Basic Cost Management Concepts
1. System Frame Work
A. What is a system?
B. What is an accounting information system?
(1) Accounting Information System consist of two major subsystems:
(2) 2 distinguishing Characteristics of AIS:
(3) 2 major subsystems of AIS:
a. Financial Accounting Information System
b. Cost Management Information System
C. What is the objective of Integrated Information Systems – Give examples of such
D. Describe the two major subsystems of Cost Management Information System?
(1). Cost Accounting Information System
(2). Operational Control Information System
2. Cost Assignment
A. Terms used in Cost Assignment Process
3.What is Product and Service Costs?
A. Tangible Product and Service Costs Definitions
B. Product Costs And External Financial Reporting
(1) What are the three major elements of product costs in a manufacturing
(2) What are the two categories of Nonproduction (Period) Costs?
Marketing (Selling) Costs
(3) What are Prime and Conversion Costs?
Are Prime Costs
a. Period or product costs?
b. Direct or indirect?
Are conversion costs:
a. Period or product costs?
b. Direct or indirect?
4.The sum of prime and conversion costs is equal to total product cost.
True or False?
5. Distinguish between the following:
a. Direct materials
b. Indirect materials
c. Direct labor
d. Indirect labor
6. What is the income statement for manufacturing firm?
a. Absorption-costing income (full-costing income)
b. Describe & Define supporting schedules for the income statement?
Cost of Good Manufactured:
Cost of Good Sold:
7. How does the income statement for service organization differ from that of a
8. To calculate the cost of goods sold during a given period, you need only to add up the
amount of materials, labor and indirect costs incurred during the period. Is this statement
9.Why is the amount of cost of goods manufactured not equal to the amount of cost of
10.Can you calculate cost of goods sold?
Beginning Raw materials
Add: Raw Materials purchased
= Materials available
Deduct Ending Raw materials
Raw Materials Purchased
add Direct labor cost incurred
add Factory overhead cost incurred
=Total manufacturing cost incurred during this period
add Beginning work in process inventory
subtract Ending work in process inventory
=Cost of Goods Manufactured
add Beginning finished goods inventory
= Cost of Goods Available for Sale
subtract Ending finished goods inventory
=Cost of Goods Sold (COGS)
Demo Problem 1
Cost of Goods Sold
Thompson Company manufactures desk lamps. At the beginning of September, the following information was
supplied by its accountant
Raw materials Inventory $18,500
Work in process Inventory $12,000
Finished goods Inventory $10,200
During September, direct labor costs were $40,500, raw materials purchases were $80,000 and the total overhead costs
were $105,750. The inventories at the end of September were:
Raw materials Inventory $16,800
Work in process Inventory $23,500
Finished goods Inventory $ 9,100
Required Calculate Cost of Goods Manufactured and Cost of Goods Sold for September.
Demo Problem 2
Danan, Inc., manufactures a stuffed rabbit called Puggsy. Last year 50,000 rabbits were made and sold for $20 each.
The actual unit cost for the stuffed rabbit is given below.
Direct materials $2.00
Direct labor 3.00
Variable overhead 2.50
Fixed overhead 4.00
Total unit cost $11.50
The only selling expenses were a commission of $2 per unit sold and advertising totaling $100,000. Administrative
expenses, all fixed, equaled $50,000. There were no beginning and ending finished goods inventories.
REQUIRED: Prepare an income statement.
Group Problem 1
Ex 2-7—Cost of Goods Manufactured and Sold:
Gaillaird Company manufactures laser pointers. At the beginning of March, the
following information was supplied by its accountant:
Direct materials inventory $40,300
Work in process inventory 10,000
Finished goods inventory 5,450
During March, direct labor cost was $22,000, direct materials purchases were $70,000,
and the total overhead cost was $216,850. The inventories at the end of March were:
Direct materials inventory $16,500
Work in process inventory 7,350
Finished goods inventory 10,210
1. Prepare a cost of good manufactured statement for March
2. Prepare a cost of good sold schedule for March
Group Problem 2
Ex 2-8 Preparation of Income Statement: Manufacturing Firm
Photosmart, Inc. manufactures disposable cameras. During the last calendar year, a total
of 200,000 cameras were made, and 207,000 were sold for $9.50 each. The actual unit
cost for a camera is as follows:
Direct materials $3.25
Direct labor 1.50
Variable overhead 0.90
Fixed overhead 1.20
Total unit cost $6.85
The selling expenses consisted of a commission of $0.25 per unit sold and advertising
co-payments totaling $36,000. Administrative expense, all fixed, equaled $74,000. There
were no beginning and ending work in process inventories. Beginning finished goods
inventory was $92,475 for 13,500 cameras.
1. Calculate the number of cameras and the value of ending finished goods
2. Prepare a cost of good sold statement.
3. Prepare an absorption-costing income statement.
11. What is Functional-Based Cost Management Systems?
Functional-Based Cost Management System has two subsystems:
a. Functional-Based Cost Accounting system (Functional-Based Cost System)
b. Functional-Based Operation Control System
12. What is Activity-Based Cost Management Systems?
a. Activity-Based Cost System (ABC System)
b. Activity-Based Operation Control System (ABM System)
Practice Problem 1—COGS STATEMENT
FURIOS BECAUSE SHE DID NOT GET A SUFFICIENT RAISE, MAE BEE
TROUBLE PLANTED A BOMB IN THE BASEMENT OF HER EMPLOYER-
CHEAPER ENTERPRISES ON MARCH 25, 1993. ALTHOUGH THE ENTIRE
PLANT BURNED TO A CRISP, NO ONE WAS HURT. THAT IS EXCEPT FOR THE
ACCOUNTANT, WHO WAS STRICKEN WITH TERROR AT THE THOUGHT OF A
MANDATORY MONTHLY REPORT. SEARCHING THROUGH THE RUINS, MR.
ACCOUNTANT WAS ABLE TO SALVAGE THE FOLLOWING PIECES OF
INFORMATION FOR PERIOD FROM 12/31/92 TO 3/25/93:
DIRECT MATERICALS PURCHASED $160,000
WORK IN PROCESS 12/31 34,000
DIRECT MATERIALS 12/31 16,000
FINISHED GOODS 12/31 30,000
FACTORY OVERHEAD 40% OF CONVERSION COSTS
DIRECT LABOR 180,000
PRIME COST 294,000
GROSS PROFIT PERCENTAGE (BASED ON SALES) 20%
COST OF GOODS AVAILABLE FOR SALE 450,000
SO THAT CHEAPER ENTERPRISES CAN FILE A CLAIN FOR INSURANCE
CALCULATE THE COST OF
1. FINISHED GOODS INVENTORY AT 3/25
1. WORK IN PROCESS INVENTORY AT 3/25
1. DIRECT MATERIALS INVENTORY AT 3/25
**************ALWAYS SHOW SUPPORTING
Practice problem 2—Ex 2-17: Cost of Goods Manufactured, Cost Identification, solving for
Whizbang Company creates, produces, and markets video games. Most of the games involve some
sort of brain teaser. Leonard Polson, the owner of Whizbang, is convinced that his employees must
have strong analytical and problem-solving skills. Before any employee is hired, he or she must
successfully solve a puzzle of some sort. The puzzle always relates to the employee’s area of expertise.
You are applying for a job as an entry-level accountant. The controller of the firms wishes to test
your knowledge of basic cost terms and concepts and, at the same time, evaluate your analytical
skills. The controller has gathered information (presented below) for one of Whizbang’ plants for the
a. Conversion cost was $360,000 and was three times the prime cost.
b. Direct materials used in production equaled $100,000.
c. Cost of good manufactured was $415,000
d. Beginning work in process is one-half the cost of ending work in process
e. There are no beginning or ending inventories for direct materials
f. Cost of good sold was 90 percent of cost of goods manufactured
g. Beginning finished goods inventory was $10,000
1. Prepare a statement of cost of goods manufactured for the previous year.
2. Prepare a statement of cost of goods sold for the previous year.
Practice Problem 3—Product and period costs, CGM AND CGS)
At the beginning of August 2003, Carlton Corporation had the following account balances:
Raw Materials Inventory (both direct and indirect) $12,000
Work in Process Inventory 18,000
Finished Goods Inventory 4,000
During August, the following transactions took place.
1. Raw materials were purchased on account, $95,000
2. Direct materials (20,200) and indirect materials ($2,500) were issued to production.
3. Factory payroll consisted of $60,000 for direct labor employees and $7,000 for indirect labor
4. Office salaries totaled $24,100 for the month.
5. Utilities of $6,700 were accrued; 70 percent of the utilities cost is for the factory area.
6. Depreciation of $10,000 was recorded on plant assets; 80 percent of the depreciation is
related to factory machinery and equipment.
7. Rent of $11,000 was paid on the building. The factory occupies 60 percent of the building.
8. At the end of August, the Work in Process Inventory balance was $8,300.
9. At the end of August, the balance of Finished Goods Inventory was $8,900. Carlton uses an
actual cost system and debits actual overhead costs incurred to work in process.
A. Determine the total amount of product cost (cost of goods manufactured) and period cost
incurred during August 2003
B. Compute the cost of good sold for August 2003.
C. What level of August sales would have generated net income of $27,700?