

To begin, provide a vertical (percentage) analysis of the income statement, and determine the implied dollar amounts. Given the Cost of Sales amount, show all cost and revenue flows in T-Accounts.

Return on sales Operating income Gross margin percent Cost of goods completed Finished goods ending inventory Change in work-in-process inventory (increase) Direct materials used Factory overhead (applied at 200% of direct labor) Materials purchased Materials ending inventory Work-in-process ending inventory

20% $40,000 40% $150,000 $70,000 $50,000 $20,000 $120,000 $25,000 $30,000 $65,000

To begin, provide a vertical (percentage) analysis of the income statement, and determine the implied dollar amounts. Given the Cost of Sales amount, show all cost and revenue flows in T-Accounts.

Vertical Analysis Item: Sales Cost of sales Gross Margin Selling and Admin. Operating income

% 100 60 40 20 20

Return on sales Operating income Gross margin percent Cost of goods completed Finished goods ending inventory Change in work-in-process inventory (increase) Direct materials used Factory overhead (applied at 200% of direct labor) Materials purchased Materials ending inventory Work-in-process ending inventory

20% $40,000 40% $150,000 $70,000 $50,000 $20,000 $120,000 $25,000 $30,000 $65,000

To begin, provide a vertical (percentage) analysis of the income statement, and determine the implied dollar amounts. Given the Cost of Sales amount, show all cost and revenue flows in T-Accounts.

Vertical Analysis Item: Sales Cost of sales Gross Margin Selling and Admin. Operating income

% 100 60 40 20 20

Item: Sales Cost of sales Gross Margin Selling and Admin. Operating income

$ $ 200,000 120,000 80,000 40,000 $ 40,000

Return on sales Operating income Gross margin percent Cost of goods completed Finished goods ending inventory Change in work-in-process inventory (increase) Direct materials used Factory overhead (applied at 200% of direct labor) Materials purchased Materials ending inventory Work-in-process ending inventory

20% $40,000 40% $150,000 $70,000 $50,000 $20,000 $120,000 $25,000 $30,000 $65,000

To begin, provide a vertical (percentage) analysis of the income statement, and determine the implied dollar amounts. Given the Cost of Sales amount, show all cost and revenue flows in T-Accounts.

Vertical Analysis Item: Sales Cost of sales Gross Margin Selling and Admin. Operating income

% 100 60 40 20 20

Item: Sales Cost of sales Gross Margin Selling and Admin. Operating income

$ $ 200,000 120,000 80,000 40,000 $ 40,000

Statement of Cost of Goods Manufactured Direct materials used $ 20,000 Direct labor $ 60,000 Manufacturing overhead $120,000 WIP Inventory, beginning $ 15,000 Total available $215,000 Less: WIP inventory, end $ 65,000 Cost of Goods $150,000 Manufactured Finished Goods, beginning $ 40,000 Total available $190,000 Less: Finished Goods, end $ 70,000 Cost of sales $120,000

Handout 1 (c): Multiple choice items re: manufacturing cost flows

Handout 1(c) Multiple choice, manufacturing cost flows

1. Abel Company's manufacturing overhead is 20% of its total conversion costs. If direct labor is $38,000 and if direct materials are $47,000, the manufacturing overhead is: A. $152,000 B. $11,750 C. $21,250 D. $9,500

Handout 1(c) Multiple choice, manufacturing cost flows

1. Abel Company's manufacturing overhead is 20% of its total conversion costs. If direct labor is $38,000 and if direct materials are $47,000, the manufacturing overhead is: A. $152,000 B. $11,750 C. $21,250 Labor is 80 % of conversion D. $9,500 cost, and overhead is of labor.
($38,000) = $9,500

2. During the month of July, direct labor cost totaled $12,000 and direct labor cost was 30% of prime cost. If total manufacturing costs during July were $86,000, the manufacturing overhead was: A. $46,000 B. $40,000 C. $28,000 D. $74,000

2. During the month of July, direct labor cost totaled $12,000 and direct labor cost was 30% of prime cost. If total manufacturing costs during July were $86,000, the manufacturing overhead was: A. $46,000 B. $40,000 Total prime cost is $40,000 ($12,000 / C. $28,000 .30), and overhead is $46,000 ($86,000 $40,000). D. $74,000

3. Using the following data for a recent period, calculate the beginning finished goods inventory:

The beginning finished goods inventory was: A. $24,000 B. $23,000 C. $7,000 D. $12,000

3. Using the following data for a recent period, calculate the beginning finished goods inventory:

The beginning finished goods inventory was: A. $24,000 B. $23,000 Cost of sales is $23,000 and cost of goods C. $7,000 manufactured is $16,000, so the finished goods D. $12,000

inventory decreased by $7,000. The beginning inventory is $12,000 ($5,000 + $7,000)

4. The following data are for a recent period's operations:

The cost of goods manufactured was: A. $115,275 B. $284,725 C. $275,275 D. $124,725

4. The following data are for a recent period's operations:

The cost of goods manufactured was: A. $115,275 B. $284,725 The finished goods inventory decreased by $4,725, C. $275,275 so the cost of goods sold ($280,000) exceeds the cost of goods manufactured by $4,725; D. $124,725
$280,000 - $4,725 = $275,275.

5. The cost of goods manufactured for October at Toule Manufacturing Corporation was $907,000. The following changes occurred in Toule inventory accounts during October:

What was Toule's cost of goods sold for October? A. $869,000 B. $886,000 C. $928,000 D. $945,000

5. The cost of goods manufactured for October at Toule Manufacturing Corporation was $907,000. The following changes occurred in Toule inventory accounts during October:

What was Toule's cost of goods sold for October? A. $869,000 B. $886,000 The cost of goods sold is less than the cost of goods C. $928,000 manufactured ($907,000) by $38,000. D. $945,000 $907,000 38,000 = $869,000.

6. Last year there was no change in either the raw materials or the work in process beginning and ending inventories. However, finished goods, which had a beginning balance of $25,000, increased by $15,000. If the manufacturing costs incurred totaled $600,000 during the year, the cost of goods available for sale must have been: A. $585,000 B. $600,000 C. $610,000 D. $625,000

6. Last year there was no change in either the raw materials or the work in process beginning and ending inventories. However, finished goods, which had a beginning balance of $25,000, increased by $15,000. If the manufacturing costs incurred totaled $600,000 during the year, the cost of goods available for sale must have been: A. $585,000 B. $600,000 C. $610,000 D. $625,000

Because the work in process did not change, manufacturing costs incurred equals cost of goods manufactured. Total available for sale equals beginning inventory ($25,000) plus cost of goods manufactured ($600,000).