Introduction to Cost

Chapter 1 Accounting
Learning Objectives
After studying this chapter, you should be able to:

[1] Explain the distinguishing features of Cost accounting.

[2] Define the three classes of manufacturing costs.

[3] Distinguish between product and period costs.

[4] Explain the difference between a merchandising and a manufacturing income

statement.

[5] Indicate how cost of goods manufactured is determined.

1-1
 Management, Financial & Cost Accounting

Management Accounting

It measures and reports financial and

nonfinancial information that helps
managers make decisions to fulfill the
goals of an organization.

1-2
 Management, Financial & Cost Accounting

Financial Accounting

Its focus is on reporting to external parties.

It measures and records business transactions.

It provides financial statements based on

generally accepted accounting principles.

1-3
 Management, Financial & Cost Accounting

Cost Accounting

It provides information for both management

accounting and financial accounting.

It measures and reports financial

and nonfinancial data.

1-4
 Management, Financial & Cost Accounting

Cost Management

It describes the activities of managers in

planning and control of costs.

It includes the continuous reduction of costs.

It is a key part of general management

strategies and their implementation.

1-5
 Basic Cost Terminology

 Cost – sacrificed resource to achieve a specific objective

 Actual cost – a cost that has occurred

 Budgeted cost – a predicted cost

 Cost object – anything of interest for which a cost is

desired

1-6
 Basic Cost Terminology

 Cost accumulation – a collection of cost data in an

organized manner

 Cost assignment – a general term that includes gathering

accumulated costs to a cost object. This includes:

 Tracing accumulated costs with a direct relationship to

the cost object and

 Allocating accumulated costs with an indirect

relationship to a cost object

1-7
 Manufacturing Costs

Managers should ask questions such as the following.

1. What costs are involved in making a product or

providing a service?

2. If we decrease production volume, will costs decrease?

3. What impact will automation have on total costs?

4. How can we best control costs?

1-8
LO 2 Define the three classes of manufacturing costs.
 Manufacturing Costs

Manufacturing Costs
Manufacturing consists of activities and processes that
convert raw materials into finished goods.

1-9
LO 2 Define the three classes of manufacturing costs.
 Manufacturing Costs

Direct Materials
Raw Materials

Basic materials and parts used in

manufacturing process.

Direct Materials

Raw materials that can be physically and directly associated

with the finished product during the manufacturing process.

1-10
LO 2 Define the three classes of manufacturing costs.
 Manufacturing Costs

Indirect Materials

 Not physically part of the finished product or they are

an insignificant part of finished product in terms of
cost.

 Considered part of manufacturing overhead.

1-11
LO 2 Define the three classes of manufacturing costs.
 Manufacturing Costs

Direct Labor
Work of factory employees that can be
physically and directly associated with
converting raw materials into finished
goods.

Indirect Labor
Work of factory employees that has no physical
association with the finished product or for which it is
impractical to trace costs to the goods produced.

1-12
LO 2 Define the three classes of manufacturing costs.
 Manufacturing Costs

Manufacturing Overhead
 Costs that are indirectly associated with manufacturing
the finished product.

 Includes all manufacturing costs except direct materials

and direct labor.

 Also called factory overhead, indirect manufacturing

costs, or burden.

1-13
LO 2 Define the three classes of manufacturing costs.
 Manufacturing Costs

Review Question
Which of the following is not an element of manufacturing
overhead?

a. Sales manager’s salary.

b. Plant manager’s salary.

c. Factory repairman’s wages.

d. Product inspector’s salary.

1-14
LO 2 Define the three classes of manufacturing costs.
 Product Versus Period Costs

Product Costs
 Direct materials
 Components:  Direct labor
 Manufacturing overhead

 Costs that are an integral part of producing the

product.

 Recorded in “inventory” account.

 Not an expense (COGS) until the goods are sold.

1-15
LO 3 Distinguish between product and period costs.
 Product Versus Period Costs

Period Costs
 Charged to expense as incurred.

 Non-manufacturing costs.

 Includes all selling and administrative expenses.

1-16
LO 3 Distinguish between product and period costs.
 Product Versus Period Costs

Illustration 1-3

1-17
LO 3 Distinguish between product and period costs.
 A bicycle company has these costs: tires, salaries of employees
who put tires on the wheels, factory building depreciation, wheel
nuts, spokes, salary of factory manager, handlebars, and salaries
of factory maintenance employees. Classify each cost as direct
materials, direct labor, or overhead.

Direct Materials Direct Labor Overhead

 Tires.  Salaries of  Factory depreciation.

 Wheel nuts employees who put  Factory manager
tires on the wheels. salary.
 Spokes.
 Handlebars.  Factory maintenance
employees salary.
1-18
LO 3 Distinguish between product and period costs.
 Manufacturing Costs in Financial Statements

Income Statement
Under a periodic inventory system, the income statements
of a merchandiser and a manufacturer differ in the cost of
goods sold section.

“COGS”
1-19 LO 4 Explain the difference between a merchandising
and a manufacturing income statement.
 Manufacturing Costs in Financial Statements

Cost of Goods Manufactured

Cost of Goods Sold Components – (Periodic Inventory System)

Illustration 1-4

1-20 LO 4
 Manufacturing Costs in Financial Statements

Cost of goods sold sections of merchandising and

manufacturing income statements
Illustration 1-5

1-21 LO 4 Explain the difference between a merchandising

and a manufacturing income statement.
 Manufacturing Costs in Financial Statements

Review Question
For the year, Red Company has cost of goods manufactured
of $600,000, beginning finished goods inventory of $200,000,
and ending finished goods inventory of $250,000. The cost of
goods sold is
Beg. Inventory $200,000
a. $450,000.
+ COGs Manufactured 600,000
b. $500,000.
Goods Available for Sale 800,000
c. $550,000. - End. Inventory 250,000

d. $600,000. Cost of Goods Sold $550,000

1-22 LO4
LO4 Explain the difference between a merchandising
and a manufacturing income statement.
 Manufacturing Costs in Financial Statements

Determining the Cost of Goods Manufactured

Total Work in Process – (1) cost of beginning work in process and (2)
total manufacturing costs for the current period.
Total Manufacturing Costs – sum of direct material costs, direct labor
costs, and manufacturing overhead in the current year.
Illustration 1-6

1-23
LO 5 Indicate how cost of goods manufactured is determined.
 Illustration 1-7

Illustration 1-8

1-24
1-25
LO 5 Indicate how cost of goods manufactured is determined.
 Manufacturing Costs in Financial Statements

1-26
LO 5 Indicate how cost of goods manufactured is determined.
 Manufacturing Costs in Financial Statements

Balance Sheet
Inventory accounts for a manufacturer
Illustration 1-8

The balance sheet for a merchandising company shows just one

category of inventory.

LO 6 Explain the difference between a merchandising

1-27
and a manufacturing balance sheet.
 Manufacturing Costs in Financial Statements

Balance Sheet
Current assets sections of merchandising and manufacturing balance
sheets
Illustration 1-9

LO 6 Explain the difference between a merchandising

1-28
and a manufacturing balance sheet.
 Manufacturing Costs in Financial Statements

Review Question
A cost of goods manufactured schedule shows beginning and
ending inventories for:
a. Raw materials and work in process only
b. Work in process only
c. Raw materials only
d. Raw materials, work in process, and finished goods

LO 6 Explain the difference between a merchandising

1-29
and a manufacturing balance sheet.
 Manufacturing Costs in Financial Statements

Illustration: Suppose you started your own snowboard

factory, KRT Boards. Here are some of the costs that your
snowboard factory would incur. Assign the following costs:

Illustration 1-10

LO 6 Explain the difference between a merchandising

1-30
and a manufacturing balance sheet.
 Manufacturing Costs in Financial Statements

Illustration 1-10

1-31
 Manufacturing Costs in Financial Statements

If KRT Boards produces 10,000 snowboards the first year,

what would be the total manufacturing costs?
Illustration 1-11

LO 6 Explain the difference between a merchandising

1-32
and a manufacturing balance sheet.
 Manufacturing Costs in Financial Statements

Product Costing For Service Industries

 U.S. economy, in general, has shifted toward an emphasis
on providing services rather than goods.

 Over 50% of U.S. workers are now employed by service

companies.

 Trend is expected to continue in the future.

 Most of the techniques learned for manufacturing firms are

applicable to service companies.

LO 6 Explain the difference between a merchandising

1-33
and a manufacturing balance sheet.