Production , Marketing and Administrative costsManufacturing companies convert

materials into finished goods . There are two type of costs involved here:

Prime costs: direct material and direct labor costs

Conversion costs: direct labor and overhead costs

Production, Marketing and Administrative CostProduction costs: include direct

materials, direct labor and factory overhead.

Direct materials are any raw materials that become an identifiable part of the finished good. eg. fabric in clothes, flour in cookies etc

Direct labor are the wages earned by workers who transform the material from its raw form to the finished good form.

Factory overhead are any production costs other than direct material or direct labor. E.g. indirect material and labor, depreciation on manufacturing facilities, light and heat.

statement of cost of goods sold

Where are production costs portrayed?They appear in the statement of cost of goods sold. This statement has the following format

Company Name

Cost of Goods Sold Statement

Date

Direct materials Inventory1.1

+Purchases - Purchase discount -Purchase returns

=Total material available for use - Material 31.12

Materials used = + Direct labor cost

=Direct cost of manufacturing + Overhead cost

Add work in process 1.1 Less work in process 31.12

Cost of completed goods= Add finished goods inventory 1.1

Goods available for sale= Less finished goods inventory 31.12

=Cost of goods sold

CGS

Marketing costs: result from selling, delivering and costs for promoting sales retaining costumers as well as transportation, warehousing and other

distribution costs .Administrative costs: result from directing and controlling the company. They include rental fees,

telephone costs and salaries .

Where are marketing and administrative costs portrayed?

Company nameIncome statementDateRevenueLess CGSGross income

Less Marketing costs

Administrative costs

Profit before tax

Less tax

Net income

Bottom line

Production costs are treated as product costs and they are included in the work in process or finished goods

inventory .

Marketing and administrative costs are treated as period costs and they are charged to revenues.

• Jerry Manufacturing Company purchased $ 310000 of materials and had the following account balances for the year 2006

• Account Balance

• Direct labor 90000

• Plant supervision 5000

• Indirect labor 3000

• Buildings 52000

• Equipments 22000• Land 45000• Factory insurance 900• Manufacturing supplies 1500• Repairs and maintenance 1500• Advertising expenses 3000

• Traveling cost administrative staff 4000

• Circulation pieces distributed 2500

• Materials inventory 1.1.2006 22000

• Work in process 1.1.2006 11000

• Finished goods inventory 1.1 2006 14000

• Utilities 2500• Marketing manger salary 6000• Clerical Salaries 5000• Administrative staff salaries 7000• Depreciation on factory buildings

4500• Depreciation on factory equipments 4000

• Materials inventory 31.12.2006 16000

• Work in process 31.12.20069000

• Finished goods inventory 31.12. 06 15000

• Purchase returns 1500

• Purchase discount 2500

• A) 1.Calculate the materials used during the year.

• 2. Develop an analysis to find the total manufacturing cost for the year.

• 3. Calculate the cost of manufactured goods.

• 4. Calculate the cost of goods sold

•

Solution

• Materials inventory 1.1.2006 22000• +Purchase 310000• Purchase discount 2500• -Purchase returns 1500• Materials available for use 328000• Materials inventory 31.12 16000 -Materials used 312000

• 2. Manufacturing cost for the Year

• Direct Material 312000

• Direct Labor 90000

• Total direct cost of manufacturing 402000

• Add overhead costs

• Plant supervision 5000

• Indirect labor 3000

• Factory insurance 900

• Manufacturing supplies 1500

• Repairs and maintenance 1500

• Utilities 2500

• Depreciation on factory buildings 4500

• Depreciation on factory equipment 4000

• Total cost for year 424900

• Cost of manufactured goods

• Work in process 1.1 11000

• + manufact cost for the period 424900

• - Work in process 31.12 9000

• Cost of completed goods 426900

• Cost of goods sold

• Finished goods inventory 1.1 14000

• +cost of completed goods 426900

• - Finished goods 31.1215000

• Cost of goods sold425900