MANUFACTURING COST :

CONCEPT AND COMPONENTS

TOPIC 2
 WHAT YOU WILL LEARN :
FP, UTM

1 THE IMPORTANCE OF COST

INFORMATION

2 DIFFERENCES BETWEEN COSTS AND

EXPENSES
COST CLASSIFICATION : FUNCTIONS;
3 COST BEHAVIOUR AND OTHERS

4 MANUFACTURING COSTS

5 NON-MANUFACTURING COSTS
 WHAT YOU WILL LEARN :
FP, UTM

6 DIRECT
COSTS

77 INDIRECT
COSTS

8 PRODUCT COSTS AND PERIOD COSTS

STATEMENT OF COSTS OF GOODS

49 MANUFACTURED AND INCOME
STATEMENT

5
 2.1 IMPORTANCE OF COST
INFORMATION
FP, UTM

To enable management to
carry out functions in an
organisation such as:
✔Planning
✔Controlling
✔Decision making
 2.2 DIFFERENCE BETWEEN
COSTS AND EXPENSES
FP, UTM

Costs Expenses

Sacrifice of resources Costs that has

to acquire products/ expired because of
services which will benefit received in
benefit in the future. the current period.
i.e. : Cost to acquire i.e. : Insurance expenses
machinery
 2.3 COST CLASSIFICATIONS
FP, UTM
 2.3.1 FUNCTION
FP, UTM

Manufacturing Non-manufacturing
Costs Costs

1 2 1 2

Direct Direct Selling Administration

Material Labour Expenses Expenses

Manufacturing
Overhead
 2.3.2 BEHAVIOUR
FP, UTM
m)
1 2 3

VARIABLE COSTS FIXED COSTS MIXED COSTS

A cost that change A cost that remains Contains both
directly with the constant, in total, variable and fixed
changes in the level regardless of cost elements.
of activity. changes in the level
of activity. i.e. : Electricity
i.e. : Direct materials
expenses
i.e. : Depreciation
of Machine
 2.3.3 OTHER CLASSIFICATIONS
FP, UTM

DIRECT INDIRECT
COSTS COSTS
 2.4 MANUFACTURING COSTS
FP, UTM
m)
1 2 3

DIRECT DIRECT LABOUR MANUFACTURING

MATERIAL OVERHEAD
Raw materials costs Labour costs
incurred in All manufacturing costs
that can be traced
converting raw except direct material
directly to the
materials into and direct labour.
finished product.
finished product. (also known as indirect
manufacturing costs)

i.e. : Indirect materials

i.e. : Wood to
produce table i.e. : Production
workers
FP, UTM
 2.5 NON-MANUFACTURING COSTS
FP, UTM

SELLING ADMINISTRATIIO
EXPENSE N
S EXPENSES

Costs involved Administration

in selling cost of the
finished company and
products. cannot be
assigned to
i.e. : production
Advertising activities.
expenses
i.e. : Director’s
salary
 2.6 DIRECT COSTS
FP, UTM

Cost that can be traced

directly to a certain cost
object.
i.e. :
Direct material
and
Direct labour
(Cost object can be product;
department or project.)
 2.7 INDIRECT COSTS
FP, UTM

Cost that cannot be traced

directly to a certain cost
object.

i.e. : manufacturing costs –

manufacturing overhead;
i.e. : Non-manufacturing costs –
advertising expenses etc.
 2.8PRODUCT COSTS AND PERIOD COSTS
FP, UTM

PRODUC PERIO
T D
COSTS COSTS
All costs that are All costs that are NOT
involved in involve in
manufacturing manufacturing
finished products. finished products but
involved in selling
i.e. : Direct and administration.
material, direct i.e. : Selling and
labour and administrative
manufacturing expenses
overhead
 FP, UTM
Direct Material
Direct Costs

Manufacturing Direct Labour

Costs Product
Costs
Indirect
Manufacturing Manufacturing
Overhead Costs

COSTS

Non- Selling Cost

Indirect
manufacturing Non- Period
costs manufacturing Costs
Administrative Costs
Cost
 EXAMPLE 1
FP, UTM

Elektrika Sdn Bhd produced 1,000 refrigerators a

month. The cost and expenses incurred are as below:

RM
a) Factory equipment rent 1,500
b) Factory building insurance 500
c) Raw materials 200,000
d) Factory utilities 800
e) Office supplies 400
f) Assemble line wages 70,000
g) Depreciation on office equipment 400
h) Indirect materials 10,000
i) Factory property taxes 125
j) Factory supervisory salaries 1,700
k) Advertising 1,250
l) Sales commission 80,000 m)
Depreciation on factory building 900
Instructions:
FP, UTM

a) By using a table, classify the above items into

product costs, period costs, prime costs and
conversion costs.

b) Calculate manufacturing costs, product costs,

non-manufacturing costs and period costs.

c) Compute prime costs and conversion costs.

d) Determine direct costs and indirect manufacturing

costs.
FP, UTM
Product Costs Period Prime Conversion
Costs
Direct Direct Manf. Costs Costs Costs
Item
Material Labour Overhead

a
b
c
d
e
f
g
h
i
j
k
l
m
 Product Cost
FP,
Cost UTM
Item Period Prime Conversion
Direct Direct Manf.
Cost Cost Cost
Material Labor Overhead

a X X
b X X
c X X
d X X
e X
f X X X
g X
h X X
i X X
j X X
k X
l X
m X X
 FP, UTM
MANUFACTURING COSTS:
RM
Direct Materials:
Raw materials 200,000
Direct Labor:
Assemble line wages 70,000
Manufacturing Overhead:
Factory equipment rent 1,500
Factory building insurance 500
Factory utilities 800
Indirect materials 10,000
Factory property taxes 125
Factory supervisory salaries 1,700
Depreciation on factory building 900
MANUFACTURING COSTS 285,525
 FP, UTM
PRODUCT COSTS:
RM
Direct Materials:
Raw materials 200,000
Direct Labor:
Assembly line wages 70,000
Manufacturing Overhead:
Factory equipment rent 1,500
Factory building insurance 500
Factory utilities 800
Indirect materials 10,000
Factory property taxes 125
Factory supervisory salaries 1,700
Depreciation on factory building 900
PRODUCT COSTS 285,525
 FP, UTM

NON-MANUFACTURING COSTS:
RM
Office supplies 400
Depreciation on office equipment 400
Advertising 1,250
Sales commissions 80,000
NON-MANUFACTURING COSTS 82,050
 FP, UTM

PERIOD COSTS:
RM
Office supplies 400
Depreciation on office equipment 400
Advertising 1,250
Sales commissions 80,000 PERIOD COSTS
82,050
 FP, UTM
PRIME COSTS:
RM
Direct Materials:
Raw materials 200,000
Direct Labor:
Assemble line wages 70,000
PRIME COSTS 270,000
 FP, UTM
CONVERSION COSTS:
RM
Direct Labor:
Assemble line wages 70,000
Manufacturing Overhead:
Factory equipment rent 1,500
Factory building insurance 500
Factory utilities 800
Indirect materials 10,000
Factory property taxes 125
Factory supervisory salaries 1,700
Depreciation on factory building 900
CONVERSION COSTS 85,525
 FP, UTM

DIRECT COSTS:
RM
Direct Materials:
Raw materials 200,000
Direct Labor:
Assemble line wages 70,000
DIRECT COSTS 270,000
 FP, UTM

INDIRECT MANUFACTURING COSTS:

RM
Manufacturing Overhead:
Factory equipment rent 1,500
Factory building insurance 500
Factory utilities 800
Indirect materials 10,000
Factory property taxes 125
Factory supervisory salaries 1,700
Depreciation on factory building 900
INDIRECT MANUFACTURING COSTS 15,525
 MANUFACTURING COSTS
FP, UTM FLOW

Direct Materials
Work In Finished
Direct Labour Process Goods COGS
Inventory Inventory
Manufacturing
Overhead
 MANUFACTURING COSTS FLOW
FP, UTM

Manufacturing activities are a process of

manufacturing raw materials to finished goods or
product.
3 types of inventory :
1. Raw materials
2. Work in Process
3. Finished Goods / Finished Products.
 2.9 STATEMENT OF COST OF GOODS
MANUFACTURED & COMPREHENSIVE INCOME
FP, UTM STATEMENT

❑ Statement of Cost of Goods

Manufactured is prepared to determine
the costs of finished goods for the
current period.
❑ Direct material costs involved is total
direct material used in the production.
 2.9 STATEMENT OF COST OF GOODS
MANUFACTURED & COMPREHENSIVE
INCOME STATEMENT
FP, UTM

STATEMENT OF COST OF GOODS COMPREHENSIVE INCOME STATEMENT

MANUFACTURED…… (partial)
SALES
Direct Materials used Less : COST OF GOODS SOLD
Direct Labor Opening Inventory Finished Goods
Manufacturing Overhead (+) Cost Of Goods Manufactured
Current Manufacturing Cost Cost Of Goods available for sale
(+) Opening Work In Process (-) Ending Inventory Finished Goods
(- ) Ending Work In Process Cost Of Goods Sold
Cost Of Goods Manufactured

(Statement of Costs Of Goods Manufactured is prepared to compute the

cost of finished goods for the current period)
 (Company name)
Statement of Cost of Goods Manufactured for the year ended…..… …
FP, Direct
UTM Materials:
Opening Raw materials inventory XXX
(+) Raw materials purchased XXX
Raw materials available for use XXX
(-) Ending Raw materials inventory XXX
Direct Materials Used XXX
Direct Labor:
Assemble line wages / Operator Salary XXX
Manufacturing Overhead:
Indirect Labour XXX
Indirect Materials XXX
Others manufacturing overhead XXX
Total manufacturing overhead XXX
Total current manufacturing costs XXX
(+) Opening Work in process XXX
Total cost of work in process XXX
(-) Ending Work in process XXX
COST OF GOODS MANUFACTURED XXX
 (Company name)
Comprehensive Income Statement for the year ended …
FP, UTM
Sales (net) XXX
(-) COST OF GOODS SOLD:
Opening Finished goods inventory XXX
(+) Cost of goods manufactured * XXX
Cost of goods available for sale XXX
(-) Ending Finished goods inventory (XXX)
Cost of goods sold (XXX)
Gross profit XXX
(-) Operating expenses:
Sales expenses XXX
Administrative expenses XXX (XXX)
Net Income / (Net Loss) XXX
 EXAMPLE 2
FP, UTM

Ohsem Manufacturing Company has the following cost and expense data
for the month ending March 31, 2018 :

Accounts receivable RM20,000

Sales 90,000
Assemble line wages 22,000
Factory utilities 5,000
Factory supervisory salaries 2,000
Plant and equipment 111,000
Factory taxes 2,000
Raw materials, March 1 9,000
Raw materials, March 31 11,000
Finished goods, March 1 18,000
Finished goods, March 31 7,000
Work in process, March 1 18,000
Work in process, March 31 8,000
FP, UTM

Factory maintenance 4,000

Advertising 3,000
Raw materials purchased 20,000
Sales commissions 5,000
Accumulated depreciation on plant and equipment 61,000
Sales expenses 12,000
Administrative expenses 10,000
Depreciation on plant and equipment 6,000

Instructions:
Prepare Statement of Cost of Goods Manufactured and Comprehensive
Income Statement.
 Ohsem Manufacturing Company
Cost of Goods Manufactured Statement
for the month ended 31 March 2018
Direct Materials:
FP, UTM
Opening Raw materials inventory 9,000
(+) Raw materials purchased 20,000
Raw materials available for use 29,000
(-) Ending Raw materials inventory (11,000)
Direct Materials Used 18,000
Direct Labor:
Assemble line wages 22,000
Manufacturing Overhead:
Factory utilities 5,000
Factory supervisory salaries 2,000
Factory taxes 2,000
Factory maintenance 4,000
Depreciation on plant and equipment 6,000
Total manufacturing overhead 19,000
Total current manufacturing costs 59,000
(+) Opening Work in process 18,000
Total cost of work in process 77,000
(-) Ending Work in process (8,000)
COST OF GOODS MANUFACTURED 69,000
 Ohsem Manufacturing Company
Comprehensive Income Statement
for the month ended 31 March 2018
FP, UTM
Sales (net) 90,000
(-) COST OF GOODS SOLD:
Finished goods inventory, beginning 18,000
(+) Cost of goods manufactured * 69,000
Cost of goods available for sale 87,000
(-) Finished goods inventory, ending (7,000)
Cost of goods sold (80,000)
Gross profit 10,000
(-) Operating expenses:
Advertising 3,000
Sales commissions 5,000
Sales expenses 12,000
Administrative expenses 10,000 (30,000)
Net Loss (20,000)
Contoh

SUMMARY
FP, UTM

Determine costs classification

(function, behaviour and others)
Determine the element of
product costs, prime costs,
conversion costs and period costs
Determine others costs classification
(direct and indirect cost; etc)
Prepare the manufacturing costs flow
And Statement of Costs Goods
Manufactured
FP, UTM

REFER TO EXTRA EXERCISE

(1 & 2)
 PAST YEAR QUESTIONS (UPS)
-LECTURE
FP, UTM
1.Define and give one (1) example for:
a) Product cost b) Period cost [3 m]

2. State the meaning of cost listed below with one (1)

example.
a) manufacturing overhead cost
b) prime cost
c) indirect manufacturing cost
d) manufacturing cost
e) non-manufacturing cost [10 m]
 FP, UTM
3. Classify the following cost items to manufacturing
cost or non-manufacturing cost for clothes factory:

No. Cost items

1 Fabric
2 Tailor
3 Managing director salary
4 Sewing machine depreciation expense [2 m]