Class Notes (1,100,000)
CA (650,000)
Ryerson (30,000)
ACC 406 (200)
Lecture

Basic Concepts


Department
Accounting
Course Code
ACC 406
Professor
Alison Beavis

Page:
of 3
Chapter 1/2
What is Cost?
Resources used in order to actualize a specific object. In general, cost refers to value
forgone to achieve a purpose. In specific, cost refers to economic resources paid for goods or
services. In manufacturing accounting, manufacturing companies have 3 inventory
accounts: Raw Materials inventory, Work in Process inventory, & Finished goods
inventory. Manufacturing companies have 3 cost components: Direct Materials (inputs
physically become part of the product [e.g. paper to produce books]), Direct Labor (wages
for employees who convert materials into product [e.g. wages paid to assembly line
workers]), & Overhead (includes all other manufacturing costs [except for direct materials
or direct labor (e.g. Factory rent, utilities, maintenance, insurance, supplies, indirect
labor)]).
Manufacturing Cost = Direct Materials (DM) + Direct Labor (DL) + Overhead (OH)
Cost equations for Manufacturing Companies
1.Beginning DM Inventory + DM Purchased = DM available to use
e.g. $1,000 + $2,000 = $3,000
2.DM available to use - Ending DM Inventory = DM Used
e.g. $3,000 - $500 = $2,500
3.DM Used + DL + OH = Total Manufacturing Cost Added
e.g. $2,500 + $3,500 + $5,000 = $11,000
4.Total Manufacturing Cost added + Beginning work in process inventory = Total
Manufacturing Cost in Process
e.g. $11,000 + $20,000 = $31,000
5.Total Manufacturing Cost in process - Ending work in process Inventory = COGS
manufactured
e.g. $31,000 - $16,000 = $15,000
Equations 1 5 can be represented by the Cost of Goods Manufactured Statement
Income equation: Revenues Expenses = Income
6.COGs Manufactured + Beginning finished goods Inventory = COGS available for sale
e.g. $15,000 + $40,000 = $55,000
7.COG available for sale - Ending finished goods inventory = COG sold
e.g. $55,000 - $17,000 = $42,000
Equations 6 & 7 can be represented by the Income Statement
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Core Classifications
1.Actual cost (Historical actually happened) VS Estimated cost (e.g. Budgeted cost,
predetermined costs, focused cost, forecasted cost)
2.Total cost VS Average cost (Total Cost / Activity Volume or Level [e.g. $1,000 to
produce 10 tables])
3.Variable Cost (total can change in response to change in activity volume) VS Fixed
Cost (total cost is kept constant within a relevant range [in terms of Activity Volume
or Time length])
Cost Behaviour: Relationship between cost and activity volume
Total
Cost
Average
Cost
Variable
Cost
ChangeNo
Change
Fixed CostNo
Change
Change
4. Product cost (inventoriable cost) VS Period cost (noninventoriable cost)
PrC Costs directly attached to product units when the costs are incurred (i.e. product
units are the direct cost object) e.g. merchandise purchases, COGs manufactured
PeC Costs allocated to the accounting period in which the costs are incurred (i.e.
functional items are the direct cost object) e.g. selling experiences, general administrative
expenses MUST BE EXPENSE BY END OF YEAR
Manufacturing Cost = Direct Materials + Direct Labor + Overhead (Variable overhead, fixed
overhead [product cost (absorption costing method), period cost (variable or direct costing
method)])
5.Prime cost (DM + DL) VS Conversion cost (DL + OH)
Homework: P2-49 & C2-53
P2-49
Beginning Materials Inventory
Add: Materials purchases
Materials available for use
Less: Ending materials inventory
Materials used
Direct Labour
Overhead: Indirect Labour
Rent, Factory building
Depreciation, Equipment
Utilities, Factory
$46, 800
$320,000
$366,800
$66,800
$300,000
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Total overhead cost
Total Manufacturing Cost Added
Add: Beginning Work in Process
Inventory
Total Manufacturing Cost in
Process
Less: Ending Work in Process
Inventory
Cost of Goods
Manufactured
$200,000
$40,000
$42,000
$60,000
$11,900
$153,900
$653,900
$13,040
$666,940
$14,962
$652,000
Sales:
Cost of Goods Sold:
Cost of Goods Manufactured
Add: Fixed Goods Inventory
Cost of Goods available for sale
Less: Ending finished Goods
inventory
Cost of Goals Sold
1,520,000
$652,000
$80,000
$732,000
$114,100
$617,900
Sales Volume (3,800 units) = Population volume (4,000), + Beginning fixed goods inventory
(500) Finished goods inventory (-700)
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