1-1 Dr. Hisham Madi

1-2 Main references Supporting the Course  Reeve, J. M., Warren, C. S. & Duchac, J. E. (2007). Principles of Accounting. (22 nd ed.). Canada: Thomson South-Western.  Horngren, HT., Datar, S.M. and Rajan, M (2012). Cost Accounting A Managerial Emphasis (14 th ) Prentic Hall.

1-3 Assessment Methods and Types Assignment 10 Marks Attendance5 Marks Midterm Test25 marks Final Examination60 Marks

1-4  Cost Accounting  Classification of cost  Costs control  Manufactured cost  Job Orders Cost  Activity Based Costing  Cost Volume Process Content

1-5 What is A Cost  Accountants define cost as a resource sacrificed or forgone to achieve a specific objective.  A cost is a payment of cash or the commitment to pay cash in the future for the purpose of generating revenues.  A cost is usually measured as the monetary amount that must be paid to acquire goods or services.  Cash (or credit) used to purchase equipment is the cost of the equipment.

1-6 What is A Cost  Costs are often classified by their relationship to a segment of operations, called a cost object  A cost object may be a product, a sales territory, a department, or an activity, such as research and development

1-7 Direct Costs and Indirect Costs Direct costs  are identified with and can be traced to a cost object.  The cost of wood (materials) used by Legend Guitars in manufacturing a guitar is a direct cost of the guitar.

1-8 Direct Costs and Indirect Costs Indirect costs  Cannot be identified with or traced to a cost object.  The salaries of the Legend Guitars production supervisors are indirect costs of producing a guitar  While the production supervisors contribute to the production of a guitar, their salaries cannot be identified with or traced to any individual guitar.

1-9 Business Sectors and Cost Manufacturing-sector companies  Purchase materials and components and convert them into various finished goods. Merchandising-sector companies  Purchase and then sell tangible products without changing their basic form. This sector includes companies engaged in retailing (Amazon) Service-sector companies  Provide services (intangible products)—for example, legal advice or audits—to their customers (accounting firms)

1-10 FactoryOverheadFactoryOverhead Direct Materials Direct Materials DirectLaborDirectLabor ProductCostsProductCosts Materials that are converted into finished products The cost of labor directly involved in converting material into the product. Manufacturing costs other than direct materials and direct labor. Manufacturing Costs

1-11 Direct materials inventory Direct materials in stock and awaiting use in the manufacturing process (for example, computer chips and components needed to manufacture cellular phones) Work-in-process inventory This inventory consists of the direct materials, direct labor, and factory overhead costs for products that have entered the manufacturing process, but are not yet completed (in process). Finished goods inventory This inventory consists of completed (or finished) products that have not been sold. Types of Inventory

1-12  are all costs of a product that are considered as assets in the balance sheet when they are incurred and that become cost of goods sold only when the product is sold.  Costs of direct materials, such as computer chips, issued to production (from direct material inventory),direct manufacturing labor costs, and manufacturing overhead costs create new assets, starting as work in process and becoming finished goods  Manufacturing costs are included in work-in-process inventory and in finished goods inventory (they are “inventoried”) to accumulate the costs of creating these assets Inventoriable Costs

1-13 Product Costs and Period Costs Product costs  Consist of manufacturing costs: direct materials, direct labor, and factory overhead. Period costs  Consist of selling and administrative expenses.  Period costs, such as marketing, distribution and customer service costs, are treated as expenses of the accounting period in which they are incurred because they are expected to benefit revenues in that period and are not expected to benefit revenues in future periods

1-14 Examples of Product Costs and Period Costs—Legend Guitars

1-15 Prime Costs and Conversion Costs Prime costs  Consist of direct materials and direct labor cost Conversion costs  Consist of direct labor and factory overhead costs  Conversion costs are the costs of converting the materials into a finished product.

1-16 Financial Statements for a Manufacturing Business Income Statement for a Manufacturing Company

1-17 Cost of Goods Manufactured

1-18 To illustrate, the following data for Legend Guitars are used: Financial Statements for a Manufacturing Business

1-19 Financial Statements for a Manufacturing Business  Determine the cost of materials used.  Determine the total manufacturing costs incurred  Determine the cost of goods manufactured. The cost of materials used in production is determined as follows: Step 1 Step 2

1-20 Financial Statements for a Manufacturing Business  Determine the cost of materials used.  Determine the total manufacturing costs incurred  Determine the cost of goods manufactured. The cost of materials used in production is determined as follows: Step 3

1-21 Flow of Manufacturing Costs

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