ACC2103 Managerial Accounting

TOPIC 2:
COST TERMINOLOGY

Mowen Chapter 2( pages 30-51)

1
LEARNING OUTCOMES

 Explain the meaning of cost and how

costs are assigned to products and
services.
 Define the various costs of producing
products and services, as well as period
costs.
 Prepare income statements for
manufacturing organizations

2
LEARNING OUTCOMES

 Explain the meaning of cost and how costs

are assigned to products and services

3
2.1 MEANING AND USES OF COST

 Costs; Expenses; Price

 Cost objects
 Accumulating costs and assigning costs

 Direct vs. Indirect costs

 Opportunity Costs

4
COST

Amount of cash sacrificed for goods

and/or services

Expected to provide a current or future

benefit to the organization
Accumulating costs is the way that costs
are measured and recorded.

5
COST: EXAMPLE

Cost
A furniture The amount given
manufacturer up…. ?
buys wood for
$10,000. Benefit
We can use the
wood to make ?

6
COST: EXAMPLE
Cost
The amount given
up…. $10,000
A furniture
manufacturer Benefit
buys wood for We can use the
$10,000. wood to make
furniture

What will the manufacturer do after making the furniture?

A. Decorate his house
B. Sell at a profit
7
COST: EXAMPLE
Cost
The amount given
up…. $10,000
A furniture
manufacturer Benefit
buys wood for We can use the
$10,000. wood to make
furniture

What will the manufacturer do after making the furniture?

A. Decorate his house
B. Sell at a profit
8
EXPENSES

As costs are used up in the production of

revenues, they are said to expire

Expired costs are called

Expenses

Cost: Use up the Stationery

Buy stationery stationery expense

9
QUIZ
Which of the following are expenses?

a. Cost of goods sold

b. Salary paid
c. Rent paid
d. All of the above

10
QUIZ
Which of the following are expenses?

a. Cost of goods sold

b. Salary paid
c. Rent paid
d. All of the above

11
COST VS PRICE

Be careful!
Cost and Price are not the same thing

Cost Price
Amount we charge
What we pay our customers for
for something Vs. our products or
services
It COST us $10 to buy The Price we sell it to
this watch our customer is $20
12
QUIZ

Your school SIMGE is charging tuition fee

to students, to SIMGE this fee collected is
______.

a. Cost
b. Price

13
QUIZ

Your school SIMGE is charging tuition fee

to students, to SIMGE this fee collected is
______.

a. Cost
b. Price

14
QUIZ
You are paying tuition fee to your school,
SIMGE, to YOU this fee is ______.

a. Cost
b. Price

15
QUIZ
You are paying tuition fee to your school,
SIMGE, to YOU this fee is ______.

a. Cost
b. Price

16
HOW TO MEASURE COSTS?

Costs are accumulated over time

Telephone Expense
Bal. $800
Phone + $150
Bill

$150 $950
Phone
Bill + $200
$200 $1150

17
HOW TO MEASURE COSTS?

This is helpful but

managers also need to Telephone Expense
know which departments Bal. $800
used the $1150 in + $150
Telephone Expense
$950
+ $200
In other words, managers
want to know how costs $1150
are assigned

18
 Assigning Costs
Sales Dept. Telephone Expense

$550 Bal. $800

+ $150
$950
Manufacturing + $200
Dept.
$1150
$600

The accountant
assigned the Telephone
Expense to the two cost
objects.
19
 Assigning Costs

▪ Costs can be assigned in a number of ways

▪ Some methods are more accurate, but time
consuming
▪ While others are quite simple but not as
precise

These methods will be discussed in

the succeeding chapters.
20
 Direct Costs

▪ Costs that can be easily and accurately

traced to a cost object
▪ Relationship between the cost and the
object can be physically observed
▪ Direct costs are easily assigned to cost
objects by tracing where it goes

EXAMPLE
Material (wood) and
labour cost ([Link] hours x rate
per hour)

21
 Direct Costs
Chinese New Year is coming and you are going to
bake cookies, what are your direct costs?

a. Material used (flour, butter & eggs)

b. Baker’s hourly pay
c. Commission paid to sell the cookies
d. All of the above.

22
 Direct Costs
Chinese New Year is coming and you are going to
bake cookies, what are your direct costs?

a. Material used (flour, butter & eggs)

b. Baker’s hourly pay
c. Commission paid to sell the cookies
d. All of the above.

23
 Indirect Costs
▪ Costs that cannot be easily traced to a cost
object
▪ Relationship between the cost and the
object not easily observed
▪ Assigned through allocation
▪ Using a reasonable and convenient
method
EXAMPLE
Eg. Maintenance
expenses
benefitting 2 or
more departments

24
 Indirect Costs
Chinese New Year is coming and you are going to
bake cookies,
what are your indirect costs?

a. Electricity
b. Water
c. Cleaning materials
d. All of the above.

25
 Indirect Costs
Chinese New Year is coming and you are going to
cookies, what are your indirect costs?

a. Electricity
b. Water
c. Cleaning materials
d. All of the above.

26
Other Categories of Cost
Opportunity Cost

Benefit given up or sacrificed when one

alternative is chosen over another

27
 Other Categories of Cost
Opportunity Cost

Benefit given up or sacrificed when one alternative is

chosen over another

2 choices:
[Link] DMS course
or
2. Work and earn money
Your opportunity cost will be____________
 Other Categories of Cost
Opportunity Cost
Benefit given up or sacrificed when one alternative is
chosen over another

2 choices:
[Link] DMS course
or
2. Work and earn $
If you choose 1, your opportunity cost will be:
‘Loss of income from choice 2’
LEARNING OUTCOME

 Define the various costs of producing

products and services, as well as the costs of
selling and administration

30
2.2 PRODUCT AND SERVICE COSTS

 Output: Product and services

 Product costs classifications
 Direct materials
 Direct labour
 Overhead
 Other cost classifications
 Prime and conversion costs
 Period costs

31
 Output

One of the most important cost

objects of a company is its output.
Two types of output:

Products Services

32
 Products

Goods produced by converting raw

materials through the use of labour and
capital inputs.

Produced by manufacturing organisations.

33
 Services

Tasks or activities performed for a

customer or an activity performed by a
customer using an organisation’s
products or facilities.

Produced by service organisations.

34
 Cost Types

Product costs (manufacturing costs)

Associated with the manufacture of goods or the
provision of services

Non-production costs
All other costs
(eg. R&D, marketing, distribution, etc)

35
 Product Cost Classifications

Only three cost elements are

assigned to products for financial
reporting:

Direct Direct
Overhead
Materials Labour

= PRODUCT COST
36
 Direct Materials
Materials that are a part of the final
product and can be directly traced
to the goods and services being
produced.

Direct Labour
Labour that can be directly traced to
the goods or services being produced.
37
 Overhead

All product costs other than direct

materials or direct labour.

Indirect
Supplies Materials
Indirect
Utilities Labour

38
 Total Product Cost

Total Product Direct Direct

= + + Overhead
Cost Materials Labour

Product cost are Costs

incurred when Direct material
are converted into finished
goods

39
QUIZ
What are the cost of production to make a
cupcake?
a. Flour cost

b. Butter cost

c. Baker’s salary

d. Depreciation of oven

e. All of the above.

40
QUIZ
What are the cost of production to make a
cupcake?
a. Flour cost

b. Butter cost

c. Baker’s salary

d. Depreciation of oven

e. All of the above.

41
 Product Cost Per Unit

Total Product Cost

Unit Cost =
Number of Units
Produced

Unit cost = Unit cost of material cost

+Unit Direct labour cost
+Unit overhead cost

42
 Direct Mat. = 48,000
Direct Labour = 30,000
Example Overhead = 72,000
Jeans made = 30,000
Information:
BlueDenim Company makes blue jeans.
Last week’s total manufacturing cost:
Direct Materials cost $48,000
(denim, thread, zippers, and rivets)
Direct labour $30,000
(50 workers x 40 hours x $15 per hour)
Overhead $72,000
By the end of the week, the company had
manufactured 30,000 pairs of jeans.
43
 Direct Mat. = 48,000
Example Direct Labour = 30,000
Overhead = 72,000
Jeans made = 30,000

Required:
Calculate the total product cost for last week

44
 Direct Mat. = 48,000
Example Direct Labour = 30,000
Overhead = 72,000
Jeans made = 30,000

Required:
Calculate the total product cost for last week
Direct Materials + Direct labour + Overhead
Direct Materials $48,000
Direct labour 30,000

Overhead 72,000

Total Product Cost $150,000

45
 Direct Mat. = 48,000
Example Direct Labour = 30,000
Overhead = 72,000
Jeans made = 30,000

Required:
Calculate the total product cost for last week
Direct Materials + Direct labour + Overhead
Direct Materials $48,000
Direct labour 30,000

Overhead 72,000

Total Product Cost $150,000

46
 Direct Mat. = 48,000
Example Direct Labour = 30,000
Overhead = 72,000
Jeans made = 30,000

Required:
Calculate the cost of one pair of jeans that were
produced last week.

Total Product Cost ?

= $? per pair
Number of Units ? of jeans
Produced

47
 Direct Mat. = 48,000
Example Direct Labour = 30,000
Overhead = 72,000
Jeans made = 30,000

Required:
Calculate the cost of one pair of jeans that were
produced last week.

Total Product Cost $150,000

= $5 per pair
Number of Units 30,000 of jeans
Produced

48
 Prime and conversion costs
Prime costs
(cost can be tracked directly to product)
Total direct costs
= Direct materials costs +
Direct labour costs

49
 Prime and conversion costs
Prime costs – direct costs
(cost can be tracked directly to product)
Which of the following will be prime cost to make
this cup of bubble tea?
a. Milk cost
b. Bubble cost
c. Tea cost
d. All of the above

50
 Prime and conversion costs
Prime costs
(cost can be tracked directly to product)
Which of the following will be prime cost related
to this cup bubble tea?
a. Milk, tea and bubble cost – direct materials
b. Cups and straws cost – direct materials
c. Staff salary at shop – direct labour
d. All of the above

51
 Prime and conversion costs
Prime costs
(cost can be tracked directly to product)
Which of the following will be prime cost to make
bubble tea?
a. Milk, tea and pearls cost – direct materials
b. Cups and straws cost – direct materials
c. Staff salary at shop – direct labour
d. All of the above

52
 Prime and conversion costs
Conversion costs
Cost of converting raw
materials into final product
= Direct labour costs +
Overhead costs

53
 Prime and conversion costs
Conversion costs
= Direct labour costs +
Overhead costs
Which of the following will be overhead cost?
a. Water and electricity cost
b. Depreciation of equipment
c. Cleaning cost for the shop
d. All of the above

54
 Prime and conversion costs
Conversion costs
= Direct labour costs +
Overhead costs
Which of the following will be overhead cost?
a. Water and electricity cost
b. Depreciation of equipment
c. Cleaning cost for the shop
d. All of the above

55
 Prime and conversion costs
Prime costs
Total direct costs
= Direct materials costs +
Direct labour costs
Conversion costs
Cost of converting raw materials
into final product
= Direct labour costs +
Overhead costs
56
 Total Product Cost

Total Product Direct Direct

= + + Overhead
Cost Materials Labour

Product cost are Costs

incurred when Direct material
are converted into finished
goods

57
Prime and conversion costs
Product Cost

Prime Cost
Direct Materials

Direct Labour

Overhead

58
Prime and conversion costs
Product Cost

Direct Materials

Conversion cost
Direct Labour
Overhead
59
 Direct Mat. = 48,000
Direct Labour = 30,000
Example Overhead = 72,000
Jeans made = 30,000
Information:
BlueDenim Company makes blue jeans.
Last week’s total manufacturing cost:
Direct Materials cost $48,000
(denim, thread, zippers, and rivets)
Direct labour $30,000 $150,000

(50 workers x 40 hours x $15 per hour)

Overhead $72,000
By the end of the week, the company had
manufactured 30,000 pairs of jeans.
60
 Direct Mat. = 48,000
Prime Costs Direct Labour = 30,000
Overhead = 72,000
Jeans made = 30,000
Required:
Calculate the total prime cost for last week

Direct Direct
+
Materials labour
$48,000 + $30,000

Prime Costs = $78,000

61
 Direct Mat. = 48,000
Prime Costs Direct Labour = 30,000
Overhead = 72,000
Jeans made = 30,000
Required:
Calculate the per-unit prime cost

Direct Direct
+
Materials labour
$48,000 + $30,000
Prime Costs $78,000
per unit = = $2.60
30,000

Units produced 62
 Direct Mat. = 48,000
Conversion Costs Direct Labour = 30,000
Overhead = 72,000
Jeans made = 30,000
Required:
Calculate the total conversion cost for last week

Direct Labour + Overhead

$30,000 + $72,000

Conversion
= $102,000
Costs

63
 Direct Mat. = 48,000
Conversion Costs Direct Labour = 30,000
Overhead = 72,000
Jeans made = 30,000
Required:
Calculate the per-unit conversion cost

Direct Labour + Overhead

$30,000 + $72,000
Conversion $102,000
Costs per unit = = $3.40
30,000

Units produced 64
 Period Costs

Product costs Period costs

Manufacturing costs Expensed in the
Carried in inventory period in which they
Expensed when sold are incurred.
MANUFACTURING COSTS NON-MANUFACTURING COST

65
 Period Costs

Two categories of period costs

Administrative
Selling Costs
Costs

66
 Administrative Costs
All costs associated with research,
development, and general administration of
the organization that cannot reasonably be
assigned to either selling or production.

Examples:
Top Executive Salaries

General Legal Fees

Accounting Expenses of printing
the annual report

67
Total costs Product Prime Conversion Period
costs costs costs costs

Direct Direct Direct

Materials Materials Materials

Direct Direct Direct Direct

Labour Labour Labour Labour

Overhead Overhead Overhead

cost cost cost

Selling cost Selling cost

Admin Admin
cost cost

68
Total costs Product Prime Conversion Period
costs costs costs costs

Direct Direct Direct

Materials Materials Materials

Direct Direct Direct Direct

Labour Labour Labour Labour

Overhead Overhead Overhead

cost cost cost

Selling cost Selling cost

Admin Admin
cost cost

69
Total costs Product Prime Conversion Period
costs costs costs costs

Direct Direct Direct

Materials Materials Materials

Direct Direct Direct Direct

Labour Labour Labour Labour

Overhead Overhead Overhead

cost cost cost

Selling cost Selling cost

Admin Admin
cost cost

70
Total costs Product Prime Conversion Period
costs costs costs costs

Direct Direct Direct

Materials Materials Materials

Direct Direct Direct Direct

Labour Labour Labour Labour

Overhead Overhead Overhead

cost cost cost

Selling cost Selling cost

Admin Admin
cost cost

71
LEARNING OUTCOME

 Prepare income statements for

manufacturing and service organizations

72
2.3 Preparing income statements

▪ Direct materials used

▪ Cost of Goods Manufactured

▪ Cost of Goods Sold

▪ Income Statement
 INVENTORY in Balance Sheet
3 types of inventory

[Link] Materials – (bought and un-used)

2. Work in process - WIP (unfinished goods)

3. Finished Goods (completed goods but not sold)

• If finished goods are sold, it will be recorded as:

Cost of Goods Sold
 Bal fm Jun = $50
POCKET MONEY Allowance in Jul = $400
Bal in Jul = $60

Required:
Calculate the amount spent in July

Beginning Closing Amount

+ Allowance - =
Balance Balance Spent

$50 + 400 - $60 = $390

Beg Allowance
$50 $400 Total

=
$390 $60
$450
Amount spent
Closing Bal
Cost of Goods Manufactured
Total product cost of goods
completed (finished goods) during
the current period:
Direct Materials used
+ Direct labour cost incurred

+ Overhead cost incurred

= Total Cost of Goods Manufactured
 Direct Materials Used
▪ Only the amount used on products produced
during the current period
▪ Consider beginning and ending inventory levels
▪ Key point:
Purchases Materials Used
Some purchases may not be entirely
used up for production, thus some
balance (un-used) is left in inventory
(direct material inventory –type 1)
 Beg. Inv = 68,000
Purchases = 210,000
Direct Materials End. Inv = 22,000

Required:
Calculate the direct materials used in
production for the month of May

Beginning Ending Materials

Materials + Purchases - Materials = Used in
Inventory Inventory Production

$68,000 + $210,000 - $22,000 = $256,000

Beg Inv. Purchases Total DM
68,000 210,000 available
= $278,000

Total DM
256,000 22,000 available
= $278,000
Materials used
End. Inv
 Direct material used
$
Purchases 210,000
Beginning inventory 68,000
Available material 278,000
Less Ending inventory ( 22,000)
Material used ?
 Direct material used
$
Purchases 210,000
Beginning inventory 68,000
Available material 278,000
Less Ending inventory ( 22,000)
Material used 256,000
 Work in Process

▪ 2nd type of inventory

▪ Cost of partially completed goods that
are still on the factory floor at the end of
the period
▪ Units are started, but not finished
▪ Included direct materials, direct labour,
and overhead costs
 Mat. Used = 256,000
Dir. Labour = 135,000
Example Overhead = 150,000
Beg WIP = 50,000
End WIP = 16,000
Information:
▪ Materials used in production = $256,000
▪ During the month of May, Blue Denim
Company incurred:
▪ Direct labour cost of $135,000
▪ Overhead of $150,000
▪ Work in process
▪ On May 1 (Beginning) was $50,000
▪ May 31 (Ending) was $16,000
 Mat. Used = 256,000
Dir. Labour = 135,000
Example Overhead = 150,000
Beg WIP = 50,000
End WIP = 16,000
Required:
Calculate the cost of goods manufactured
(finished goods only) for the month of May.

Calculate the cost of one pair of jeans

assuming that 115,000 pairs of jeans were
completed during May.
 Cost of Goods Manufactured
(cost of finished goods)
Required:
Calculate the Cost of Goods Manufactured (COGM) in May

Beginning Ending Cost of Goods

WIP + (DM;DL;OH) - WIP = Manufactured

$50,000 + $541,000 - $16,000 = $575,000

Total
Beg WIP. (DM;DL;OH) Manufac
50,000 541,000 turing
cost
=
575,000 16,000 $591,000
COGM FG n WIP
End. WIP
 Mat. Used = 256,000
Dir. Labour = 135,000
Cost of Goods Overhead = 150,000
Beg WIP = 50,000

Manufactured End WIP = 16,000

Direct Materials $256,000

Direct labour 135,000
Overhead 150,000
Total Manufacturing Cost $541,000

Total amount spent this month to make

the jeans (finished and unfinished)

But we want to know how much is the

Cost of Goods Manufactured for finished goods
 Mat. Used = 256,000
Dir. Labour = 135,000
Cost of Goods Overhead = 150,000
Beg WIP = 50,000

Manufactured End WIP = 16,000

Direct Materials $256,000

Direct labour 135,000
Overhead 150,000
Total Manufacturing Cost $541,000
Work in Process, May 1 50,000

Add the cost of making unfinished goods last

month (which we will complete this month)
 Mat. Used = 256,000
Dir. Labour = 135,000
Cost of Goods Overhead = 150,000
Beg WIP = 50,000

Manufactured End WIP = 16,000

Direct Materials $256,000

Direct labour 135,000
Overhead 150,000
Total Manufacturing Cost $541,000
Work in Process, May 1 50,000
Work in Process, May 31 ( 16,000)

Less: Cost of making

unfinished goods this month, which will
become next month’s opening WIP
 Mat. Used = 256,000
Dir. Labour = 135,000
Cost of Goods Overhead = 150,000
Beg WIP = 50,000

Manufactured End WIP = 16,000

Direct Materials $256,000

Direct labour 135,000
Overhead 150,000
Total Manufacturing Cost $541,000
Work in Process, May 1 50,000
Work in Process, May 31 ( 16,000)
Cost of Goods Manufactured $575,000

Cost of making all the completed

(finished) goods -115,000 pairs of jeans
 Mat. Used = 256,000
Dir. Labour = 135,000
Cost of Goods Overhead = 150,000
Beg WIP = 50,000

Manufactured End WIP = 16,000

Direct Materials $256,000

Direct labour 135,000
Overhead 150,000
Total Manufacturing Cost $541,000
Work in Process, May 1 50,000
Work in Process, May 31 ( 16,000)
Cost of Goods Manufactured $575,000
Cost of making 115,000 units of finished goods is $575,000
Per unit Cost of $575,000
= $5
Goods Manufactured 115,000 units
Transfer the COST to Finished Goods A/c - ready for Sale
 Cost of Goods Sold
▪ Represents the total cost of units sold
during a period
▪ “Sold” is the key word.
▪ Includes only product cost
▪ direct materials, direct labour, and
overhead
▪ Reported as an expense on the income
statement
 COGM = 575,000
Beg. Fin. Gds = 50,000
Example End. Fin. Gds = 130,000

Information:

▪ On May 1 BlueDenim Company had 10,000

units in finished goods inventory costing $50,000
▪ On May 31 the company had 26,000 units in
finished goods inventory costing $130,000
▪ NOTE: NOT all Finished goods are sold in the
same month, that’s why there is balance
inventory called ‘Ending Finished Goods’ –
3rd type of inventory
 COGM = 575,000
Beg. Fin. Gds = 50,000
Cost of Goods Sold End. Fin. Gds = 130,000

Required:
Calculate the cost of goods sold for the
month of May.

Cost of good manufactured $575,000

Finished goods, May 1 50,000

Add: Goods that are completed

but not sold last month
 COGM = 575,000
Beg. Fin. Gds = 50,000
Cost of Goods Sold End. Fin. Gds = 130,000

Required:
Calculate the cost of goods sold for the
month of May.

Cost of good manufactured $575,000

Finished goods, May 1 50,000
Finished goods, May 31 (130,000)

Less: Goods that are Appears on the

completed but are not Balance Sheet at
sold yet end May
 COGM = 575,000
Beg. Fin. Gds = 50,000
Cost of Goods Sold End. Fin. Gds = 130,000

Required:
Calculate the cost of goods sold for the
month of May.
UNITS

Cost of good manufactured $575,000 115,000

Finished goods, May 1 50,000 10,000

Finished goods, May 31 (130,000) -26,000

Cost of Goods Sold $495,000 99,000

Reported as an expense on
the Income Statement
Cost of Goods Manufactured
(cost of finished goods)
Required:
Calculate the Cost of Goods Sold (COGS) in May

Beginning Ending Cost of Goods

FG + COGM - FG = Sold

$50,000 + $575,000 - $130,000= $495,000

Beg FG (COGM)
$50,000 $575,000 Total
=
$625,000
$495,000 $130,000
COGS
End. FG
 BlueDenim Company
Statement of Costs of Goods Manufactured for
month ended 31 May
$ $
Direct materials:
Opening raw materials inventory 68,000
Add: Purchases of raw materials 210,000
Raw materials available for use 278,000
Less Closing raw materials inventory 22,000
Raw materials used in production 256,000
Direct labor 135,000
Overhead 150,000
Total manufacturing costs 541,000
Add: Opening WIP inventory 50,000
591,000
Less Closing work in process inventory - 16,000
Cost of goods manufactured 575,000
 COGM = 575,000
Beg. Fin. Gds = 50,000
Cost of Goods Sold End. Fin. Gds = 130,000

Required:
Calculate the cost of goods sold for the
month of May.

Cost of good manufactured $575,000

Finished goods, May 1 50,000
Finished goods, May 31 (130,000)
Cost of Goods Sold $495,000

Reported as an expense on
the Income Statement
97
How to prepare an Income Statement for a
Manufacturing firm?
Sold 99,000 jeans Selling costs
Cost = 495,000 Commission 10%
Selling price = $8 Example Others 120,000
Admin expense = 85,000
Information:

• BlueDenim Company sold 99,000 pairs of

jeans during the month of May at a total cost
of $495,000.
• Each pair sold at a price of $8.
• Blue Denim also incurred two types of selling
costs:
▪ Commissions equal to 10% of the sales price
▪ Other selling expense of $120,000.
• Administrative expense totalled $85,000
Sold 99,000 jeans Selling costs
Cost = 495,000 Commission 10%
Selling price = $8
Example Others 120,000
Admin expense = 85,000

Required:

Prepare an income statement for BlueDenim

for the month of May
Sold 99,000 jeans Selling costs
Cost = 495,000 Commission 10%
Selling price = $8 Others 120,000
Admin expense = 85,000
BlueDenim Company
Income Statement
For the Month of May
Sales revenue ($8x99,000) $792,000

99,000 jeans x $8
Sold 99,000 jeans Selling costs
Cost = 495,000 Commission 10%
Selling price = $8 Others 120,000
Admin expense = 85,000
BlueDenim Company
Income Statement
For the Month of May
Sales revenue $792,000
Cost of goods sold -$495,000
Gross margin $297,000

Gross Margin is the difference

between sales revenue and
cost of goods sold.
Sold 99,000 jeans Selling costs
Cost = 495,000 Commission 10%
Selling price = $8 Others 120,000
Admin expense = 85,000
BlueDenim Company
Income Statement
For the Month of May
Sales revenue $792,000
Cost of goods sold -$495,000
Gross margin $297,000
Less:
Selling expense:
Commissions($792,000x0.1) $ 79,200

$792,000 x 10%
Sold 99,000 jeans Selling costs
Cost = 495,000 Commission 10%
Selling price = $8 Others 120,000
Admin expense = 85,000
BlueDenim Company
Income Statement
For the Month of May
Sales revenue $792,000
*Cost of goods sold -$495,000
Gross margin $297,000
Less:
#Selling expense:
Commissions $ 79,200
Fixed selling expense $120,000 -$199,200
#Administrative expense -$85,000
Operating income $ 12,800

* Product cost # Period cost

 Income Statement

Blue Denim Company

Income statement
for the month of May
$ $
Sales revenue 792,000 (a)

Less Cost of goods sold

Cost of good manufactured 575,000
Finished goods, 1 May 50,000
Finished goods, 31 May - 130,000
Cost of goods sold 495,000 (b)
Gross margin 297,000 (c) =(a)-(b)
Less operating expenses
Selling expenses
Commissions 79,200
Fixed selling expenses 120,000
199,200 (d)
Administrative expenses 85,000 (e)
Total operating expenses 284,200 (f)=(d)+(e)

Operating profit 12,800 (c)-(f)

 Learning outcomes

2.1 Explain the meaning of cost and how

costs are assigned to products and
services.
2.2 Define the various costs of producing
products and services, as well as the
costs of selling and administration.
2.3 Prepare income statements for
manufacturing and service organizations
Any Questions

mltay002@[Link]
 a) Prepare a Statement of
Cost of Goods Manufactured.
Identify the Direct material
used,
Direct labour and Overhead.
 a) Prepare a Statement of
Cost of Goods Manufactured.
a)

Factory supplies used

$
22,000
Depreciation of factory
building 10,000
Factory janitorial costs 3,000
#Overhead 35,000

Blossom Company
Statement of Cost of goods manufactured for May
Material Inventory , May 1 ?
Add Purchases ?
?
Less Material Inventory May
31 - ?
Material used ?
Direct labour cost ?
#Overhead ?
Total manufacturing cost ?
WIP May 1 ?
Less WIP May 31 - ?
Total cost of goods
manufactured ?
 a) Prepare a Statement of
Cost of Goods Manufactured.
a)
$
Factory supplies used 22,000
Depreciation of factory
building 10,000
Factory janitorial costs 3,000
#Overhead 35,000

Blossom Company
Statement of Cost of goods manufactured for May
Material Inventory , May 1 2,100
Add Purchases 15,000
17,100
Less Material Inventory May
31 - 4,200
Material used 12,900
Direct labour cost 40,000
#Overhead 35,000
Total manufacturing cost 87,900
WIP May 1 7,500
Less WIP May 31 - 3,300
Total cost of goods
manufactured 92,100
b) Calculate the cost of one
unit assuming 10,000 units
were completed during May.
a)

Factory supplies used

$
22,000
Depreciation of factory building 10,000
Factory janitorial costs 3,000
#Overhead 35,000

Blossom Company
Statement of Cost of good manufactured for May
Material Inventory , May 1 2,100
Add Purchases 15,000
17,100
Less Material Invenrtory May 31 - 4,200
Material used 12,900
Direct labour cost 40,000
#Overhead 35,000
Total manufacturing cost 87,900
WIP May 1 7,500
Less WIP May 31 - 3,300
Total cost of goods manufactured 92,100

For 10,000
units
Per unit
cost?
b) Calculate the cost of one
unit assuming 10,000 units
were completed during May.
Total cost of goods
manufactured 92,100

Cost per unit completed

$92,100/10,000
= $9.21
c) Prepare a Statement of
Cost of Goods Sold.
Statement of Cost of goods
sold

$
Finished goods inv May 1
36,000
Add Goods manufactured
92,100
Less closing Finished goods
inv May 31 -
59,865
Cost of goods sold
68, 235
d) Calculate the number of
units that were sold during
May How many units were sold?
Units
Finished goods inv May 1
4,000
Add Goods manufactured
10,000
Less closing Finished goods
inv May 31 -
6,500
Units sold
7,500
 e) Prepare an Income
Statement assuming the sales
price per unit is $35.
Find out the Sales and
expenses and work out
the profit/(loss)
 e) Prepare an Income
Statement assuming the sales
price per unit is $35.
Income statement
Sales (7,500 x $35) 262,500
Less COGS - 68,235

Gross profit 194,265

Less expenses
Commissions for sales
personnel 32,000
Salary of company CFO 9,000
Research & Development 5,000
Depreciation on corporate
office 8,500
Advertising costs 2,500
- 57,000
Profit 137,265