calculate cost of goods manufactured © dale r. geiger 20111

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