CHAPTER 2:

COST CLASSIFICATION AND

STATEMENT OF COST
WHAT IS COST?
 Cost is a sacrifice of resource to achieve some
future benefits.
 The amount of expenditure (actual or notional)
incurred on, or attributable to, a given thing.
The value of Economic Resources used
 Expense is known as expired cost.
 Benefits
of which have been derived is known
as expense.
 Expense always results in negative cash flow.
 ELEMENTS OF COST
 For proper control and managerial decisions,
management is to be provided with necessary
data to analyze and classify costs. For this
purpose ,the total cost is analyzed by elements
of cost i.e., materials, labor and other expenses.
 ELEMENTS OF COST ARE
 Materials

Direct and indirect.

 Labor

Direct and indirect.

 Other Expenses
Direct and indirect.
 ELEMENTS COST
OF
COST

OTHER EXPENSES
MATERIALS LABOUR

DIRECT INDIRECT
DIRECT INDIRECT INDIRECT
DIRECT

OVERHEADS

SOH DOH
FOH AOH
 OVERVIEW OF COST CATEGORIES FOR
A MANUFACTURING FIRM
 Allcosts incurred by the firm must be
accounted for in its financial statements
 MANUFACTURING COSTS
¸ Direct Labor (DL)
¸ Direct Materials (DM)
¸ Direct Expense
¸ Factory Overhead (FOH)
 Indirect Materials
 Indirect Labor
 Other Factory Expenses
NON-MANUFACTURING COSTS
¸ Marketing or Selling Costs
¸ Administrative Costs
 MANUFACTURING COSTS
1. Direct Materials (DM)
 Materials that are consumed in the
manufacturing process and physically
incorporated in the finished product
 Materials whose cost is sufficiently large to
justify the record keeping expenses necessary
to trace the costs to individual products
 These are those materials which can be
identified in the product and can be
conveniently measured and directly charged to
the product.
 For eg:
 All raw materials like jute in the manufacture
of gunny bags.
 Timber in furniture
 Cloth in dress
 Materials specifically purchased for a specific
job.
 Parts or components purchased or produced.
2. Direct Labor (DL)
 Labor time that is physically traceable to the
products being manufactured and whose
cost is sufficiently large to justify the record
keeping expenses necessary to trace the
costs to individual products
 It is all labor expended in altering the
construction, composition, confirmation or
condition of the product.
 It is the labor which can be conveniently
identified or attributed wholly to a particular
job ,product or process or expended in
converting raw materials into finished
goods. Wages of such labor are known as
Direct labor for manufacturing Honda
Accords
 Line workers, robot operators, painters,
assembly workers
Any labor probably not included in direct
labor?
 Factory janitors, factory supervisors,
factory secretaries
KEY ISSUES IN DETERMINING DIRECT LABOR
Is idle time generally considered as direct labor?
Why or why not?
 Usually not. It is not usually due to one
product, hence it is not traceable
What are the typical fringe benefits an assembly
line worker receives?
 Health insurance, pension plan, disability
insurance
Is the cost of fringe benefits for the assembly
line workers generally considered direct labor?
 Usually yes, the costs can be traced
When an assembly line worker works overtime,
he/she is paid a regular wage plus an overtime
premium. Would most companies treat his/her
regular wage as a direct labor cost?
 Yes,
the amount of time an employee works
can be traced to the products.

What about the overtime premium?

 Treated as OH, cannot be traced to a specific
product.
 3. Direct Expenses

 All expenses (other than direct material and

direct labor) which can be identified to a
particular cost centre and hence directly
charged to the centre are known as direct
expenses.
 Itincurred specifically for a particular product,
job, department etc. are called direct
expenses.
 These are directly charged to the product.
 Examples of such expenses are cost of
customer’s name embossed, charge for a hire
4. Overheads
 Itmay be defined as the aggregate of the cost
of indirect materials, indirect labor and such
other indirect expenses including services as
conveniently be charged to specific cost units.
 So , these are all expenses other than direct
expenses. These comprise all expenses
incurred for or in connection with the general
organization of the whole or part of the
undertaking i.e. the cost of operating supplies
and services used by the undertaking and
including the maintenance of capital assets.
4.1 Manufacturing/Factory/Production/
Works Overheads (FOH)
It is indirect expense of operating the
manufacturing divisions of a concern and
covers all indirect expenditure incurred by the
undertaking from the receipt of the order until
its completion ready for dispatch either to the
customer or to the finished goods store.
All costs of manufacturing excluding direct
materials and direct labor
For example depreciation and insurance
charges on fixed assets like plant and
machinery, works building, and electric
equipments and floating assets like stores
a. Indirect Materials (IM) – Materials, used in the
manufacturing of products, which are difficult
to trace to particular products in an economical
way. These materials do not normally form a
part of the finished product and can not be
allocated but which can be apportioned to or
absorbed by cost centres or cost units.
 Glue, nails, cleaning supplies
b. Indirect Labor (IL) – Labor, used in the
manufacturing of products, which is difficult to
trace to particular products in an economical
way. The wages of that labor which can not be
allocated but which can be apportioned to or
absorbed by cost centres or cost units is
known as indirect labor.
 Wages for maintenance workers, factory
supervisor’s salary, idle time
c. Other Factory Expenses
 Indirect expenses : Such expenses which
can not be allocated but can be
apportioned to or absorbed by cost centres
or cost units ,as rent, rates, insurance,
municipal taxes, etc are known as indirect
expenses.
 Depreciation on machinery, depreciation on
factory building, factory insurance, utilities
for factory
 PRIME COSTS AND CONVERSION COSTS

 Direct materials, direct labor, and factory

overhead costs may be grouped together for
analysis and reporting.
Two such common groupings are as
follows:
Prime costs, which consist of direct materials
and direct labor costs
Conversion costs, which consist of direct
labor and factory overhead costs
Conversion costs are the costs of
converting the materials into a finished
product.
 NON-MANUFACTURING EXPENSES

4.2 Marketing or Selling Overhead –

It is the cost of seeking to create and
stimulate demand and of securing orders and
comprises the cost of soliciting and recurring
orders for the articles or commodities dealt in
and of efforts to find and retain customers.
It refers to those indirect cost which are
associated with marketing and selling
activities.
For example sales office expenses, showroom
expenses, samples ands free gifts.
 Costs incurred in securing orders from
customers and providing customers with the
finished product
 Sales commissions, costs of shipping
products to customers, storage of finished
goods, depreciation of selling equipment
(cash register)
4.3 Administration/Office Overheads

Executive, organizational, and clerical costs

that are not related to manufacturing or
marketing
It is the indirect expenditure incurred in
formulating the policy, directing the
organization, controlling and managing the
operations of an undertaking which is not
related directly to a research, development,
production or selling activity or function.
For example expenses in running the
general office eg. Office rent, light, heat,
salaries and wages. CEO’s salary, cost of
controller’s office, depreciation on
4.4 Distribution Overhead
It is the expenditure incurred in the process
which begins with making the packed product
available for dispatch and ends with making
the reconditioned return empty package, if any
available for reuse.
For example warehouse rent, warehouse staff
salaries, insurance etc.
 4.5 Research & Development Expenses
 Research cost is the cost of searching for new
and improved products, new applications of
materials or products, and new applications of
improved methods.
 Development cost is the cost of the process
which begins with implementations of the
decision too produce a new or improved
method and ends with the commencement of
formal production of that product or by that
method.
 COST CLASSIFICATIONS
 Costclassifications is the process of grouping
costs according to their common
characteristics. It is the placement of like
items together according to their common
characteristics.
 Cost may be classified according to their
nature as follows:
IMPORTANT WAYS OF CLASSIFYING COST:
1) By nature of elements
2) By managerial functions
3) By ease of traceability
4) By changes in activity or volume
5) By degree of controllability
6) By degree of averaging
7) By relationship with accounting period
8) By time when computed
9) For managerial decisions
1. NATURE OF ELEMENTS

 Natural Classification:
-Direct material
-Direct labor
-Factory overhead
2. MANAGERIAL FUNCTIONS:

 Manufacturing:

-Direct material
-Direct labor
-Direct expense
-Factory overhead
 Non-manufacturing:

-Marketing
-Selling
-Administrative
2. FUNCTIONAL

Mfg.
Overhead
Materials

Labor

Prime costs = Dir. Materials + Dir. Labor

Conversion costs = Dir. Labor + Total Mfg.

Overhead
3. EASE OF TRACEABILITY
 Direct Cost:
It is easily identified and traceable to an
object of costing such as a product, product
line, department or segment of the firm. Ex.:
Salary expense of departmental supervisor.
 Indirect Cost:
It can’t be identified and traceable to one
segment of a firm and is usually associated
with several segments. Ex.: Building rent &
depreciation, cost of service department
such as maintenance, payroll, food service
etc.
4. Changes in Activity or Volume
VARIABLE COSTS AND FIXED COSTS
Activity – a quantitative measure of a firm’s output of
goods or services
 Number of Chrysler vans
 Pairs of Nike shoes
 Tons of cement produced
Variable Costs – costs that change proportionately (in
total) with the activity level within a relevant range of
activity
Fixed Costs – costs that do not change in total as
activity level changes within a relevant range of activity
Example: Publishing a magazine
Variable costs Fixed Costs
Cost of paper Rent on building
Cost of ink Salaries to reporters
Sales Commissions Depreciation on printing
equipment
TOTAL VARIABLE AND FIXED COSTS

Total Variable Cost Total Fixed Cost

Number of Number of
units units
VARIABLE AND FIXED COSTS PER UNIT

Per Unit Variable Cost Per Unit Fixed Cost

Number of units Number of units

5. DEGREE OF CONTROLLABILITY
 Controllable Cost:
It is under the entity’s direct influence. The
firm can control it. Ex.: Cost of wastage,
obsolescence, defective unit.
 Uncontrollable Cost:
These costs are not under the control of firm.
Ex.: Cost of national advertising, Cost of
national accounting & data processing,
Increase of cost due to inflation
6. DEGREE OF AVERAGING
 Total
Cost:
Encompasses the total level of activity
 Unit Cost:
It is related to a single unit of activity
Example:
$70,000,000 (Total Cost)_ = $7,000 per vehicle
10,000 vehicles

 Marginal Cost:
It is the additional cost needed to add one
unit of output. fixed costs will not change
when one more unit is manufactured, so
therefore the marginal cost of a unit is simply
its variable cost
7. Relationship with Accounting Period
PRODUCT VS. PERIOD COST
Product Costs or Inventoriable Costs –
 Costs assigned to products that were either
purchased for resale (merchandising firm or
retailer) or manufactured for sale
(manufacturing firm)
 When products are sold, product costs are
recognized as an expense (cost of goods
sold or COGS). The costs of unsold products
remain in inventory and are not expensed
(i.e. not deducted from revenue in
calculating net income)
PRODUCT COSTS ON THE INCOME STATEMENT

Income Statement
Sales Revenue………………. $ xx
Cost of Goods Sold………….. xx
 COST OF GOODS SOLD COMPARISON
Manufacturing Merchandising
Beginning finished goods Beginning merchandise
inventory
+ Cost of goods manufactured + Purchases
+/- Under (over)applied MOH
– Ending finished goods - Ending merchandise
= Cost of goods sold inventory
= Cost of goods sold
PRODUCT COSTS ON BALANCE SHEET
Balance Sheet
Inventories:
Raw Materials………….$xx
Work in Process………. xx
Finished Goods……….. xx
 Period Costs –
Costs that are not product costs and that are
associated with the period in which they are
incurred
Period costs such as selling and
administrative costs are expensed (i.e.
deducted from revenue in calculating net
income) in the period they are incurred
 PRODUCT COSTS VERSUS PERIOD COSTS

Product costs include Period costs are not

direct materials, included in product
direct labor, and costs. They are
manufacturing expensed on the
overhead. income statement.
Cost of
Inventory Goods Sold
Expense

Sale

Balance Income Income

Sheet Statement Statement
 PRODUCT AND PERIOD COSTS

Type of Inventoriable Period Costs

Company Product Costs
Service None All costs along
Company the value chain
Merchandising Purchases plus All costs
Company cost of freight purchases
Manufacturing Direct All costs
Company Materials, production
Labor and MFG
OH
Accounting Inventory, then Always
Treatment expense Expense
QUICK CHECK ¸

Which of the following costs would be

considered a period rather than a product
cost in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.
8. TIME WHEN COMPUTED

 Historical Cost:
These are past costs valued at the
acquisition cost of the asset.
 Budgeted or Standard Cost:
It express the future trend of historical cost
and results from forecasting models.
Budgeted costs set yardstick for future
performance.
9. COSTS RELATED TO DECISION MAKING
A．Opportunity Costs:
Costs when taking one action requires giving
up the opportunity to earn profits from a
different action

 Nike Inc. has limited production capacity.

What would be Nike’s opportunity cost of
accepting a special order from the military for
combat boots?

If Nike accepts the special order, they may

not be able to produce enough product for
B. Incremental Costs or Differential Costs:
Additional costs incurred when choosing a
certain course of action over another (Note
that incremental costs can include
opportunity costs)

 What would be Macy’s incremental costs of

expanding its fragrance department and
shrinking its accessories department?

The costs of stocking and staffing the new

fragrance area, opportunity costs of lost profit
from the decrease in sales of accessories
 Incremental Benefits or Differential Benefits
– additional benefits reaped when choosing a
certain course of action over another
 What would be Macy’s incremental benefits of
expanding its fragrance department and
shrinking its accessories department?
Profits Macy’s expects to earn on the new
fragrances it displays/stocks
C. Sunk Costs:
Costs that have been incurred and that are
not affected by any current/future action
 What would be considered sunk cost if Macy’s
decides to expand its fragrance department
and shrink its accessories department?
Depreciation on the building, cost of the
THE INVENTORY EQUATION
QUICK CHECK ¸

If your inventory balance at the beginning of the

month was $1,000, you bought $100 during the
month, and sold $300 during the month, what
would be the balance at the end of the month?

A. $1,000. $1,000 + $100 = $1,100

B. $ 800.
C. $1,200.
$1,100 - $300 = $800
D. $ 200.
QUICK CHECK ¸

Beginning raw materials inventory was

$32,000. During the month, $276,000 of raw
material was purchased. A count at the end of
the month revealed that $28,000 of raw
material was still present. What is the cost of
direct material used?
A. $276,000
B. $272,000
C. $280,000
D. $ 2,000
QUICK CHECK ¸
Beginning work in process was $125,000.
Manufacturing costs incurred for the month
were $835,000. There were $200,000 of
partially finished goods remaining in work in
process inventory at the end of the month.
What was the cost of goods manufactured
during the month?
A. $1,160,000
B. $ 910,000
C. $ 760,000
D. Cannot be determined.
FLOW OF MANUFACTURING COSTS
 Cost Relationships: Manufacturing Company
PRIOR
PERIOD

Fin Goods
WIP (Beg)
(Beg)

Direct Mat.
(Beg)
Direct Mat.
+ +
+ Used

+
Direct Mat. Direct labor Tot. Mfg. Costs Cost of Goods Cost of Goods
Purchases incurred incurred Mfg. Sold

- +
- -
Overhead costs
Direct Mat. applied
(End)
Fin Goods
WIP (End) (End)

NEXT
PERIOD
 COST FLOWS IN A MANUFACTURING
COMPANY
 Inputs such as labor and capital
equipment are also incurred to make the
product. The costs of all the inputs used in
the manufacturing facilities are recorded
in WORK IN PROCESS INVENTORY
 As products are finished, they are moved
to finished goods warehouse and their
costs are recorded in FINISHED GOODS
(FG) INVENTORY
 CLASSIFICATION EXERCISE
Classify the following cost items
 Depreciation on factory building
 Depreciation on office equipment
 Property tax on finished goods
warehouse
 Wages paid to forklift operator in
finished goods warehouse
 Wages paid to forklift operator in factory
 Wages paid to welders when welding
equipment is not working
 Paper used in textbook production
 Paper used in central office computer
 Wages paid to assembly line workers
INCOME STATEMENT FORMAT (TRADITIONAL)
Sales revenue
- Cost of goods sold
Gross profit
- Operating expenses
Income from operations
+/- Non-operating items
Income before taxes
- Income taxes
Net income
 INCOME STATEMENT
 Revenues are earned for the sale of goods
or services.
 Note
that revenues occur when the sale is
made.
 Thepayment may or may not have been
received.
Examples of revenues include sales,
service revenue and interest revenue.
 Cost of goods sold represents the expense a
business incurred to buy or make a product
for resale. or
 CGS is the costs that go into making the
products that a company sells.

Example - a book store buys a book for

$25 and then sells it for $32. The cost of
goods sold is $25.
 Expenses are incurred when a business
receives goods and services. Like revenues,
payment may or may not have been made.
Examples of expenses include salaries
expense,
utility expense and interest expense.
• Most businesses require more information
from their businesses than a simple income
statement can provide. Therefore, they use
a multi-step income statement format.
• A format for a multi-step income statement
is:
 Operating expenses are the usual expenses
incurred in operating a business.

Accounts such as salaries expense, utility

expense, and depreciation expenses are all
shown in this section.

• Non-operating items are revenue, expenses &

gains that do not relate to the company’s
primary operations.

Accounts include interest expense, rent

revenue and gains of the sale of equipment
and investments.
 INCOME STATEMENT
Sales 100,000
- Cost of Goods Sold -58,000

Gross Margin 42,000

- Operating Expenses -27,000

Income from Operations 15,000
- Non-operating Items -5,000
Income before Taxes 10,000

- Income Taxes -3,000

Net Income 7,000

Income Statement for a Manufacturing
Business
A manufacturer makes the products it sells,
using direct materials, direct labor, and factory
overhead.
 The total cost of making products that are
available for sale during the period is called the
cost of goods manufactured.
 Thecost of finished goods available for sale is
determined as follows:

 The cost of goods sold is determined as

follows:
 Income Statement
Manufacturing Company
Beg. WIP
Beg. Fin. Goods + Direct Mat’l
+ Used
- + Direct Labor
+ Mfg. Overhead
- End. WIP
= - =
End. Finished Goods
=

= • Selling expenses
• Admin. expenses
• Income taxes
Income Statement for a Merchandise
Business

Amerchandising business purchases

merchandise ready for resale to customers.
 Thetotal cost of the merchandise available for
sale during the period is determined as follows:

 The cost of merchandise sold is:

 INCOME STATEMENT
SERVICE ORGANIZATION

-
• Direct Materials/ Supplies
= • Direct Labor
• Indirect Costs or Overhead

-
• Selling Expenses
• Administrative Expenses
= • Income taxes
 Balance Sheet for a Manufacturing
Business
A merchandising business reports only
Merchandise Inventory on its balance sheet.
 In contrast, a manufacturing business reports
three types of inventory on its balance sheet as
follows:
Materials inventory consists of the costs of
the direct and indirect materials that have not
yet entered the manufacturing process.
Work in process inventory consists of the
direct materials, direct labor, and factory
overhead costs for products that have
entered the manufacturing process, but are
not yet completed (in process).
Finished goods inventory consists of
 Cost Sheet: Meaning and
Importance
 DEFINITION
Cost sheet is a statement which shows
various components of total cost of a product
 USES
 Classification and analysis of cost
components of a product
 Comparison with previous data
 Display of unit cost with total cost
 Selling point finalization with the help of cost
sheet
 BENEFITS OF COST SHEET
 Guide for pricing decisions
 Base for cost control
 Ease in calculation of per piece cost
 Deals
with monetary as well as
non-monetary
 Provide
valuable information about plants &
machinery
 Facilitates management decision:
Whether to produce or buy a component
What prices to quote in the tender
Whether to retain or replace an existing
 Statement of Cost of Goods Manufactured
 Costof goods manufactured is required to
determine the cost of goods sold. It is often
determined by preparing a statement of cost of
goods manufactured.
 FLOW OF COSTS
Beginning Work in Process
+ Total manufacturing costs incurred this period
– Ending Work in Process
= Cost of Goods Manufactured
COST OF GOODS MANUFACTURED STATEMENT

70
Direct Materials
 Raw material inventory, beginning
 Add: Raw materials purchased
 Raw materials available for use
 Deduct: Raw material inventory,
ending
 Total: Raw material used
Direct Materials
Direct Labor Add: Direct Labor
Manufacturing Overhead Add: Manufacturing Overhead
 Indirect Material Total: Manufacturing Costs Incurr
 Add: Indirect labor Add: Work in Process, Beg. Perio
 Add: Rent on factory building Manufacturing Costs to Account
 Add: Depreciation on factory Deduct: Work in Process, End Pe
equipment Cost of Goods Manufactured
 Add: Utilities
 Add: Property taxes
 Add: Insurance

 Total Manufacturing Overhead

 STATEMENT OF COST OF GOODS SOLD

a)Direct Materials & Labor:

b) Indirect Manufacturing Cost /Factory
Overhead:
c) Work in Process:
d) Finished Goods:
 SCHEDULE OF COST OF GOODS SOLD
 Finished Goods Inventory, Beginning of
Period
 Add: Cost of Goods Manufactured
 =Cost of Goods Available for Sale
 Deduct: Finished Goods Inventory, End of
Period
= Cost of Goods Sold
 SPECIMEN OF COST SHEET
Particulars Amount Amount
Opening stock of raw materials ***
+Purchases ***
+Carriage inwards ***
-Closing stock of raw materials ***
Direct materials consumed ***
+Direct labour ***
+Direct or chargeable expenses ***
= Prime cost ***
+ Factory overhead:
i. Indirect material ***
ii. Indirect labor ***
iii. Rent & insurance, factory building, ***
equipment ***
iv. Depreciation, factory building, equipment ***
etc. ***
v. Repair & maintenance, factory assets ***
vi. Property taxes, factory assets ***
vii. Factory utilities (electricity, gas, water) ***
***
 SPECIMEN OF COST SHEET
Particulars Amoun Amoun
t t
=Total Manufacturing cost ****
+ Work in process beginning ****
inventory ****
-Work in process closing inventory ****
= Cost of Goods Manufactured ****
+ Finished goods beginning ****
inventory ****
-Finished goods closing inventory ***
= Cost of Goods Sold ***
+ Administrative & Office overhead ****
+ Marketing & Selling overhead ****
= Cost of sales ****
 Direct Materials Used:
Beginning Raw Materials Inventory + Raw
Material Purchases – Ending Raw Materials
Inventory
 Total Manufacturing Cost: Direct
Materials + Direct Labor + Overhead applied
 Cost of Goods Manufactured:
Total Manufacturing Cost (Direct Materials +
Direct Labor + Overhead applied) +
Beginning Work In Process Inventory –
Ending Work in Process Inventory
 Cost of Goods Sold:
Beginning Finished Goods Inventory + Cost
of Goods Manufactured – Ending Finished
Goods Inventory
Illustration 1: From the books of accounts of
M/s. Khurram Enterprises, following details
have been extracted for the year ending 31st
March, 2015:
Particulars Amount (Tk.)
Opening stock of raw material 2,88,000
Closing stock of raw material 3,00,000
Material purchased during the year 9,42,000
Direct labor cost 4,43,000
Indirect wages 54,000
Salaries to office staff 2,12,000
Freight outward 43,000
Repairs for plant and machinery 21,000
Factory rent and taxes 55,000
Office rent and taxes 32,000
Distribution expenses
76,000
Salesman salaries and commission
54,000
Manager’s salary (40% of his time used in
60,000
factory & rest in office)
Factory electricity charges
25,000
Office telephone expenses
5,000
Opening stock of finished goods
2,03,000
 M/s. Khurram Enterprises
Cost Sheet
For the year ending 31st March 2015
Particulars Amount(Tk.)
Amount(Tk.)
(A) Purchases during the year 9,42,000
(B) Add: Opening stock of raw material 2,88,000
(C) Less: Closing stock of raw material (3,00,000)
(D) Direct Material Consumed (A+B-C) 9,30,000
9,30,000
(E) Direct labour cost
4,43,000
(F) Prime Cost (D+E)
13,73,000
Add: Factory Overheads
Indirect wages 54,000
Repairs for plant and machinery 21,000
Factory rent and taxes 55,000
Manager’s salary – Factory 24,000
Factory electricity charges 25,000
(G) Total Factory Overheads 1,79,000 1,79,000
(H) Manufacturing/Work Cost (F+G) 15,52,000
WIP-Beginning ---
WIP-Ending ----
(I) Cost of goods manufactured 15,52,000
(J)Add: Opening stock of finished goods
2,03,000
(K)Less: Closing stock of finished goods
(1,12,000)
Add: Office and Administrative overheads
Salaries to office staff 2,12,000
Office rent and taxes 32,000
Manager’s salary – Office 36,000
Office telephone expenses 5,000
Depreciation of office furniture 13,000
(M) Office & Administrative overheads 2,98,000
2,98,000
Add: Selling and Distribution Overheads
Freight outward 43,000
Distribution expenses 76,000
Salesman salaries and commission 54,000
(N) Selling& Distribution Overheads 1,73,000
1,73,000
 Illustration 2
Prepare a cost sheet to show the total cost and
cost per unit of goods manufactured by M/s.
Abram Enterprises for month of January 2015.
Also, find out cost of sales.
Particulars Amount (Tk.)
Stock of raw material (1.1.15) 4,000
Stock of raw material (31.1.15) 5,500
Raw material purchased 29,000
Manufacturing wages 8,000
Depreciation on plant 1,500
Factory rent and rates 4,000
Office rent 1,000
General expenses 1,200
Sales discount 1,000
The number of units produced during the
month was 4,000. The stock of finished goods
was 300 and 400 units on 1.1.15 and 31.1.15
respectively. The total cost of units in hand on
1.1.15 was Tk. 3,900. All these had been sold
during the month.
 M/s. Abram Enterprises
Cost Sheet
For the month ending 31st January 2015
Particulars Amount Amount Per
Unit
(Tk.) (Tk.) (Tk.)
(A) Purchases during the year 29,000
(B) Add: Opening stock, raw material 4,000
(C) Less: Closing stock, raw material (5,500)
(D) Material Consumed (A+B-C) 27,500 27,500
6.875
(E) Manufacturing wages 8,000
2.000
(F) Prime Cost (D+E) 35,500
Add: Factory Overheads
Depreciation on plant 1,500
Factory rent and rates 4,000
(G) Total Factory Overheads 5,500 5,500 1.375
(H) Factory/Work Cost (F+G) 41,000 10.25
WIP-Beginning ---
WIP-Ending ----
(I) Cost of goods manufactured 41,000
10.25
(J) Add: Opening finished stock 3,900
(K) Less:Closing finished stock (10.25*400) (4,100)
(L) Cost of Goods Sold (I+J-K) 40,800
Add: Selling and Distribution Overheads
Sales Discount 1,000
Advertising Expenses 5,000
(M) Selling & Distribution OH 6000 6,000
Add: Office and Administrative Overheads
Office rent 1,000
General expenses 1,200
(N) Office & Administrative OH 2,200 2,200
(O) Total Cost/Cost of Sales (L+M+N) 49,000
Problem 3:A manufacturer has shown an amount of
Rs. 16190 in his books as “establishment” which
includes the following expenses:
Agents commission-- Rs. 5750, Warehouse wages--
Rs. 1800
Warehouse repairs-- Rs. 510, Lighting of office-- Rs.
70
Office salaries-- Rs. 1130 ,Director’s remuneration--
Rs. 1400
Traveling expenses-- Rs. 760 Rent, rates and
insurance of warehouse-- Rs. 310 , Rent, rates and
insurance of office-- Rs. 230, Lighting of
warehouse-- Rs. 270
Printing and stationery-- Rs. 1500, Trade
magazines-- Rs. 70
Donations-- Rs. 150, Bank charges-- Rs. 100
Discount allowed-- Rs. 1970, Bad debts-- Rs. 170
Illustration 4
Illustration 5 LUQMAN & BROTHERS CORPORATION
COST OF GOODS SOLD STATEMENT, FOR THE PERIOD OF DECEMBER
31, 2010
Direct Materials-Opening (Jan 1, 2010) US$
123,000
Add: Purchases 100,000
Cost of D. Materials available for Use
223,000
Less: D. Materials-Ending (Dec 31, 2010)
23,000
D. Materials used US$
200,000
D. Manufacturing Labor
20,000
Factory Overhead:
Depreciation-Plant Equipment 3,500
Miscellaneous 1,000 US$
46,500
Manufacturing costs incurred during the period…
266,500 Add: Beginning Work-in-process Inventory
33,500
Cost of Goods available for manufacturing…
300,000
Less: Ending Work-in-process Inventory 100,000
Cost of Goods manufactured… 200,000
Add: Finished Goods Beginning (Jan 1, 2010)
200,000
Cost of Goods available for sale..
400,000
Less: Finished Goods Ending (Dec 31, 2010)
 Illustration 6
REPORTING INVENTORIES EXAMPLE

Finished goods $11,60

Sales 424,000
inventory, ending 0
Finished goods Direct labor cost 72,400
12,300
inventory, beginning Direct materials
178,000
Indirect materials purchased
3,200
issued production Work in process,
12,800
General administrative ending
9,400
expenses Work in process,
10,500
Raw materials beginning
4,500
inventory, ending
Raw materials Total overhead applied 56,100
98

5,100
inventory, beginning
Direct materials
Beginning RM inventory $ 5,100
Add net purchases 178,000
Less indirect materials (3,200)
Less ending RM inventory 4,500
Direct materials used $184,400
Direct labor incurred 72,400
Manuf. overhead applied 56,100
Total manufacuturing costs 312,900
Add beginning WIP inventory 10,500
Less ending WIP inventory (12,800)
Cost of goods manufactured $310,600
99
EXERCISE
Opening: (Jan 1, 2017):
Direct Materials 12,000, Work in Process11,000,
Finished Goods 10,000
Purchases Returns 11,500, Purchases
22,500
Freight-In 400
Ending (Dec 31, 2017):
Direct Materials 2,000, Work in Process
1,000, Finished Goods 900
Factory Overhead:
Indirect Manufacturing Labor 1,500, Supplies
1,000
Electricity 2,000, Dep.-Plant Building 1,000