Basic Concepts

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17 May 2011
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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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