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Calculate Cost of Goods Calculate Cost of Goods ManufacturedManufactured
© Dale R. Geiger 2011 1
Terminal Learning ObjectiveTerminal Learning Objective• Task: Calculate Cost of Goods Manufactured• Condition: You are a cost advisor technician with
access to all regulations/course handouts, and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors.
• Standard: with at least 80% accuracy.• Explain terminology• Differentiate between product and period costs• Identify key elements in Inventory chain template• Solve for missing variables in Inventory chain template
© Dale R. Geiger 2011 2
Input
Output
What is the Cost of the
Output?
© Dale R. Geiger 2011 3
Cost Accounting TerminologyCost Accounting Terminology
• Direct Costs• MATERIALS and LABOR that can be identifiedidentified
with a particular product or process• Example: Lumber and hardware for furniture
• Indirect Costs• PRODUCTION-RELATED costs that cannot be
identifiedidentified with a particular product or process• Example: Maintenance on power tools
© Dale R. Geiger 2011 4
Cost Accounting TerminologyCost Accounting Terminology
• Direct Costs• MATERIALS and LABOR that can be identifiedidentified
with a particular product or process• Example: Lumber and hardware for furniture
• Indirect Costs• PRODUCTION-RELATED costs that cannot be
identifiedidentified with a particular product or process• Example: Maintenance on power tools
© Dale R. Geiger 2011 5
Cost Accounting TerminologyCost Accounting Terminology
• Direct Costs• MATERIALS and LABOR that can be identifiedidentified
with a particular product or process• Example: Lumber and hardware for furniture
• Indirect Costs• PRODUCTION-RELATED costs that cannot be
identifiedidentified with a particular product or process• Example: Maintenance on power tools
© Dale R. Geiger 2011 6
Cost Accounting TerminologyCost Accounting Terminology
• Direct Costs• MATERIALS and LABOR that can be identifiedidentified
with a particular product or process• Example: Lumber and hardware for furniture
• Indirect Costs• PRODUCTION-RELATED costs that cannot be
identifiedidentified with a particular product or process• Example: Maintenance on power tools
© Dale R. Geiger 2011 7
Cost Accounting TerminologyCost Accounting Terminology
• Direct Costs• MATERIALS and LABOR that can be identifiedidentified
with a particular product or process• Example: Lumber and hardware for furniture
• Indirect Costs• PRODUCTION-RELATED costs that cannot be
identifiedidentified with a particular product or process• Example: Maintenance on power tools
© Dale R. Geiger 2011 8
Cost Accounting TerminologyCost Accounting Terminology
• Manufacturing Overhead• An AGGREGATION of indirect production-
related costs• Will be ASSIGNED to products or processes and
become part of the cost of the product• Conversion Costs• Costs incurred to CONVERT raw materials into
finished goods • Examples: cost of machinery, labor, utilities
© Dale R. Geiger 2011 9
Cost Accounting TerminologyCost Accounting Terminology
• Manufacturing Overhead• An AGGREGATION of indirect production-
related costs• Will be ASSIGNED to products or processes and
become part of the cost of the product• Conversion Costs• Costs incurred to CONVERT raw materials into
finished goods• Examples: cost of machinery, labor, utilities
© Dale R. Geiger 2011 10
Cost Accounting TerminologyCost Accounting Terminology
• Manufacturing Overhead• An AGGREGATION of indirect production-
related costs• Will be ASSIGNED to products or processes and
become part of the cost of the product• Conversion Costs• Costs incurred to CONVERT raw materials into
finished goods• Examples: cost of machinery, labor, utilities
© Dale R. Geiger 2011 11
Cost Accounting TerminologyCost Accounting Terminology
• Manufacturing Overhead• An AGGREGATION of indirect production-
related costs• Will be ASSIGNED to products or processes and
become part of the cost of the product• Conversion Costs• Costs incurred to CONVERT raw materials into
finished goods• Examples: cost of machinery, labor, utilities
© Dale R. Geiger 2011 12
Cost Accounting TerminologyCost Accounting Terminology
• Manufacturing Overhead• An AGGREGATION of indirect production-
related costs• Will be ASSIGNED to products or processes and
become part of the cost of the product• Conversion Costs• Costs incurred to CONVERT raw materials into
finished goods• Examples: cost of machinery, labor, utilities
© Dale R. Geiger 2011 13
Overhead IllustrationOverhead Illustration
• Supervisor’s Salary • Utilities• Factory Depreciation• General Supplies
• Assigned to Products
2000 700 250 100
Manufacturing OverheadManufacturing Overhead
3050 3050
© Dale R. Geiger 2011 14
Check on LearningCheck on Learning
• Costs that can be identified with a particular product or process are called
• An aggregation of indirect costs is called
© Dale R. Geiger 2011 15
Cost Accounting TerminologyCost Accounting Terminology
• Product Costs• All costs incurred in the PRODUCTION of goods • Examples: Flour, sugar, baker’s wages, cost of
operating and maintaining bakery equipment • Must be CAPITALIZED to the inventory account• Will only be reported as an EXPENSE when the
product is sold
© Dale R. Geiger 2011 16
Cost Accounting TerminologyCost Accounting Terminology
• Product Costs• All costs incurred in the PRODUCTION of goods • Examples: Flour, sugar, baker’s wages, cost of
operating and maintaining bakery equipment • Must be CAPITALIZED to the inventory account• Will only be reported as an EXPENSE when the
product is sold
© Dale R. Geiger 2011 17
Cost Accounting TerminologyCost Accounting Terminology
• Product Costs• All costs incurred in the PRODUCTION of goods • Examples: Flour, sugar, baker’s wages, cost of
operating and maintaining bakery equipment • Must be CAPITALIZED to the inventory account• Will only be reported as an EXPENSE when the
product is sold
© Dale R. Geiger 2011 18
Cost Accounting TerminologyCost Accounting Terminology
• Product Costs• All costs incurred in the PRODUCTION of goods • Examples: Flour, sugar, baker’s wages, cost of
operating and maintaining bakery equipment • Must be CAPITALIZED to the inventory account• Will only be reported as an EXPENSE when the
product is sold
© Dale R. Geiger 2011 19
Cost Accounting TerminologyCost Accounting Terminology
• Product Costs• All costs incurred in the PRODUCTION of goods • Examples: Flour, sugar, baker’s wages, cost of
operating and maintaining bakery equipment • Must be CAPITALIZED to the inventory account• Will only be reported as an EXPENSE when the
product is sold
© Dale R. Geiger 2011 20
Cost Accounting TerminologyCost Accounting Terminology
• Period Costs• Costs incurred in all activities other than the
production of goods• Examples: Administrative Salaries, Sales
Commissions, Sales and Administrative Facilities• Will be reported as expenses on the Income
Statement in the period incurred• May be allocated to products for managerial
purposes
© Dale R. Geiger 2011 21
Check on LearningCheck on Learning
• The cost of utilities for the manufacturing facility would be a product or a period cost?
• The cost of utilities for the retail sales outlet would be a product or a period cost?
• Period costs are reported on which financial statement?
© Dale R. Geiger 2011 22
Cost ClassificationCost Classification
• Which are Direct Costs?
Direct Materials
Direct Labor
Indirect Materials
Indirect Labor
Other Overhead© Dale R. Geiger 2011
23
Cost ClassificationCost Classification
• Which are Direct Costs?
Direct Materials
Direct Labor
Indirect Materials
Indirect Labor
Other Overhead© Dale R. Geiger 2011
24
Cost ClassificationCost Classification
• Which are Indirect Costs?
Direct Materials
Direct Labor
Indirect Materials
Indirect Labor
Other Overhead© Dale R. Geiger 2011
25
Cost ClassificationCost Classification
• Which are Indirect Costs?
Direct Materials
Direct Labor
Indirect Materials
Indirect Labor
Other Overhead© Dale R. Geiger 2011
26
Cost ClassificationCost Classification
• Which are overhead?
Direct Materials
Direct Labor
Indirect Materials
Indirect Labor
Other Overhead© Dale R. Geiger 2011
27
Cost ClassificationCost Classification
• Which are overhead?
Direct Materials
Direct Labor
Indirect Materials
Indirect Labor
Other Overhead© Dale R. Geiger 2011
28
Cost ClassificationCost Classification
• Which are conversion costs?
Direct Materials
Direct Labor
Indirect Materials
Indirect Labor
Other Overhead© Dale R. Geiger 2011
29
Cost ClassificationCost Classification
• Which are conversion costs?
Direct Materials
Direct Labor
Indirect Materials
Indirect Labor
Other Overhead© Dale R. Geiger 2011
30
Cost ClassificationCost Classification
• Which are product costs?
Direct Materials
Direct Labor
Indirect Materials
Indirect Labor
Other Overhead© Dale R. Geiger 2011
31
Cost ClassificationCost Classification
• Which are product costs?
Direct Materials
Direct Labor
Indirect Materials
Indirect Labor
Other Overhead© Dale R. Geiger 2011
32
Check on LearningCheck on Learning
• Which category of cost includes all production costs except Direct Materials?
© Dale R. Geiger 2011 33
Types of InventoriesTypes of Inventories
• Merchandise Inventory• Includes goods purchased from a supplier and
sold to the customer without alteration• Examples?
• Raw Materials Inventory• Includes purchase cost of Direct Materials held
in inventory • Examples?
© Dale R. Geiger 2011 34
Types of InventoriesTypes of Inventories
• Work in Process Inventory• Includes Direct Materials costs and capitalized
labor and overhead costs of unfinished goods• Examples?
• Finished Goods Inventory • Includes Cost of Goods Manufactured
by the seller • Examples?
© Dale R. Geiger 2011 35
Overhead
The Inventory ChainThe Inventory Chain
© Dale R. Geiger 2011 36
Overhead
The Inventory ChainThe Inventory Chain
© Dale R. Geiger 2011 37
OverheadOverhead
The Inventory ChainThe Inventory Chain
© Dale R. Geiger 2011 38
Overhead
The Inventory ChainThe Inventory Chain
© Dale R. Geiger 2011 39
Overhead
The Inventory ChainThe Inventory Chain
© Dale R. Geiger 2011 40
The Inventory ChainThe Inventory Chain
Overhead
© Dale R. Geiger 2011 41
The Inventory ChainThe Inventory Chain
OverheadOverhead
© Dale R. Geiger 2011 42
The Inventory ChainThe Inventory Chain
OverheadOverhead
© Dale R. Geiger 2011 43
Input-Output EquationInput-Output Equation
Beginning + Input – Output = End
If you take more water out of the bucket than you put in,
what happens to the level in the bucket?
© Dale R. Geiger 2011 44
Check on LearningCheck on Learning
• What are the key variables to the Work in Process account?
• What is the input to the raw materials account?
© Dale R. Geiger 2011 45
Using the Inventory ChainUsing the Inventory Chain
© Dale R. Geiger 2011 46
Using the Inventory ChainUsing the Inventory Chain
© Dale R. Geiger 2011 47
Using the Inventory ChainUsing the Inventory Chain
© Dale R. Geiger 2011 48
Using the Inventory ChainUsing the Inventory Chain
© Dale R. Geiger 2011 49
Using the Inventory ChainUsing the Inventory Chain
© Dale R. Geiger 2011 50
Using the Inventory ChainUsing the Inventory Chain
© Dale R. Geiger 2011 51
Using the Inventory ChainUsing the Inventory Chain
© Dale R. Geiger 2011 52
Practical ExercisePractical Exercise
© Dale R. Geiger 2011 53
Accounting for Manufacturing Accounting for Manufacturing SpreadsheetSpreadsheet
Enter the information given in the exercise above into the white blanks in the T-accounts
© Dale R. Geiger 2011 54
Accounting for Manufacturing Accounting for Manufacturing SpreadsheetSpreadsheet
The “Results” tab displays the calculations using the given data
© Dale R. Geiger 2011 55
Accounting for Manufacturing Accounting for Manufacturing SpreadsheetSpreadsheet
“Solve” indicates that the value displayed has been calculated using the information given in the Data Input tab.
© Dale R. Geiger 2011 56