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FINANCIAL STATEMENTS : THE

BASES FOR PLANNING AND


CONTROL

Lecture # 3
REQUIREMENT IN COST
ACCOUNTING

A Manufacturing A/C Is
Prepared In Addition To
The Trading And Income
Statement Accounts
COMPARING MERCHANDISING AND
MANUFACTURING ACTIVITIES

Merchandisers . . . Manufacturers . . .
 Buy finished  Buy raw
goods. materials.
 Sell finished  Produce and sell
goods. finished goods.
MegaLoMart
MANUFACTURING COST CONCEPTS

Financial
Accounting Managerial
Cost is a measure of Accounting
resources used or Product costs are the
given up to achieve a costs a company
stated purpose. assigns to units
produced.
MANAGERIAL
COST CONCEPTS

 Manufacturing consists of activities and


processes that convert raw materials into
finished goods.
DIRECT COSTS AND INDIRECT
COSTS
Direct costs Indirect costs
 Costs that can be  Costs cannot be easily
easily and conveniently and conveniently traced
traced to a unit of to a unit of product or
other cost object.
product or other cost
objective.  Example: Manufacturing
overhead
 Examples:
 Direct material
 Direct labor
MANUFACTURING COSTS

 Manufacturing costs are usually classified as


follows:
1. Direct materials,
2. Direct labor, and
3. Manufacturing overhead.
COST OF GOODS SOLD
COMPONENTS

 Under a periodic inventory system, the


income statements of a merchandiser and a
manufacturer differ in the cost of goods sold
section.
ILLUSTRATION
COST OF GOODS SOLD
COMPONENTS

Merchandiser

Beginning Ending
Merchandise + Cost of Goods - Merchandise =
Inventory Purchased Inventory
Manufacturer Cost of
Goods Sold
Beginning Ending
Finished Goods + Cost of Goods - Finished Goods =
Manufactured
Inventory Inventory
INVENTORIES

 Most manufacturers maintain a perpetual


inventory system that uses FIFO, LIFO, or moving
average methods of costing.
 An inventory ledger is maintained to provide
support for the control accounts.
 Some manufacturers may use a factory ledger,
which contain all of the accounts relating to
manufacturing.
INVENTORIES

Merchandiser Manufacturer
Current assets:
Current assets:
Cash
Cash Accounts receivable
Accounts receivable Inventories:
Finished goods
Merchandise Work in process
inventory
Materials
PRODUCT COSTS

Costs that are a necessary and integral part of


producing the finished product.
include each of the manufacturing cost elements

(direct materials, direct labor, and


manufacturing overhead)
These costs are not expensed to cost of goods

sold under the matching principle until the


finished goods inventory is sold.
PERIOD COSTS

a) are identifiable with a specific time period,


b) relates to nonmanufacturing
non-inventoriable costs, and
c) include selling and administrative expenses.
ILLUSTRATION:
PRODUCT VERSUS PERIOD COSTS
Product Costs

Direct Materials { Prime


Costs
Manufacturing
Direct Labor {
Costs
Conversion
Manufacturing Costs
Overhead

Period Costs

Selling Expenses
Nonmanufacturing
Costs Administrative
Expenses
NONMANUFACTURING COSTS

a) Administration / Operating costs

a) Marketing and selling costs


ADMINISTRATION EXPENSES

 All executive, organizational,


and clerical costs.
 Examples:
- managers’ salaries
- legal and accountancy
charges
- depreciation of accounting
machinery & secretarial
salaries
SELLING AND DISTRIBUTION
EXPENSES

Costs necessary to get


the order and deliver the
product.
Examples:
- Sales staff’s
- Salaries & commission
- Carriage outwards
- Depreciation of
delivery vans
- Advertising expenses
COST OF GOODS SOLD STATEMENT

 Direct materials:
 Beginning Materials inventory xxx
 Purchases xxx
 less purchases returns and allowances xxx xxx
 Materials available for use xxx
 less ending materials inventory xxx
 direct materials consumed xxx
 Direct labor xxx
 Factory overhead
 Indirect labor xxx
 Salaries xxx
 Payroll taxes xxx
 Power xxx
 Heat xxx
 Light xxx
 Factory supplies xxx
 Depreciation-factory building xxx
 Depreciation – machinery xxx
 Repairs and maintenance xxx
 Patent xxx
 Tools and dies used xxx
 Insurance xxx
 Total factory overhead cost xxx
 Total manufacturing cost
xxx
 Total manufacturing cost xxx
 Add beginning work in process inventory xxx
 xxx
 less ending work in process inventory xxx
 Cost of goods manufactured xxx
 Add beginning finished goods inventory xxx
 Cost of goods available for sale xxx
 less ending finished goods inventory xxx
 Cost of goods sold xxx
STATEMENT OF COST OF GOODS SOLD

Pure-Ice Inc. had $52,000 of inventory in


direct materials inventory on January 1,
2005. During the year, Pure-Ice
purchased $586,000 of additional direct
materials. At December 31, 2005, $78,000
of the direct materials were still on hand.
STATEMENT OF COST OF GOODS SOLD

In addition to the direct materials, Pure-


Ice incurred $306,000 of direct labor cost
during 2005. Manufacturing overhead for
2005 was $724,000.
Pure-Ice started 2005 with $132,000 in
work in process. During 2005, units
costing $1,480,000 were transferred to
finished goods inventory.
STATEMENT OF COST OF GOODS SOLD

Pure-Ice Inc. had $300,000 of inventory in


Finished Goods inventory on January 1,
2005. At December 31, 2005, $350,000 of
the Finished Goods were still on hand.

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