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Cost Accounting
H.T.I
.
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Introduction
The management functions:
1 Planning
2 Organizing
3 Directing
4 Controlling
Managerial

Cost

Data

1 Direct materials cost

2 Direct labor cost
3 Factory overhead cost

xxxx
xxxx
xxxx

Total manufacturing costs

xxxx

Need information

Direct costs:
1 Direct materials
2 Direct labor

Indirect costs:
1 Indirect cost of raw materials
2 Indirect cost of labor
3 Indirect cost of factory overhead

Classifying Manufacturing Costs

Some people further classify manufacturing costs by combining two of the three basic
elements.
1 When direct materials and direct labor cost are combined, they are refer to as prime costs,
Since they are the two major costs of producing a product.
When direct labor and factory overhead costs are combined, they are referred to as
conversion costs.

Costs are two:

1 Product costs (in the factory)

Equal (materials + labor + factory overhead) costs
2 Period costs
Selling cost

Administrative cost

All that is spent on marketing process.

Ex: Rent exhibitions - Consumption car sales
and distribution Commissions - Anything
to be paid in order to market the product.

They are the people who work in managerial

positions
Ex: Expenses salaries - Expenses of their cars Expenses stationery and printing.

* The costs of furniture can be found in (Product selling Administrative) costs.

* Anything sold without the cost of manufacturing this means that it was purchased from
abroad, and there is Exp. & Rev.

* The Merchandising company has one kind of inventory

* The Manufacturing company has More than one type:
1 Finished goods inventory.
2 Raw materials inventory.
3 Work in process inventory.

Example:
ABC Merchandising Company
Income statement
On Dec. 31,2013

Net sells
Cost of goods sold
Beginning Merchandising Inventory Jan 1
Add: Net purchases
Cost of goods available for sale
Less: Ending merchandising inventory Dec
Cost of goods sold

xxx
xxx
+
xxx
xxx
)xxx)

xxx
xxx

Gross profit

* Gross profit = net sells cost of goods sold

El-Nasr Manufacturing Co.

Income statement
On Dec. 31,2013

Net sells
Cost of goods sold:
Beginning finished goods Inventory Jan 1
Add: Cost of goods production (manufactured)
Cost of available finished goods sold
Less: Ending finished goods inventory

xxx
xxx
+
xxx
xxx
)xxx)

xxx
xxx

Cost of finished goods sold

Gross profit
Balance sheet
Merchandising
Current Assets:
Cash
A/R
N/R
Inventory

Manufacturing
Cash
A/R
N/R
Inventory:
1 Finished goods inventory.
2 Raw materials inventory.
3 Work in process inventory.

Condensed Income statement for a manufacturing Business

Elements of Manufacturing Costs:

Regardless of the type of product a manufacturing business makes, its cost is made up of three
basic elements: direct materials, direct labor, and factory overhead.

1 Direct Materials cost:

Direct materials are the materials that are used to make and can be easily traced to a finished
product. Direct materials are also called raw materials.
As an example, suppose you decide to manufacture pencils. The direct materials you need to
manufacture those pencils include wood, graphite, paint, glue, erasers, and metal bands. The
direct materials of one manufacturer may be the finished goods of another manufacturer. For
example, flour may be the finished product of a miller but part of the direct materials used by a
baker.

2 Direct labor costs:

The wages paid to employees who actually work on a product with either machines or hand
tools are called direct labor.
Direct labor includes only the wages paid to workers who convert the direct materials into
finished products. It does not include the wages and salaries paid to supervisors, office
workers, managers, maintenance personnel, or others who are not directly involved in the
production process.

3 Factory (Manufacturing) overhead costs:

All other manufacturing costs that cannot be easily or directly traced to the products being
manufactured are referred to as factory overhead. Factory over-head include a number of
different types of production-related costs. Some examples of factory overhead costs are listed
below.
Indirect labor
Supervisory salaries
Heat, light, and power for the factory
Depreciation of factory equipment and factory buildings
Repairs and maintenance of factory equipment and buildings
Insurance on factory equipment and buildings
Factory supplies used
Payroll taxes on the wages and salaries of factory personnel
Property taxes on factory equipment and buildings
Cost of small tools
Separate accounts are kept for each type of factory overhead cost. In some manufacturing
businesses, there are so many factory overhead accounts that the businesses use a Factory
Overhead controlling account. Individual accounts for each cost item are maintained in a
factory overhead subsidiary ledger.
Remember: Factory overhead costs are those production-related costs that cannot be easily or
directly traced to the products being manufactured.
Most of the items listed above are self-explanatory. Two items that need further discussion are
indirect labor and factory supplies.

Indirect Labor

As explained earlier, direct labor is the wages paid to employees who actually convert the raw
materials into finished products. However, a factory could not operate without the services of
other types of employees. These other employees include maintenance personnel,
timekeepers, security guards, fork lift operators, and so on. The wages paid to these factory
employees who do not physically work on the products are called indirect labor.
Indirect labor is different from the salaries paid to supervisors. Salaries are set amounts paid
each pay period to employees. Wages are the amounts paid to employees at a specified rate
per hour. Wages can vary greatly, depending upon the number of hours worked by employees.
Salaries do not vary; salaried employees receive the same amount each pay period regardless
of the number of hours they work. Because of this difference, separate accounts are
maintained for indirect labor and for supervisory salaries.

Factory Supplies
Direct materials are the materials that can be easily traced to a finished product or group of
products. However, other materials are used in the production process. These materials include
such items as the grease and oil for machinery, cleaning supplies, or the sandpaper used by a
furniture maker. These other indirect materials are referred to as factory supplies.

Before reading further, do the following activity to check your understanding of manufacturing
costs.

Check Your Learning

Write your answers to the following questions on a sheet of notebook paper.
1- The sheet metal, glass, and tires of an automobile manufacturer are considered to be
2- ......... labor is the wages paid to the employees who actually produce a product;.
labor is the wages paid to such employees as repair and janitorial workers.
3- Examples of .. Include depreciation of factory equipment, factory sup-plies, and
indirect labor.
4- . are often referred to as indirect materials.
Compare your answers with those in the answers section. Re-read the preceding part of the
chapter to find the correct answers to any questions you may have missed
Example:
Cairo manufacturing company has the following information for July 2014.
- Cost of direct material used in production L.E 120,000
- Direct labor
L.E 310,000
- Factory overhead costs
L.E 200,000

- working process inventory July 1

- working process inventory July 31
- Finished goods inventory July 1
- Finished goods inventory July 31

L.E 100,000
L.E 106,000
L.E 42,000
L.E 48,000

Required: Determined both:

A) Cost of goods manufactured.
B) Cost of goods sold.
Cairo manufacturing company
Statement of cost of goods manufactured
July, 2014
Beginning work in process inventory July
Direct material used in production
Direct labor
Factory overhead costs
Total manufactured costs incurred

,
,
,
,

+
,

Less: Ending work in process July 31

,
,

Cost of goods manufactured

Total July manufactured cost

Cost of goods sold

Bingeing finished good inventory July 1

Less: Ending finished goods inventory July 31

,
+
,
,
,

Cost of goods sold

Add: Cost of goods manufactured

Cost of finished goods available for sale

Example: The following data for El-NASR Manufacturing co. for January 2014:

Inventory
Materials
Work in process

Jan 1
$ ,
,

Dec 31
,
,

Finished goods

7
- Manufacturing costs incurred during 2014:
Material purchased
Direct labor
Factory overhead:
Indirect labor
Depreciation Exp.
Factory supplies
Total
Sales
Selling cost Exp.
Administrative cost

,
,
,
,
,
,
.
.
.

Required:
1 The cost of materials used during 2014?
2 The total manufacturing cost incurred 2014?
3 Cost of goods manufactured?
4 Net income of 2014?

1 The cost of materials used during 2014:

Bingeing materials inventory Jan 1

Less: Ending materials inventory Dec 31

,
+
,
,
,

Cost of material used ( Direct material )

Add: Material purchased

Cost of materials available

2 The total manufacturing cost incurred 2014:

Direct material

Factory overhead

,
+
,
+
,

Total manufacturing cost

Direct labor

3 Cost of goods manufactured:

Bingeing work in process inventory Jan 1

Less: Ending work in process inventory Dec 31

,
+
,
,
,

Cost of goods manufactured

Total manufacturing cost incurred 2014

Total manufacturing cost

4 Net income of 2014:

El-NASR Manufacturing company

Income statement
For the year ended 2014
Net sales
Cost of goods sold:
Bingeing finished inventory

9
,

Add: Cost of goods manufactured

Cost of finished goods available for sale
Less: Ending finished inventory
Cost of goods sold
Gross profit
Less: operating Exp.
-Selling Exp. (costs)

,
+
,
,
,

,
,
,
+
,

-Administrative Exp.
,
,

Net income

The difference between financial accounting and managerial Accounting (cost accounting):
There are both similarities and differences between financial accounting and managerial
accounting.

Feature

Financial Accounting

1 Primary uses of reports

2 Types & frequency of reports
purposes of reports

External users: creditor

,suppliers, stock holders,
regulators banks
Financial statement quarterly
and monthly
General purpose

4 comment of reports

Prepared to business as a whole,

highly accepted (GAAP)

5 Verifications process

Audited by CPA

PE 16-

on page

Managerial Accounting
Internal users: officers &
managers
Internal reports as frequency
as needed
Special purposes for specific
decision
Pertains to subunits of
business extends beyond
double entry to any relevant
data based as standard
No In dependent Audits

Direct materials, direct labor, and factory overhead

Identify the following costs as direct materials (DM), direct labor (DL), or factory
overhead (FO) for a magazine publisher.
a. Paper used in the magazine
b. Maintenance on printing machines
c. Wages of printing machine employees
d. Staples used to bind magazines

10

The Answer:
a
DM

FO

DL

FO

PE 16-3A on page : Prime and conversion costs

Identify the following costs as a prime cost (P), conversion cost (C), or both (B) for an
automobile manufacturer,
a. Steel
b. Wages of employees that operate painting equipment
c. Oil used for assembly line machinery
d. Wages of the plant manager
The Answer:
a)
P

b)

c)

d)

PE 16-4A on page 770: Product and period costs

Identify the following costs as a product cost or a period cost for an automobile
manufacturer.
a. Sales staff salaries
b. Rent on office building
c. Wages of employees that operate painting equipment
d. Steel
The Answer:
a

Period cost b

Period cost c

PE 16-4B on page 770: Product and period costs

Product cost d

Product cost

Identify the following costs as a product cost or a period cost for a magazine publisher.
printing machines
a. Maintenance on
Neaves Manufacturing Company
b. Sales salaries
cost of goods manufactured
c. Depreciation expense corporate headquarters
d. Paper used for the magazine

11

The Answer:
a

Product cost b

Period cost

Period cost d

Product cost

EX 16-12 on page 781: Cost of goods manufactured for a manufacturing company

Two items are omitted from each of the following three lists of cost of goods
manufactured statement data. Determine the amounts of the missing items, identifying
them by letter

Work in process inventory, November 1

Total manufacturing costs incurred during November

Total manufacturing costs

(c)

,
,

Work in process inventory, November 30

(a)
,

Cost of goods manufactured

(b)

(d)

The Answer:
a) ,
+
,
d)
,
- ,

,
,

b)
e)

,
,

- ,
- ,

c)
f)

(e)

,
,

,
(f)
,

,
,

,
,

EX 16-13 on page 781: Cost of goods manufactured for a manufacturing company

The following information is available for Neaves Manufacturing Company for the month
ending January 31, 2012:
Cost of direct materials used in production

Direct labor

Work in process inventory, January 1

Work in process inventory, January 31

Total factory overhead

Determine Neaves' cost of goods manufactured for the month ended January 31, 2012.

For the month ended January 31,

12

Beginning work in process inventory Jan 1

Direct material used in production
Direct labor
Total Factory overhead costs
Total manufactured costs incurred

,
,
,

+
,

Less: Ending work in process inventory Jan 31

,
,

Cost of goods manufactured

Total July manufactured cost

EX 16-14 on page 781: Income statement for a manufacturing company

Two items are omitted from each of the following three lists of cost of goods sold data
from a manufacturing company income statement. Determine the amounts of the
missing items, identifying them by letter.
Finished goods inventory, November 1

(e)

Cost of goods manufactured

(c)

Cost of goods available for sale

Finished goods inventory, November 30

(a)
,

Cost of goods sold

(b)

(d)

,
(f)
,

The Answer:
a)
d)

+
,

,
,

,
,

b)
e)

,
,

,
,

,
,

c)
f)

,
,

,
,

EX 16-15 on page 782: Statement of cost of goods manufactured for a manufacturing

company

,
,

Cost data for Bedford Manufacturing Company for the month ending May 31, 2012, are
as follows:
Inventories
Materials
Work in process
Finished goods

May 1
,
,
,

May 31
,
,
,

Direct labor
$
,
Materials purchased during May
,
Factory overhead incurred during May:
Indirect labor
,
Machinery depreciation
,
Heat, light, and power
,
Supplies
,
Property taxes
,
Miscellaneous cost
,

a. Prepare a cost of goods manufactured statement for May 2012.

b. Determine the cost of goods sold for May 2012.

13

Bedford Manufacturing Company

Statement of cost of goods manufactured
For the month ended May 31, 2012.

14

Beginning work in process inventory May 1

Direct materials:
Materials inventory May 1
Materials purchased during May

,
,

Cost of materials available for use

Less: Materials inventory May 31

,
,
,
,

Direct labor
Factory overhead costs:
Indirect labor

Machinery depreciation
Heat, light, and power
Supplies
Property taxes
Miscellaneous cost

,
,
,
,
,
,
,

Total manufactured cost incurred

Total manufactured cost

,
,

Less: Ending work in process inventory, May 31

Cost of goods manufactured

Bedford Manufacturing Company

Deutsch
Company
Statement
of cost
of goods sold
For the month ended May 31, 2012.
Bingeing finished good inventory May 1

15

,
+
,

Add: Cost of goods manufactured

Cost of finished goods available for sale

Less: Ending finished goods inventory May 31

Cost of goods sold

EX PR 16-5A on page 786: Statement of cost of goods manufactured for a manufacturing

company

The following information is available for Deutsch Corporation for 2010:

Inventories
Materials
Work in process
Finished goods

January 1
,
,
,

December 31
,
,
,

Advertising expense (Selling Exp.)

Depreciation expense-office equipment (Adm. Exp.)
Depreciation expense-factory equipment (Over. Cost)
Direct labor (Manu. Exp.)
Heat, light, and power-factory (factory overhead cost)
Indirect labor (Factory overhead cost)
Materials purchased (DM Cost)
Office salaries expense (Adm. Exp.)
Property taxes-factory ( factory overhead cost)
Property taxes-office building (Adm. Cost)
Rent expense-factory (Factory overhead cost)
Sales (Income)
Sales salaries expense (Selling Exp.)
Supplies-factory ( Factory overhead cost)
Miscellaneous cost-factory ( Factory overhead cost)

Instructions:
a. Prepare the 2010 statement of cost of goods manufactured.
b. Prepare the 2010 income statement.

,
,
,
,
,
,
,
,
,
,
,
,
,
,
,

Statement of cost of goods manufactured

ForDeutsch
the yearCompany
ended 2010

16

work in process inventory May 1

Direct materials:
Materials inventory Jan 1
purchases

,
,
,
,

Cost of materials available for use

Less: Materials inventory Dec 31

+
Direct labor

Factory overhead costs:

Dep. Factory equipment.

Heat, light, and power

Indirect labor
Property taxes
Rent Exp.
Supplies
Miscellaneous cost

,
,
,
,
,

,
,

,
,

Total manufactured cost incurred

Total manufactured costs

Less: Ending work in process inventory, May 31

Cost of goods manufactured

Income statement
For the year ended 2010

17

Sales

Cost of goods sold:

Finished goods inventory Jan 1

Add:
Total Manufactured
Available finished goods for sale

,
,

Less:
Finished goods inventory Dec 31
Cost of goods sold

,
,

Gross profit
Operating Exp.:
Advertising expense
Sales expense

,
,

Total sales expense

Depreciation expense-office equipment
Property taxes-office building
Office salaries expense

,
,
,
,

Total Adm. Exp.

Net income

EX: you have the following information about the inventory transaction of ABC
Manufacturing Company. For August 2014:

- August, 1 Beginning inventory units 200, unit cost L.E 10

- August, 2 purchases inventory units 100, unit cost L.E 12
- August, 8 uses in processing 250
- August, 12 purchases inventory units 150, unit cost L.E 20
- August, 19 purchases inventory units 200, unit cost L.E 25
- August, 25 uses in processing 320
- August, 29 purchases inventory units 100, unit cost L.E 30

18

Required:
1 Direct materials used in processing.
2 Ending inventory.
(Under FIFO and LIFO method)

FIFO method
Date

Explanation

Purchases

Uses in process

Balances

Units
Aug. 1

Aug. 2

Unit
cost

Total Units

Units
cost

Total Units

Beginning
inv.
Purchases

Unit
cost

19

Aug. 8

Aug. 12

Uses in
processing

Purchases

Aug. 19

Purchases

Aug. 25

Uses in
processing

Aug. 29

Purchases

Direct materials used in processing = 2600+6600=9200

Ending inventory = 5000

LIFO method
Date

Explanation

Purchases

Uses in process

Total

Balances

Units
Aug. 1

Aug. 2

Unit
cost

Total Units

Units
cost

Beginning
inv.
Purchases

Total Units

Unit
cost

20

Aug. 8

Aug. 12

Uses in
processing

Purchases

Aug. 19

Purchases

Aug. 25

Aug. 29

Uses in
processing

Purchases

Direct materials used in processing = 2700+9400=121000

Ending inventory = 4100

Total