1. Calculate Cost of Goods Manufactured
Principles of Cost Analysis and Management

2. Terminal Learning Objective
Action: Calculate Cost of Goods Manufactured
Condition: FM Leaders in a classroom environment working individually and as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion.
Standard: With at least 80% accuracy (70% for International Learners):
Interpret Cost Accounting Terminology
Identify Key Elements in the Inventory Chain Template
Identify “Solve” for Missing Variables in the Inventory Chain Template

3. Cost Accounting Terminology
Direct Costs
Materials and Labor that can be identified with a particular product or process
Example: Lumber and hardware for furniture
Indirect Costs
Production-Related costs that cannot be identified with a particular product or process
Example: Maintenance on power tools

4. Cost Accounting Terminology (Cont.)
Direct Costs
Materials and Labor that can be identified with a particular product or process
Example: Lumber and hardware for furniture
Indirect Costs
Production-Related costs that cannot be identified with a particular product or process
Example: Maintenance on power tools

5. Cost Accounting Terminology (Cont.)
Direct Costs
Materials and Labor that can be identified with a particular product or process
Example: Lumber and hardware for furniture
Indirect Costs
Production-Related costs that cannot be identified with a particular product or process
Example: Maintenance on power tools

6. Cost Accounting Terminology (Cont.)
Direct Costs
Materials and Labor that can be identified with a particular product or process
Example: Lumber and hardware for furniture
Indirect Costs
Production-Related costs that cannot be identified with a particular product or process
Example: Maintenance on power tools

7. Cost Accounting Terminology (Cont.)
Direct Costs
Materials and Labor that can be identified with a particular product or process
Example: Lumber and hardware for furniture
Indirect Costs
Production-Related costs that cannot be identified with a particular product or process
Example: Maintenance on power tools

8. Cost Accounting Terminology (Cont.)
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

9. Cost Accounting Terminology (Cont.)
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

10. Cost Accounting Terminology (Cont.)
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

11. Cost Accounting Terminology (Cont.)
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

12. Cost Accounting Terminology (Cont.)
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

13. Overhead Illustration
Manufacturing Overhead
Supervisor’s Salary
Utilities
Factory Depreciation
General Supplies
Assigned to Products
 2000  700  250  100
3050 

14. Cost Accounting Terminology (Cont.)
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
production
Flour, sugar, baker’s wages, cost of operating and maintaining bakery equipment
Capitalized
Expense

15. Cost Accounting Terminology (Cont.)
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

16. Cost Classification Which are Direct Costs? Direct Materials
Indirect Materials
Direct Labor
Direct Labor
Indirect Labor
Other Overhead

17. Cost Classification Which are Indirect Costs? Direct Materials
Indirect Materials
Indirect Materials
Direct Labor
Indirect Labor
Indirect Labor
Other Overhead
Other Overhead

18. Cost Classification (Cont.)
Which are Overhead?
Direct Materials
Indirect Materials
Indirect Materials
Direct Labor
Indirect Labor
Indirect Labor
Other Overhead
Other Overhead

19. Cost Classification (Cont.)
Which are Conversion Costs?
Direct Materials
Indirect Materials
Direct Labor
Indirect Labor
Direct Labor
Indirect Labor
Other Overhead
Other Overhead

20. Cost Classification (Cont.)
Which are Product Costs?
Direct Materials
Direct Materials
Indirect Materials
Indirect Materials
Direct Labor
Direct Labor
Indirect Labor
Indirect Labor
Other Overhead
Other Overhead

21. LSA #1 Check on Learning
Q1. Costs that can be identified with a particular product or process are called? A1. Q2. An aggregation of indirect costs is called? A2. Q3. The cost of utilities for the manufacturing facility would be a product or a period cost? A3.
Q1. Costs that can be identified with a particular product or process are called?
A1. Direct Costs
Q2. An aggregation of indirect costs is called?
A2. Manufacturing Overhead
Q3. The cost of utilities for the manufacturing facility would be a product or a period cost?
A3. Product cost

22. LSA #1 Check on Learning (Cont.)
Q4. The cost of utilities for the retail sales outlet would be a product or a period cost? A4. Q5. Period costs are reported on which financial statement? A5. Q6. Which category of cost includes all production costs except Direct Materials? A6.
Q4. The cost of utilities for the retail sales outlet would be a product or a period cost?
A4. Period cost
Q5. Period costs are reported on which financial statement?
A5. Income Statement (aka Statement of Activities)
Q6. Which category of cost includes all production costs except Direct Materials?
A6. Conversion Costs

23. LSA #1 Summary
In this lesson, we discussed Direct vs. Indirect Costing, Manufactured overhead and Conversion costs. We touched on the definition of Product cost and how it can have both Direct and Indirect costs. Finally, we covered how cost is classified as it pertains to Other Overhead - Direct / Indirect Labor- and Direct / Indirect Materials.

24. Types of Inventories Merchandise Inventory Raw Materials 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

25. Types of Inventories (Cont.)
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

26. The Inventory Chain
Overhead

27. The Inventory Chain (Cont.)
Overhead

28. The Inventory Chain (Cont.)
Overhead

29. The Inventory Chain (Cont.)
Overhead

30. The Inventory Chain (Cont.)
Overhead

31. The Inventory Chain (Cont.)
Overhead

32. The Inventory Chain (Cont.)
Overhead

33. The Inventory Chain (Cont.)
Overhead

34. Input-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?

35. LSA #2 Check on Learning
Q1. What are the key variables to the Work in Process account?
A1.
Q2. What is the input to the Raw Materials account?
A2.
Q1. What are the key variables to the Work in Process account?
A1. Beginning balance, Direct Labor, Materials Used, Overhead, Cost of Goods Manufactured, and Ending balance.
Q2. What is the input to the Raw Materials account?
A2. Purchases

36. LSA #2 Summary
During this block, we identified and defined the four types of inventory as well as identifying the inventory chain and how it uses these types of inventory to produce the products it sells.

37. Using the Inventory Chain

38. Using the Inventory Chain (Cont.)

39. Using the Inventory Chain (Cont.)

40. Using the Inventory Chain (Cont.)

41. Using the Inventory Chain (Cont.)

42. Using the Inventory Chain (Cont.)

43. Using the Inventory Chain (Cont.)

44. Accounting for Manufacturing Spreadsheet Demo
Enter the information given in the exercise above into the white blanks in the T-accounts

45. Accounting for Manufacturing Spreadsheet Demo (Cont.)
The “Results” tab displays the calculations using the given data

46. Accounting for Manufacturing Spreadsheet Demo (Cont.)
“Solve” indicates that the value displayed has been calculated using the information given in the Data Input tab.

47. LSA #3 Check on Learning
Q1. When we think about the three T-accounts, we should think about them as what? A1. Q2. True or False; if we know three of the four variables, we can solve for the fourth. A2.
Q1. When we think about the three T-accounts, we should think about them as what?
A1. As a Bucket
Q2. True or False; if we know three of the four variables, we can solve for the fourth.
A2. True

48. LSA #3 Summary
During this lesson, we solved for the missing variables in the inventory chain template manually and then went over how to use the excel spreadsheet to solve for the missing variables.

49. Practical Exercise / Review

50. TLO Summary Action: Calculate Cost of Goods Manufactured
Condition: FM Leaders in a classroom environment working individually and as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion.
Standard: With at least 80% accuracy (70% for International Learners):
Interpret Cost Accounting Terminology
Identify Key Elements in the Inventory Chain Template
Identify “Solve” for Missing Variables in the Inventory Chain Template