Scribd
Upload
316 views22 pages

Manufacturing Cost

This document discusses manufacturing costs, including direct materials costs, direct labor costs, and manufacturing overhead costs. It defines these terms and explains how they flow through the manufacturing process. Direct materials include raw materials that are traced to finished products. Direct labor includes wages of employees who work directly on products. Manufacturing overhead includes indirect materials, indirect labor, equipment costs, and other costs not traced to specific products. The document also distinguishes between product costs, which become inventory, and period costs, which are expenses. Finally, it provides examples to illustrate how direct materials, direct labor, and overhead flow through a manufacturing company's inventory accounts.

Uploaded by

adane
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
316 views22 pages

Manufacturing Cost

This document discusses manufacturing costs, including direct materials costs, direct labor costs, and manufacturing overhead costs. It defines these terms and explains how they flow through the manufacturing process. Direct materials include raw materials that are traced to finished products. Direct labor includes wages of employees who work directly on products. Manufacturing overhead includes indirect materials, indirect labor, equipment costs, and other costs not traced to specific products. The document also distinguishes between product costs, which become inventory, and period costs, which are expenses. Finally, it provides examples to illustrate how direct materials, direct labor, and overhead flow through a manufacturing company's inventory accounts.

Uploaded by

adane
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 22

CHAPTER Manufacturing Cost

Addis College

Argaw Asha (PhD)


2.1Manufacturing Operations

Steps in the Manufacturing Process:


Convert raw Sell
Buy raw
materials into finished
materials.
finished goods. goods.

Direct Direct labor and Cost of


materials manufacturing goods
costs. overhead costs. sold.
2.1.1 Direct Materials
Direct-material
Raw materials cost: refers to the
& component acquisition costs of
Can be traced materials that are
parts that
directly and physically
become an identified as a part
conveniently
integral part of the goods
to products.
of finished manufactured
products. &that may be
traced to the
manufactured
goods
If materials cannot be traced directly to products,
the materials are considered indirect and are part
of manufacturing overhead.
Direct-labour2.1.2
costsDirect Labor
are the wages of all labor

The wages of all labor that can be traced


specifically and exclusively to the manufactured
goods in an economically feasible way.

Includes the payroll cost of direct workers.

Those employees
who work directly
Direct labor Wage on the goods
× being
hours rate
manufactured.
(Direct Labor, Cont’d)

Includes the payroll cost of direct workers.

The cost of
employees who do
not work directly on Those employees
the goods is who work directly
considered indirect on the goods
labor and is part of being
manufacturing manufactured.
overhead.
2.1.3 Manufacturing Overhead

All manufacturing costs other than direct


materials and direct labor.

Includes: Many labor costs, such as that of


janitors, forklift truck operators,
 Indirect materials. plant guards, & storeroom clerks
 Indirect labor. are considered to be indirect labor
 Machinery and because it’s impossible to trace
such activity to specific products.
equipment costs. Other examples are power,
 Cost of regulatory supplies, property taxes, rent,
compliance. insurance, & depreciation.
(Manufacturing Overhead, Cont’d)

All manufacturing costs other than direct


materials and direct labor.

Includes:
 Indirect materials.
 Indirect labor. Does not include
selling or general
 Machinery and and administrative
equipment costs. expenses.
 Cost of regulatory
compliance.
(Manufacturing Overhead, Cont’d)
NB: In addition to direct-
material, direct-labor, & indirect
The cost to manufacturing costs, all
manufacturing companies also
produce a unit of incur costs associated with the
product includes: other value chain functions
Direct material (R&D, design, marketing,
distribution, and customer
Direct labor service). These costs are
Manufacturing treated as Selling & Admin.
Expenses. These costs do not
overhead constitute a part of the inventory
cost of the manufacturing
products.
(Manufacturing Overhead, Cont’d)

The cost to
produce a unit of
product includes: Manufacturing overhead
Direct material must be mathematically
allocated to each unit of
Direct labor product using a
Manufacturing predetermined overhead
overhead application rate.
(This will be discussed
later in this chapter.)
2.2 Product Costs Versus Period Costs
Costs appear on both the income statement, as cost of goods sold,
and the balance sheet, as inventory amounts. When preparing both
income statements and balance sheets, accountants frequently
distinguish between product costs and period costs.

Product Costs: are costs Period Costs: Costs that are


identified with goods produced deducted as expense during the
or purchased for resale. Product current accounting period without
costs first become part of the going through an inventory stage.
inventory on hand. These A merchandising firm also has a
product costs (inventoriable variety of selling & admin.
costs) become expenses (in the Expenses. These costs are period
form of COGS) only when the Co. costs because they are deducted
sells the inventory. from revenue as expenses.
(Product Costs Versus Period Costs,
Cont’d)

Balance Sheet
Product Costs
(manufacturing Current assets
costs) as and inventory
incurred
When goods
Income are sold.
Statement
Period Costs Revenue
(operating COGS
expenses and Gross profit
income taxes.) Expenses
as Net income.
incurred
2.3 Inventories of a Manufacturing
Business

Raw materials - inventory on


hand and available for use.

Finished Work in
goods- process -
completed partially
goods awaiting completed
sale. goods.
2.4 The Flow of Physical Goods

Direct Materials Direct Factory


Warehouse
materials materials
purchased used

Direct labor &


Manufacturing overhead
Finished
goods
Finished goods
Warehouse
Goods
sold
(The Flow of Physical Goods, Cont’d)

Direct Materials Direct Work in Process


materials Inventory materials Inventory
purchased used
$$$ $$$ $$$ $$$

Direct labor &


Manufacturing overhead
Cost of goods
manufactured
Cost of Finished Goods
Goods Sold Inventory

$$$ $$$ $$$


The Flow of Physical Goods, Example

Akaki Metal Melting Mfg. had Br. 52,000 of


inventory in direct materials inventory on January
1, 2012. During the year, Akaki purchased Br.
586,000 of additional direct materials. At
December 31, 2012, Br. 78,000 of the direct
materials were still on hand.
How much direct material was placed into
production during 2012?
The Flow of Physical Goods, Example

Beginning materials
inventory Br. 52,000
+ Materials purchased 586,000
Materials available to be
=
placed into production Br. 638,000
Materials placed into
–
production ??
Ending materials
=
inventory Br. 78,000
The Flow of Physical Goods, Example

Beginning materials
inventory Br. 52,000
+ Materials purchased 586,000
Materials available to be
=
placed into production Br. 638,000
Materials placed into
–
production 560,000
Ending materials
=
inventory Br. 78,000
The Flow of Physical Goods, Example

In addition to the direct materials, Akaki


incurred Br. 306,000 of direct labor cost
during 2012. Manufacturing overhead for
2012 was Br. 724,000.
Akaki started 2012 with Br. 132,000 in
work in process. During 2012, units
costing Br. 1,480,000 were transferred to
finished goods inventory.
What is the ending balance in work
in process at December 31, 2012?
The Flow of Physical Goods, Example

Beginning work in
process inventory Br. 132,000
+ Manufacturing costs
added 1,590,000
= Total costs in process
during
Direct the yearBr. 560,000 #VALUE!
Materials
– Cost
Direct of goods
Labor 306,000
completed during the
Manufacturing
year
Overhead 724,000 (1,480,000)
= Ending
Total
work in
costs added
process inventory ?
during the year Br. 1,590,000
The Flow of Physical Goods, Example

Beginning work in
process inventory Br. 132,000
+ Manufacturing costs
added 1,590,000
= Total costs in process
during the year 1,722,000
– Cost of goods
completed during the
year (1,480,000)
= Ending work in
process inventory Br. 242,000
CONQUEST, INC.
Schedule of the Cost of Finished Goods Manufactured
For the Year Ended December 31, 2012

Work in process inventory, beg. Br. 30,000


Manufacturing cost assigned to
production:
Direct Materials Br. 150,000
Direct Labor 300,000
Manufacturing overhead 360,000

Total manufacturing costs 810,000


Total cost of all work in process
during the year Br. 840,000
Less: Work in process
inventory, end of year (40,000)
Cost of finished goods manufactured Br. 800,000
Beginning finished goods
inventory Br. 150,000
Add: Cost of finished goods
manufactured during the
CONQUEST, INC.
year
Schedule of the Cost of Finished Goods Manufactured
800,000
Cost 31,
For the Year Ended December of2012
finished goods
available for sale Br. 950,000
Work in process inventory, beg. Br. 30,000
Manufacturing cost assigned to Less: Ending finished goods
production:
Direct Materials
inventory
Br. 150,000
168,000
Direct Labor Cost of Goods Sold
300,000 Br. 782,000
Manufacturing overhead 360,000

Total manufacturing costs 810,000


Total cost of all work in process The cost of goods
during the year Br. 840,000
Less: Work in process
completed during
inventory, end of year (40,000) the period is used
Cost of finished goods manufactured Br. 800,000
to compute COGS
for the period.

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy