CLASSIFICATIONS OF MANUFACTURING COSTS

Manufacturing operations purchase raw materials and converts these materials into finished goods through
the process of production. Three components of manufacturing costs are;
1. Direct Raw Material
2. Direct Labor
3. Manufacturing overhead

Product Costs
Product costs are those costs incurred to manufacture inventory. (Direct raw materials, direct labor and
manufacturing overhead costs).

Direct materials and direct labors are classified as prime costs because without them, production cannot be
started. Direct labor and manufacturing overhead can be pooled together and named as conversion costs.
(The cost of converting raw materials into finished product).

Period Costs
Period costs are nonmanufacturing costs which include selling and administrative expenses.

INVENTORIES OF A MANUFACTURING BUSINESS

1. Materials inventory- raw materials on hand and available for use in the production.
2. Work in process inventory- partially completed goods on which production activities have been
started but not yet completed.
3. Finished goods inventory- unsold finished products available for sale.

Basic example of Income statement

The income statements of a merchandiser and manufacturer differ in the cost of goods sold section.

MERCHANDISE COMPANY
Income Statement (partial)
For the year ended December 31, 2023
Sales revenue RM480,000
(Less): Cost of goods sold
Merchandise inventory, January 1 RM58,000
(+) Cost of goods purchased 507,000
Cost of goods available for sale 565,000
(-) Merchandise inventory, December 31 320,000
Cost of goods sold 245,000
Gross Profit 235,000

MANUFACTURING COMPANY
Income Statement (partial)
For the year ended December 31, 2023
Sales revenue RM530,000
Cost of goods sold
Finished goods inventory, January 1 RM73,000
(+) Cost of goods manufactured (see Illustration 1) 297,430
Cost of goods available for sale 370,430
(-) Finished goods inventory, Dec 31 64,000
Cost of goods sold RM306,430
Gross Profit 223,570

1
Illustration1: Cost of Goods Manufactured
Cammy Manufacturing Company
Cost of Goods Manufactured Schedule
For the Year Ended December 31, 2023
Direct materials
Raw materials inventory, January 1 13,400
(+) Raw materials purchases 120,500
Total raw materials available for use 133,900
Less: Raw materials inventory, December 31 18,200
Direct materials used 115,700
Direct labor 142,200
Manufacturing overhead
Indirect labor 11,000
Factory repairs 9,800
Factory utilities 8,000
Factory depreciation 7,550
Factory insurance 6,680
Total manufacturing overhead 43,030
Total current manufacturing costs 300,930
Plus: Work in process, January 1 16,500
Total cost of work in process 317,430
Less: Work in process, December 31 20,000
Cost of goods manufactured 297,430

Balance Sheet

Merchandise Company
Balance sheet
December 31, 2023
Current assets RM
Cash 85,000
Receivables (net) 172,000
Merchandise inventory 320,000
Prepaid expenses 17,600
Total current assets 594,600

Manufacturing Company
Balance sheet
December 31, 2023
$
Current assets
Cash 145,000
Receivables (net) 172,000
Inventories
Finished goods 64,000
Work in process 20,000
Raw materials 18,200 102,200
Prepaid expenses 15,000
434,200

2
Illustration 2

ComfortShoes manufacturing company has the following cost and expense data for the year ending
December 31, 2022.
RM RM
Raw materials, 1/1/22 24,000 Insurance, factory 11,200
Raw materials, 31/12/22 16,000 Property taxes, factory building 4,800
Raw materials purchased 164,000 Sales (net) 1,200,000
Indirect materials 12,000 Delivery expenses 80,000
Work in process, 1/1/22 64,000 Sales commissions 120,000
Work in process, 31/12/22 40,000 Indirect labor 72,000
Finished goods, 1/1/22 88,000 Factory machinery rent 32,000
Finished goods, 31/12/22 96,000 Factory utilities 52,000
Direct labor 280,000 Depreciation, factory building 19,200
Factory manager's salary 28,000 Administrative expenses 240,000

(a) Construct Manufacturing Costs Statement which shows the costs of goods manufactured for the period
ended 31/12/2022.

(b) Calculate cost of goods sold for the period ended 31/12/2022.

ComfortShoes Manufacturing Company

Cost of Goods Manufactured Schedule
For the Year Ended December 31, 2022
RM RM RM
Work in process, 1/1 64,000
Direct materials
Raw materials inventory, 1/1/22 24,000
(+) Raw materials purchased 164,000
Total raw materials available for use 188,000
Less: Raw materials inventory, 31/22 16,000
Direct materials used 172,000
Direct labor 280,000
Manufacturing overhead
Indirect labor 72,000
Indirect materials 12,000
Factory machinery rent 32,000
Factory utilities 52,000
Depreciation, factory building 19,200
Insurance, factory 11,200
Property taxes, factory building 4,800
Factory manager's salary 28,000
Total manufacturing overhead 231,200
Total manufacturing costs 683,200
Total cost of work in process 747,200
Less: Work in process, 31/22 40,000
Cost of Goods Manufactured 707,200

3
 ComfortShoes Manufacturing Company
Income statement
For the Year Ended December 31, 2022
RM
Sales (net) 1,200,000
Cost of goods sold
Finished goods inventory, January 1 88,000
(+) Cost of goods manufactured 707,200
Cost of goods available for sale 795,200
Less: Finished goods inventory, December 31 96,000
Cost of goods sold 699,200
Gross profit 500,800
Operating expenses
Administrative expenses 240,000
Sales commissions 120,000
Delivery expenses 80,000
Total operating expenses 440,000
Net profit 60,800

ComfortShoes Manufacturing Company

Balance sheet (partial)
December 31, 2022
RM RM
Current assets
Cash 15,500
Short-term investments 19,600
Accounts receivable (net) 85,000
Inventories
Finished goods 96,000
Work in process 40,000
Raw materials 16,000 152,000
Prepaid expenses 7,600
Total current assets 279,700