CHAPTER 2

AN INTRODUCTION TO COST TERMS AND PURPOSES

2-1 When you think of a cost, you invariably think of it in the context of putting a price on a
particular ‘thing’. That ‘thing’ is called a cost object. Therefore, a cost object is anything for
which a cost measurement is desired. For example, an accounting textbook which cost you some
money to purchase, material purchased for use in the factory, an Apple phone which you
purchased from the shop, etc.

2-2 Direct costs of a cost object are those costs that are related to the particular cost object
and can be traced to it in an economically cost-effective manner. For example, in a computer
production company, the cost of the computer screen is directly traceable to the cost of the
computer.
Therefore, the computer screen is a direct cost when computing the manufacturing cost of
the computer. Direct costs make direct input in the production of the product. They must be
incurred if the product is to be produced.
Indirect costs of a cost object are related to the particular cost object but cannot be traced
to it in an economically cost-effective manner. For example, the salaries of security guards at a
computer production company. Though the security guards are securing the computer
production plant, they make no direct input into the manufacturing of the computer.

2-3 Managers believe that direct costs that are traced to a particular cost object are more
accurately assigned to that cost object than are indirect allocated costs. When costs are allocated,
managers are less certain whether the cost allocation base accurately measures the resources
demanded by a cost object. Managers prefer to use more accurate costs in their decisions.

2-4 Yes, it can. This is because everything for which you need to know the cost of is called a
cost object and a business department is one such item. For example, an organization’s supplies
and maintenance department is a cost object for the cost of the maintenance supplies and the
maintenance employees. At a later stage in the organization’s work process, the supplies and
maintenance department costs will be assigned to various products, which will also be regarded
as cost objects.

2-5 Fixed costs are costs that tend to remain the same in amount, regardless of level of
activity. They remain fixed during the relevant range of activity. Typical examples of costs that
are fixed include annual rent of business accommodation, salaries of supervision staff and
insurance. Variable costs are costs that increase or decrease in total as the volume of activity
increases or decreases. Examples of variable costs include raw materials and power for
machinery. It also includes labor where payment is made according to the level of output.

2-6 Variable and direct: Tires used to manufacture a particular kind of car
Variable and indirect: Electricity used in the plant where multiple products are manufactured
Fixed and direct: Depreciation for a machine that is only used for one product
Fixed and indirect: Salary for the company’s CEO

2-1
2-7 A cost driver is a variable, such as the level of activity or volume that causally affects
total costs over a given time span. A change in the cost driver results in a change in the level of
total costs. For example, the number of vehicles assembled is a driver of the costs of steering
wheels on a motor-vehicle assembly line.

2-8 Calculating a unit cost is essential in many cases, especially when managers want to take
a decision regarding the pricing of different cost objects as well as when they want to accept a
special order or prioritize a product mix. The unit cost calculation is vital during these cases
because the manager needs to be certain that they are making the right choice by accepting or
rejecting a special offer for a specific cost object.

2-9 A unit cost is computed by dividing some amount of total costs (the numerator) by the
related number of units (the denominator). In many cases, the numerator will include a fixed cost
that will not change despite changes in the denominator. It is erroneous in those cases to multiply
the unit cost by activity or volume change to predict changes in total costs at different activity or
volume levels.

2-10 Manufacturing-sector companies purchase materials and components and convert them
into various finished goods, for example automotive and textile companies.
Merchandising-sector companies purchase and then sell tangible products without
changing their basic form, for example retailing or distribution.
Service-sector companies provide services or intangible products to their customers, for
example, legal advice or audits.

2-11 Although all manufacturing costs are considered as inventoriable costs, they are not just
peculiar to the manufacturing firms. In the retail industry, for example, inventoriable costs
include the costs of purchasing goods that are for resale, costs of freight, insurance, and any
other handling costs. Inventoriable costs are first converted into work-in-process before the final
finished product, which is an asset in the balance sheet. Therefore, the service sector firms do not
have associated inventoriable costs.
Period costs are all costs in the income statement other than cost of goods sold. In the
manufacturing industry, all non-manufacturing costs including research and development
expenses are treated as period costs. In the retail industry, period costs include all costs shown in
the income statement except the cost of goods sold. Costs such as marketing and distribution
expenses, administration expenses and other operating expenses are considered as period costs.
In the service sector firms, all costs are treated as period costs.

2-12 Inventoriable costs 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 when the product is sold. These
costs are included in work-in-process and finished goods inventory (they are “inventoried”) to
accumulate the costs of creating these assets.
Period costs are all costs in the income statement other than cost of goods sold. These
costs are treated as expenses of the accounting period in which they are incurred because they are
expected not to benefit future periods (because there is not sufficient evidence to conclude that
such benefit exists). Expensing these costs immediately best matches expenses to revenues.

2-2
2-13 Overtime premium is the wage rate paid to workers (for both direct labor and indirect
labor) in excess of their straight-time wage rates. Overtime premium is usually considered to be
part of indirect costs or overheads. This is because it is attributable to the general use of the
work done rather to any specific product. However, where overtime premium relates to a single
product, such circumstance will lead to overtime being treated as labor cost rather than overhead.
Idle time is a subclassification of indirect labor that represents wages paid for
unproductive time caused by lack of orders, machine breakdowns, material shortages, poor
scheduling, and the like. This is not related to any product and therefore considered an overhead,
and not a direct labor cost.

2-14 A product cost is the sum of the costs assigned to a product for a specific purpose.
Purposes for computing a product cost include:
 pricing and product mix decisions,
 contracting with government agencies, and
 preparing financial statements for external reporting under GAAP.

2-15 The following three main features of cost accounting and cost management, which can be
used in wide range of applications include:
1. Calculating the cost of products, services and other cost objects – costing systems trace
direct costs and allocate indirect costs to products. For example, job costing and
activity-based costing are used to calculate total costs and unit costs of products and
services.
2. Obtaining information for planning and control, and performance evaluation – budget
is the most commonly used tool for planning and control. A budget forces managers to
look ahead, to translate a company’s strategy into plans, to coordinate and
communicate within the organization. It also provides a benchmark for evaluating the
company’s performance. Managers make efforts to meet their budget targets, thus
budgeting can affect the attitude of staff towards achieving the set target.
3. Analyzing the relevant information for making decisions – when designing strategies
and implementing them, managers must understand which revenues and costs to
consider and which ones to ignore. When making strategic decisions about which
products and how much to produce, managers must know how revenues and costs vary
with changes in output levels.

2-16 Choice “a” is incorrect. Variable costs are not fixed, they change in relation to the level
of activity. Fixed costs are fixed irrespective of the level of activity within the relevant range.

Choice “b” is also incorrect. Cost of materials and wages for factory workers are variable costs.
This is because these costs increase with the level of production. However, the fixed costs
remain the same at all levels of activity. Salaries paid to office staff do not vary with the level of
production. Note that costs are regarded as variable or fixed within a period or over a certain
range of activity.

Choice “c” is correct. Variable costs and fixed costs are only variable or fixed for a specific
activity and for a given time period. A cost may be variable in period one but fixed in period
two. For example, the cost of electricity used in the factory may vary on the level of production

2-3
activity in the factory. However, the company may decide to obtain a fixed bill contract that
allows it to pay a fixed amount irrespective of the level of production activity.

Choice “d” is incorrect. Reducing the level of activity can reduce the total variable cost whilst
for fixed cost, such reduction will not affect the total fixed costs.

2-17 Choice “2” is correct. Costs that maintain production capacity and do not vary regardless
of utilization are classified as fixed costs. In this instance, the salary costs of direct service staff
are required to maintain capacity based on the number of residents (doctors) and will be incurred
whether the facility is full or empty. The costs are fixed.

Choice “1” is incorrect. Direct labor costs mandated by statute do not vary with production, they
vary with the compliance requirement. Consequently, direct labor costs, in this instance, are
fixed, not variable.

Choice “3” is incorrect. Direct costs related to service provider salaries are considered to be
direct costs of the service, not overhead costs.

Choice “4” is incorrect. Comprehensive Care Nursing Home is a service company and does not
have any inventory and therefore no inventoriable costs.

2-18 Choice "3" is correct. The question asks what happens to variable and fixed costs when
cost driver activity changes (i.e., when the cost driver level increases or decreases). Statement I
says that, as the cost driver level increases, total fixed cost remains unchanged. Statement I is
correct. Total fixed cost will remain unchanged regardless of changes in the cost driver because
total fixed cost is unaffected by changes in the cost driver.

Statement II says that, as the cost driver level increases, unit fixed cost increases. This statement
is asking about unit fixed cost like the previous statement asked about total fixed cost. While
total fixed cost will remain unchanged regardless of changes in the cost driver, unit fixed cost
will not. If the cost driver level increases, total fixed cost will remain the same, but the total
number of units will increase, and unit fixed cost will decrease, not increase. Statement II is
incorrect.

Statement III says that as the cost driver level decreases, unit variable cost decreases. This
statement is asking about unit variable cost like the previous statement asked about unit fixed
cost. Unit variable cost will remain unchanged regardless of what happens to the cost driver.
Statement III is incorrect.

2-4
2-19 Choice “a” is incorrect because overtime premium and idle time are overhead costs. They
are not normally considered as cost of labor since they are not identifiable with specific
production process.

Choice “b” is incorrect because overtime is traceable to a single product, the overtime premium
can be treated as a labor cost.

Choice “c” is incorrect because idle time occurs when labor is not productively used. This may
be caused by breakdown of machine, unavailability of materials and other problems.

Choice “d” is correct as all the above options are accurate descriptions of overtime and idle time.
For example, overtime premium and idle time are both overhead costs. Overtime premium can
be classified as direct labor cost where the overtime related to a single product. However, all idle
time costs are treated as overheads.

2-20 Choice “4” is correct. The question seeks to analyze the flow of inventoriable and period
costs in an organization. Statement I is correct because both cost categories flow through the
income statement at a merchandising business. Statement II is also correct because inventoriable
costs are transformed to current assets in the balance sheet, e.g. work-in-process and finished
goods. Statement III is correct because period costs include all costs in the income statement
except the cost of goods sold.

2-5
2-21 (15 min) Computing and interpreting manufacturing unit costs.

1. & 2.
(in millions)
Supreme Deluxe Regular Total
Direct material cost $ 89.00 $ 57.00 $60.00 $206.00
Direct manuf. labor costs 16.00 26.00 8.00 50.00
Manufacturing overhead costs 48.00 78.00 24.00 150.00
Total manuf. costs 153.00 161.00 92.00 406.00
Fixed costs allocated at a rate
of $15M ÷ $50M (direct mfg.
labor) equal to $0.30 per
dir. manuf. labor dollar
(0.30 $16; 26; 8) 4.80 7.80 2.40 15.00
Variable costs $148.20 $153.20 $89.60 $391.00
Units produced (millions) 125 150 140
Manuf. cost per unit (Total manuf.
costs ÷ units produced) $1.2240 $1.0733 $0.6571
Variable manuf. cost per unit
(Variable manuf. costs
Units produced) $1.1856 $1.0213 $0.6400

(in millions)
Supreme Deluxe Regular Total
Based on total manuf. cost
per unit ($1.2240 150;
$1.0733 190; $0.6571 220) $183.60 $203.93 $144.56 $532.09
Correct total manuf. costs based
on variable manuf. costs plus
fixed costs equal
Variable costs ($1.1856 150; $177.84 $194.05 $140.80 $512.69
$1.0213 190; $0.64 220)
Fixed costs 15.00
Total costs $527.69

The total manufacturing cost per unit in requirement 1 includes $15 million of indirect
manufacturing costs that are fixed irrespective of changes in the volume of output per month,
while the remaining variable indirect manufacturing costs change with the production volume.
Given the unit volume changes for August 2020, the use of total manufacturing cost per unit
from the past month at a different unit volume level (both in aggregate and at the individual
product level) will overestimate total costs of $532.09 million in August 2020 relative to the
correct total manufacturing costs of $527.69 million calculated using variable manufacturing cost
per unit times units produced plus the fixed costs of $15 million.

2-6
2-22 (15-20 min)

1. Classify each of the costs listed earlier as either direct or indirect costs.
Cost Amount (£) Direct costs Indirect costs
(£) (£)
Materials used in the product 100,000 100,000
Depreciation on factory machine 80,000 80,000
Factory insurance 6,000 6,000
Labor cost for factory workers 120,000 120,000
Factory repairs 10,000 10,000
Advertising expense 35,000 35,000
Distribution expenses 15,000 15,000
Sales commission 20,000 20,000
Secretary’s salary 25,000 25,000

2. Compute the total manufacturing cost.

Cost Amount (£)
Direct materials:
Materials used in the product 100,000
Direct labor:
Labor cost for factory workers 120,000
Manufacturing overhead:
Depreciation on factory machine 80,000
Factory insurance 6,000
Factory repairs 10,000
Total manufacturing costs 316,000
Note: Advertising, sales commission, distribution and secretary’s salaries are not considered part of
the manufacturing costs. They are regarded as selling and administrative expenses.

2-7
2-23 (10-15 mins.)

1. For each cost item (A-I) from the records, identify the direct and indirect costs

Direct costs £’000 Indirect costs £’000

Ink for the pens 600 Depreciation of factory machine 8,500
Wages of factory staff 5,000 Salary of supervisors 2,500
Plastics for pens 10,000 Machine maintenance costs 350
Depreciation of delivery 4,000
vehicles

2. Compute Timi Company’s total indirect manufacturing cost.

Indirect costs £’000
Depreciation of factory machine 8,500
Salary of supervisors 2,500
Machine maintenance costs 350
Total manufacturing overhead 11,350

Items excluded in (2) and the reason for excluding them are as follows: ink for the pens (direct
materials), wages for factory staff (direct labor cost), depreciation of delivery vehicles
(marketing cost), interest expense (financing cost), salary of general manager (administrative
cost), plastics for pens (direct material cost).

2-24 (15-20 min) Classification of costs, merchandising sector.

Cost object: t-shirts sold in apparel section of store

Cost variability: With respect to changes in the number of t-shirts sold

There may be some debate over classifications of individual items, especially with regard
to cost variability.

Cost Item D or I V or F
A D F
B I F
C D V
D D F
E I F
F I V
G I F
H D V

2-8
2-25 (15-20 min) Classification of costs, manufacturing sector.

Cost object: Type of chair assembled (Recliners or Rockers)

Cost variability: With respect to changes in the number of Recliners assembled

There may be some debate over classifications of individual items, especially with regard to cost
variability.

Cost Item D or I V or F
A D V
B I F
C I F
D D V
E D V
F I V
G D V
H I F
I I F

2-26 (20 min) Variable costs, fixed costs, total costs.

1.
Minutes/month 0 50 100 150 200 240 300 327.5 350 400 450 510 540 600 650
Plan A ($/month) 0 5 10 15 20 24 30 32.75 35 40 45 51 54 60 65
Plan B ($/month) 15 15 15 15 15 15 19.80 22 23.80 27.80 31.80 36.60 39 43.80 47.80
Plan C ($/month) 22 22 22 22 22 22 22 22 22 22 22 22 23.50 26.50 29

2. In each region, Ashton chooses the plan that has the lowest cost. From the graph (or from
calculations)*, we can see that if Ashton expects to use 0–150 minutes of long-distance each

2-9
month, she should buy Plan A; for 150–327.5 minutes, Plan B; and for more than 327.5 minutes,
Plan C. If Ashton plans to make 100 minutes of long-distance calls each month, she should
choose Plan A; for 240 minutes, choose Plan B; for 540 minutes, choose Plan C.

*Let x be the number of minutes when Plan A and Plan B have equal cost
$0.10x = $15
x = $15 ÷ $0.10 per minute = 150 minutes.
Let y be the number of minutes when Plan B and Plan C have equal cost
$15 + $0.08 (y – 240) = $22
$0.08 (y – 240) = $22 – $15 = $7
y – 240 =
y = 87.5 + 240 = 327.5 minutes

2-27 (20 min.) Variable costs, fixed costs, relevant range.

1. The production capacity is 4,400 jawbreakers per month. Therefore, the current annual
relevant range of output is 0 to 4,400 jawbreakers × 12 months = 0 to 52,800 jawbreakers.
2. Current annual fixed manufacturing costs within the relevant range are $1,300 × 12 =
$15,600 for rent and other overhead costs, plus $9,500 ÷ 10 = $950 for depreciation, totalling
$16,550.
The variable costs, the materials, are 10 cents per jawbreaker, or $3,720 ($0.10 per
jawbreaker × 3,100 jawbreakers per month × 12 months) for the year.

3. If demand changes from 3,100 to 6,200 jawbreakers per month, or from 3,100 × 12 = 37,200
to 6,200 × 12 = 74,400 jawbreakers per year, Dotball will need a second machine. Assuming
Dotball buys a second machine identical to the first machine, it will increase capacity from
4,400 jawbreakers per month to 8,800. The annual relevant range will be between 4,400 × 12
= 52,800 and 8,800 × 12 = 105,600 jaw breakers.
Assume the second machine costs $9,500 and is depreciated using straight-line
depreciation over 10 years and zero residual value, just like the first machine. This will add
$950 of depreciation per year.
Fixed costs for next year will increase to $17,500 from $16,550 for the current year +
$950 (because rent and other fixed overhead costs will remain the same at $15,600). That is,
total fixed costs for next year equal $950 (depreciation on first machine) + $950
(depreciation on second machine) + $15,600 (rent and other fixed overhead costs).
The variable cost per jawbreaker next year will be 90% × $0.10 = $0.09. Total variable
costs equal $0.09 per jawbreaker × 74,400 jawbreakers = $6,696.
If Dotball decides not to increase capacity and meet only that amount of demand for
which it has available capacity (4,400 jaw breakers per month or 4,400 × 12 = 52,800 jaw
breakers per year), the variable cost per unit will be the same at $0.10 per jawbreaker.
Annual total variable manufacturing costs will increase to $0.10 × 4,400 jawbreakers per
month × 12 months = $5,280. Annual total fixed manufacturing costs will remain the same,
$16,550.

2-10
2-28 (10-15 min) Cost behavior.

Variable Costs: Cost per unit is constant ($5)

10,000 units X $5 per unit = $50,000
20,000 units X $5 per unit = $100,000
50,000 units X $5 per unit = $250,000

Fixed Costs: Total cost is constant ($30,000)

10,000 units X $3 per unit = $30,000
$30,000/ 20,000 units = $1.50 per unit
$30,000/ 50,000 units = $0.60 per unit

2-29 (20 min) Variable costs, fixed costs, relevant range.

1. The production capacity is 5,000 jaw breakers per month. Therefore, the current annual
relevant range of output is 0 to 5,000 jaw breakers × 12 months = 0 to 60,000 jaw breakers.
2. Current annual fixed manufacturing costs within the relevant range are $1,200 × 12 =
$14,400 for rent and other overhead costs, plus $6,500 ÷ 10 = $650 for depreciation, totaling
$15,050.
The variable costs, the materials, are 40 cents per jaw breaker, or $18,720 ($0.40 per jaw
breaker × 3,900 jaw breakers per month × 12 months) for the year.

3. If demand changes from 3,900 to 7,800 jaw breakers per month, or from 3,900 × 12 =
46,800 to 7,800 × 12 = 93,600 jaw breakers per year, Gummy Land will need a second machine.
Assuming Gummy Land buys a second machine identical to the first machine, it will increase
capacity from 5,000 jaw breakers per month to 10,000. The annual relevant range will be
between 5,000 × 12 = 60,000 and 10,000 × 12 = 120,000 jaw breakers.
Assume the second machine costs $6,500 and is depreciated using straight-line
depreciation over 10 years and zero residual value, just like the first machine. This will add
$650 of depreciation per year.
Fixed costs for next year will increase to $15,700 from $15,050 for the current year + $650
(because rent and other fixed overhead costs will remain the same at $14,400). That is, total
fixed costs for next year equal $650 (depreciation on first machine) + $650 (depreciation on
second machine) + $14,400 (rent and other fixed overhead costs).
The variable cost per jaw breaker next year will be 90% × $0.40 = $0.36. Total variable
costs equal $0.36 per jaw breaker × 93,600 jaw breakers = $33,696.
If Gummy Land decides not to increase capacity and meet only that amount of demand for
which it has available capacity (5,000 jaw breakers per month or 5,000 × 12 = 60,000 jaw
breakers per year), the variable cost per unit will be the same at $0.40 per jaw breaker. Annual
total variable manufacturing costs will increase to $0.40 × 5,000 jaw breakers per month × 12
months = $24,000. Annual total fixed manufacturing costs will remain the same, $15,050.

2-11
2-30 (20 min) Cost drivers and value chain.

1. A. Perform market research on competing brands - design of products and processes

B. Design a prototype of the phone app and the security camera - design of products and
processes
C. Test the compatibility of the phone app and the security camera - design of products
and processes
D. Make necessary design changes to the prototype based on testing performed in C
above - design of products and processes
E. Manufacture the security cameras – production
F. Attend trade shows to make wholesalers aware of the camera - marketing
G. Process orders from the trade show orders and wholesalers - distribution
H. Deliver the security cameras to the wholesalers - distribution
I. Provide online assistance to the security camera users - customer service
J. Make additional design changes to the security camera based on customer feedback -
design of products and processes

2-12
2.

Value Chain
Category Activity Cost Driver
Design of Perform market research on Hours spent researching competing market
products and competing brands brands
processes
Design a prototype of the Engineering hours spent on initial product
phone app and the security design
camera

Test the compatibility of the Number of product tests conducted

phone app and the security
camera

Make necessary design changes Number of design changes

to the prototype based on
testing performed

Make additional design Number of design changes

changes to the security
camera based on customer
feedback
Production Manufacture the security Machine hours required to run the
cameras production equipment
Marketing Attend trade shows to make FTEs spent on attending trade shows
wholesalers aware of the
camera

Distribution Process orders from the trade Number of security camera orders processed
show orders and wholesalers

Deliver the security cameras to Number of deliveries made to wholesalers

the wholesalers
Customer Provide online assistance to the Customer-service hours
service security camera users

2-13
2-31 (20-25 mins.) Calculating unit cost

1. Prepare the cost of goods manufactured for the year 2019.

£ £
Beginning work in process inventory 0
Add: Direct materials used:
Beginning materials inventory 10,000
Purchases of direct materials 33,000
Available for use 43,000
Less: Ending materials inventory (9,500)
Direct materials used 33,500
Direct labor 25,000
Manufacturing overhead:
Rent on plant 8,000
Utilities for plant 1,100
Plant janitorial services 300 9,400

Total manufacturing costs 67,900

Less: Ending work in process (3,500)
Cost of goods manufactured 64,400

2. If the company produced 20,000 bottles of water in 2019, calculate the company’s unit
product cost for the year.

Unit product cost = Cost of goods manufactured ÷ total units produced

= £64,400 ÷ 20,000 = £3.22 per unit

2-32 (20 min.) Total costs and unit costs, service setting
1.

Number of guests 0 50 100 150 200 250 300

Variable cost per guest
(£80 caterer charge –
£5 discount for ads) £75 £75 £75 £75 £75 £75 £75
£14,0 £14,00 £14,00 £14,00 £14,00 £14,00
Fixed Costs
£14,000 00 0 0 0 0 0
Variable costs (number of
guests × variable cost per
0 3,750 7,500 11,250 15,000 18,750 22,500
guest)
Total costs (fixed +
£14,000 £17,750 £21,500 £25,250 £29,000 £32,750 £36,500
variable)

2-14
2.
Number of guests 0 50 100 150 200 250 300
Total costs
(fixed + variable) £14,000 £17,750 £21,500 £25,250 £29,000 £32,750 £36,500
Costs per guest (total £168.3
costs ÷ number of guests)   £355 £215 3 £145 £131 £121.67

As shown in the table above, for 150 attendees the total cost will be £25,250, and the cost per
attendee will be £168.33.

3. As shown in the table in requirement 2, for 200 attendees, the total cost will be £29,000,
and the cost per attendee will be £145.
4. TBE should charge customers based on the number of guests. As the number of guests
increase, TBE could offer price discounts because its fixed costs would be spread over a larger
number of guests.
Alternatively, TBE could charge a flat fee of £10,000 plus a margin for the music. The
catering costs would then vary less with the number of guests because only £4,000 of fixed costs
would be spread over the number of guests. For 100 guests, the fixed catering cost per guest
would be £40 (£4,000 ÷ 100 guests); for 200 guests, it would be £20 (£4,000 ÷ 200 guests).
TBE’s total cost would be £115 (variable cost per guest of £75 + fixed catering cost per guest of
£40) for 100 guests and £95 (variable cost per guest of £75 + fixed catering cost per guest of
£20) for 200 guests.

2-15
2-33 (15 – 20 mins.) Inventoriable versus period costs.

1. Identify the following as either an inventoriable product cost or a period cost:

Inventoriable costs Period costs

Depreciation on plant and equipment Depreciation on delivery vans
Insurance on plant and building Marketing manager’s salary
Raw materials Electricity bill for the residential quarters
Manufacturing overheads
Production staff wages

2. Compute the cost of goods manufactured:

£ £
Beginning work in process inventory 12,000
Add: Direct materials used 24,000
Direct labor 9,000
Manufacturing overhead 17,000
Total manufacturing costs incurred during the period 50,000
Total manufacturing costs 62,000
Less: Ending work in process (5,000)
Cost of goods manufactured 57,000

2-34 (20-30 min) Inventoriable costs versus period costs.

1. Manufacturing-sector companies purchase materials and components and convert them

into different finished goods.
Merchandising-sector companies purchase and then sell tangible products without
changing their basic form.
Service-sector companies provide services or intangible products to their customers—for
example, legal advice or audits.
Only manufacturing and merchandising companies have inventories of goods for sale.

2. Inventoriable costs are all costs of a product that are regarded as an asset when they are
incurred and then become cost of goods sold when the product is sold. These costs for a
manufacturing company are included in work-in-process and finished goods inventory (they are
“inventoried”) to build up the costs of creating these assets.
Period costs are all costs in the income statement other than cost of goods sold. These
costs are treated as expenses of the period in which they are incurred because they are presumed
not to benefit future periods (or because there is not sufficient evidence to conclude that such
benefit exists). Expensing these costs immediately best matches expenses to revenues.

2-16
3.
A. Cost of lumber and plumbing supplies available at Home Depot - is an inventoriable cost
of a merchandising company. The cost becomes part of cost of goods sold when the
lumber and plumbing supplies are sold to customers.
B. Electricity used to provide lighting for assembly-line workers at an Apple manufacturing
plant – inventoriable cost of a manufacturing company. It is part of the manufacturing
overhead that is included in the manufacturing cost of a finished good.
C. Depreciation on store shelving in Home Depot – period cost of a merchandising
company. It is a cost that benefits the current period, and it is not traceable to goods
purchased for resale.
D. Mileage paid to nannies traveling to clients for Rent a Nanny - period cost of a service
company. Rent a Nanny has no inventory of goods for sale and, hence, no inventoriable
cost.
E. Wages for personnel responsible for quality testing of the Apple products during the
assembly process – inventoriable cost of a manufacturing company. It is usually part of
the manufacturing overhead that is included in the manufacturing cost of a finished good
(if quality testing is done for several products), but may be a direct cost, if quality testing
is done by personnel who work on a specific Apple product line such as the iPhone.
F. Salaries of Rent a Nanny marketing personnel planning local-newspaper advertising
campaigns – period cost of a service company. Rent a Nanny has no inventory of goods
for sale and, hence, no inventoriable cost.
G. Lunches provided to the nannies for Rent a Nanny - period cost of a service company.
Rent a Nanny has no inventory of goods for sale and, hence, no inventoriable cost.
H. Salaries of employees at Apple retail stores - period cost of a manufacturing company.
This is a distribution cost, not an inventoriable cost.
I. Shipping costs for Apple to transport products to retail stores - period cost of a
manufacturing company. This is a distribution cost, not an inventoriable cost.

2-17
2-35 (20 min.) Cost of goods purchased, cost of goods sold, and income statement.

1a. Huang Wong Ping Retail Outlet Stores

Schedule of Cost of Goods Purchased
For the Year Ended December 31, 2021
(in thousands)
Purchases $654,000
Add freight-in 25,000
679,000
Deduct:
Purchase returns and allowances $ 32,400
Purchase discounts 22,600 55,000

Cost of goods purchased $624,000

1b. Huang Wong Ping Retail Outlet Stores

Schedule of Cost of Goods Sold
For the Year Ended December 31, 2021
(in thousands)

Beginning merchandise inventory January 1, 2021 $ 115,800

Cost of goods purchased (see above) 624,000
Cost of goods available for sale 739,800
Ending merchandise inventory December 31, 2021 124,200
Cost of goods sold $ 615,600

2. Huang Wong Ping Retail Outlet Stores

Income Statement
For the Year Ended December 31, 2021
(in thousands)
Revenues $798,000
Cost of goods sold (see above) 615,600
Gross margin 182,400
Operating costs
Marketing and advertising costs $54,300
Depreciation on Store Fixtures 10,420
Shipping of merchandise to customers 5,700
General and administrative costs 74,800
Total operating costs 145,220
Operating income $ 37,180

2-18
2-36 (20 min) Cost of goods purchased, cost of goods sold, and income statement.

1a. Mama Retail Outlet Stores

Schedule of Cost of Goods Purchased
For the Year Ended December 31, 2020
(in thousands)

Purchases $521,000
Add Freight—in 21,000
542,000
Deduct:
Purchase returns and allowances $25,000
Purchase discounts 22,000 47,000

Cost of goods purchased $495,000

1b. Mama Retail Outlet Stores

Schedule of Cost of Goods Sold
For the Year Ended December 31, 2020
(in thousands)

Beginning merchandise inventory 1/1/2020 $94,000

Cost of goods purchased (see above) 495,000
Cost of goods available for sale 589,000
Ending merchandise inventory 12/31/2020 101,000
Cost of goods sold $488,000

2. Mama Retail Outlet Stores

Income Statement
Year Ended December 31, 2020
(in thousands)

Revenues $690,000
Cost of goods sold (see above) 488,000
Gross margin 202,000
Operating costs
Marketing and advertising costs $54,000
Depreciation on store fixtures 8,800
Shipping of merchandise to customers 10,000
General and administrative costs 63,000
Total operating costs 135,800
Operating income $ 66,200

2-19
2-37 (20 min) Flow of inventoriable costs.

(All numbers below are in millions).

1.
Direct materials inventory 3/1/2020 $ 90
Direct materials purchased 345
Direct materials available for production 435
Direct materials used (365)
Direct materials inventory 3/31/2020 $ 70

2.
Total manufacturing overhead costs $ 485
Subtract: Variable manufacturing overhead costs (270)
Fixed manufacturing overhead costs for March 2020 $ 215

3.
Total manufacturing costs incurred during March 2020 $ 1,570
Subtract: Direct materials used (from requirement 1) (365)
Total manufacturing overhead costs (485)
Direct manufacturing labor costs for March 2020 $ 720

4.
Work-in-process inventory 3/1/2020 $ 215
Total manufacturing costs incurred during March 2020 1,570
Work-in-process available for production 1,785
Subtract: Cost of goods manufactured (moved into finished goods) (1,640)
Work-in-process inventory 3/31/2020 $ 145

5.
Finished goods inventory 3/1/2020 $ 160
Cost of goods manufactured (moved from work in process) 1,640
Cost of finished goods available for sale in March 2020 $ 1,800

6.
Cost of finished goods available for sale in March 2020
(from requirement 5) $ 1,800
Subtract: Cost of goods sold (1,740)
Finished goods inventory 3/31/2020 $ 60

2-20
2-38 (30-40 min) Cost of goods manufactured, income statement, manufacturing
company.

1. Peterson Company
Schedule of Cost of Goods Manufactured
Year Ended December 31, 2020
(in thousands)

Direct materials cost  

Beginning inventory, January 1, 2020 $ 21,000  
Purchases of direct materials 74,000  
Cost of direct materials available for use 95,000  
Ending inventory, December 31, 2020 23,000  
Direct materials used $ 72,000
Direct manufacturing labor costs 22,000
Indirect manufacturing costs  
Indirect manufacturing labor 17,000  
Plant insurance 7,000  
Depreciation—plant building & equipment 11,000  
Repairs and maintenance—plant 3,000  
Total indirect manufacturing costs 38,000
Manufacturing costs incurred during 2020 132,000
Add beginning work-in-process inventory, January 1, 2020 26,000
Total manufacturing costs to account for 158,000
Deduct ending work-in-process inventory, December 31, 2020 25,000
Cost of goods manufactured (to Income Statement) $133,000
 
   

2. Peterson Company
Income Statement
Year Ended December 31, 2020
(in thousands)
   
Revenues $310,000
Cost of goods sold:  
Beginning finished goods, January 1, 2020 $ 13,000  
Cost of goods manufactured 133,000  
Cost of goods available for sale 146,000  
Ending finished goods, December 31, 2020 20,000  
Cost of goods sold 126,000
Gross margin 184,000
Operating costs:  
Marketing, distribution, and customer-service costs 91,000  
General and administrative costs 24,000  
Total operating costs 115,000
Operating income $ 69,000

2-21
2-39 (30-40 min) Cost of goods manufactured, income statement, manufacturing
company.

(30–40 min.)

Sales - Cost of Goods Sold (60% of Sales) = Gross Margin

If Cost of Goods Sold = 60% Sales, then Gross Margin = 40% of Sales
Gross Margin = $400,000
40% Sales = $400,000; Sales = $1,000,000 (= $400,000 / 40%)
Cost of Goods Sold = 60% Sales ($1,000,000) = $600,000

Cost of Goods Sold:

Finished Goods, 1/1 $ 75,000
+ Cost of Goods Mfg ****
- Finished Goods, 12/31 ($ 50,000)
= Cost of Goods Sold $600,000 (from above)

****Cost of Goods Mfg = $575,000 (Cost of Goods Sold $600,000 + Finished Goods, 12/31
$50,000 – Finished Goods $75,000)

Cost of Goods Mfg:

Raw Materials used $100,000
Direct Labor
Mfg Overhead
Total Mfg Costs
+ Work in Process, 1/1 $ 25,000
- Work in Process, 12/31 ( 60,000)
Cost of Goods Mfg $575,000 (from COGS computation above)

Total Mfg Costs = $610,000 (Cost of Goods Mfg $575,000 + Work in Process, 12/31 $60,000 –
Work in Process, 1/1 $25,000)

Acct Rec Acct Pay

1/1 120,000 1/1

credit 1,000,000 collections pymts 80,000 130,000 Raw Matl

purchased
sales

12/31 80,000 200,000 12/31

2-22
Acct Rec Collections = $1,040,000 (Acct Rec, 1/1 $120,000 + Collections $1,000,000 – Acct
Rec, 12/31 $80,000)

Acct Pay, 1/1 = $150,000 (Acct Pay, 12/31 $200,000 – Raw Matl purchase $130,000 + Acct Pay
pymts $80,000)

Raw Matls
1/1 10,000

purchases 130,000 100,000 used

12/31

Raw Materials, 12/31 = $40,000 (Raw Matls, 1/1 $10,000 + Raw Matl purchased $130,000 –
Raw Matl used$100,000)

2-40 (25-30 min) Income statement and schedule of cost of goods manufactured.

Howell Corporation
Income Statement for the Year Ended December 31, 2020
(in millions)

Revenues $950
Cost of goods sold
Beginning finished goods, Jan. 1, 2020 $ 70
Cost of goods manufactured (below) 645
Cost of goods available for sale 715
Ending finished goods, Dec. 31, 2020 55 660
Gross margin 290
Marketing, distribution, and customer-service costs 240
Operating income $ 50

2-23
 Howell Corporation
Schedule of Cost of Goods Manufactured
for the Year Ended December 31, 2020
(in millions)

Direct materials costs

Beginning inventory, Jan. 1, 2020 $ 15
Purchases of direct materials 325
Cost of direct materials available for use 340
Ending inventory, Dec. 31, 2020 20
Direct materials used $320
Direct manufacturing labor costs 100
Indirect manufacturing costs
Indirect manufacturing labor 60
Plant supplies used 10
Plant utilities 30
Depreciation––plant and equipment 80
Plant supervisory salaries 5
Miscellaneous plant overhead 35 220
Manufacturing costs incurred during 2020 640
Add beginning work-in-process inventory, Jan. 1, 2020 10
Total manufacturing costs to account for 650
Deduct ending work-in-process, Dec. 31, 2020 5
Cost of goods manufactured $645

2-24
2-41 (15-20 min) Interpretation of statements (continuation of 2-40).

1. The schedule in 2-40 can become a Schedule of Cost of Goods Manufactured and Sold
simply by including the beginning and ending finished goods inventory figures in the supporting
schedule, rather than directly in the body of the income statement. Note that the term cost of
goods manufactured refers to the cost of goods brought to completion (finished) during the
accounting period, whether they were started before or during the current accounting period.
Some of the manufacturing costs incurred are held back as costs of the ending work in process;
similarly, the costs of the beginning work in process inventory become a part of the cost of goods
manufactured for 2020.

2. The sales manager’s salary would be charged as a marketing cost as incurred by both
manufacturing and merchandising companies. It is basically a period (operating) cost that
appears below the gross margin line on an income statement.

3. An assembler’s wages would be assigned to the products worked on. Thus, the wages
cost would be charged to Work-in-Process and would not be expensed until the product is
transferred through Finished Goods Inventory to Cost of Goods Sold as the product is sold.

4. The direct-indirect distinction can be resolved only with respect to a particular cost
object. For example, in defense contracting, the cost object may be defined as a contract. Then, a
plant supervisor working only on that contract will have his or her salary charged directly and
wholly to that single contract.

5. Direct materials used = $320,000,000 ÷ 1,000,000 units = $320 per unit

Depreciation on plant equipment = $80,000,000 ÷ 1,000,000 units = $80 per unit

6. Direct materials unit cost would be unchanged at $320 per unit. Depreciation cost per
unit would be $80,000,000 ÷ 1,200,000 = $66.67 per unit. Total direct materials costs would rise
by 20% to $384,000,000 ($320 per unit × 1,200,000 units), whereas total depreciation would be
unaffected at $80,000,000.

7. Unit costs are averages, and they must be interpreted with caution. The $320 direct materials
unit cost is valid for predicting total costs because direct materials is a variable cost; total direct
materials costs indeed change as output levels change. However, fixed costs like depreciation
must be interpreted quite differently from variable costs. A common error in cost analysis is to
regard all unit costs as one—as if all the total costs to which they are related are variable costs.
Changes in output levels (the denominator) will affect total variable costs, but not total fixed
costs. Graphs of the two costs may clarify this point; it is safer to think in terms of total costs
rather than in terms of unit costs.

2-25
2-42 (25-30 min) Income statement and schedule of cost of good manufactured.

Chan Corporation
Income Statement
for the Year Ended December 31, 2020
(in millions)

Revenues $352
Cost of goods sold
Beginning finished goods, Jan. 1, 2020 $ 40
Cost of goods manufactured (below) 219
Cost of goods available for sale 259
Ending finished goods, Dec. 31, 2020 20 239
Gross margin 113
Marketing, distribution, and customer-service costs 92
Operating income (loss) $ 21

Chan Corporation
Schedule of Cost of Goods Manufactured
for the Year Ended December 31, 2020
(in millions)

Direct material costs

Beginning inventory, Jan. 1, 2020 $ 31
Direct materials purchased 83
Cost of direct materials available for use 114
Ending inventory, Dec. 31, 2020 10
Direct materials used $104
Direct manufacturing labor costs 48
Indirect manufacturing costs
Plant supplies used 3
Property taxes on plant 7
Plant utilities 9
Indirect manufacturing labor costs 24
Depreciation––plant and equipment 5
Miscellaneous manufacturing overhead costs 12 60
Manufacturing costs incurred during 2020 212
Add beginning work-in-process inventory, Jan. 1, 2020 15
Total manufacturing costs to account for 227
Deduct ending work-in-process inventory, Dec. 31, 2020 8
Cost of goods manufactured (to income statement) $219

2-26
2-43 (15 -20 mins.)

1. Calculate Granolla’s overtime premium pay and total compensation for December 2019

Direct labor cost: 120 hours X £60 per hour = £7,200

Overtime premium: 60 X £30 per hour = £1,800

Total compensation £9,000

2. What is Granola’s idle time cost for December 2019?

Direct labor cost: 114 hours X £60 per hour = £6,840

Idle time (overhead): 6 hours X £60 per hour = £ 360
Overtime premium (overhead): 60 hours X £30 = £1,800
Total earnings for 120 hours £9,000

3. Discuss the treatment of overtime premium and idle time on the product costs.
Though overtime premium and idle time are labor costs, but they are treated as overhead costs
here. However, where these costs are related to a single product, they may be classified as direct
costs.

2-44 (15 min) Different meanings of product costs.

Purpose:
Purpose: Product Purpose: Financial Statement
Mix Government (using GAAP)
Type of Cost
Contract
Direct material Include Include Include
Direct manufacturing labor Include Include Include
Manufacturing overhead Include Include Include
Distribution costs Include Exclude* Exclude
Product design costs Include** Exclude* Exclude
R&D costs Include Exclude* Exclude
Customer service Include Exclude* Exclude
* May change depending on the specifics of the contract.
** Assuming the product design costs have not already been incurred.

2-27
2-45 (30-40 min) Missing records, computing inventory costs.

1. Finished goods inventory, 3/31/2020 = $190,000

2. Work-in-process inventory, 3/31/2020 = $30,000
3. Direct materials inventory, 3/31/2020 = $43,500

This problem is not as easy as it first appears. These answers are obtained by working from the
known figures to the unknowns in the schedule below. The basic relationships between
categories of costs are:

Manufacturing costs added during the period (given) $400,000

Conversion costs (given) $340,000
Direct materials used = Manufacturing costs added – Conversion costs
= $400,000 – $340,000 = $60,000

Cost of goods manufactured = Direct Materials Used × 5

= $60,000 × 5 = $300,000

Schedule of Computations
Direct materials inventory, 3/1/2020 (given) $ 13,500
Direct materials purchased (given) 90,000
Direct materials available for use 103,500
Direct materials inventory, 3/31/2020 3= 43,500
Direct materials used 60,000
Conversion costs (given) 340,000
Manufacturing costs added during the period (given) 400,000
Add work in process inventory, 3/1/2020 (given) 30,000
Manufacturing costs to account for 430,000
Deduct work in process inventory, 3/31/2020 2= 130,000
Cost of goods manufactured (5 × $60,000) 300,000
Add finished goods inventory, 3/1/2020 190,000
Cost of goods available for sale 490,000
Deduct finished goods inventory, 3/31/2020 1= 42,000
Cost of goods sold (70% × $640,000) $448,000

2-28
 Some instructors may wish to place the key amounts in a Work in Process T-account. This
problem can be used to introduce students to the flow of costs through the general ledger
(amounts in thousands):
Cost of
Direct Materials Work in Process Finished Goods Goods Sold
Beg Inv 13.5 Beg Inv 30 Beg Inv 190
Purch. 90.0 DM DM used COGM 300 COGS 415 448
used 60 (400– 60 300
300)
End Inv 43.5 Conversio 340
n
To Availabl
account 430 e for 490
for sale

End Inv 130 End Inv 42

2-46 (30 min.) Comprehensive problem on unit costs, product costs.

1. If 2 pounds of direct materials are used to make each unit of finished product, 115,000 units ×
2 lbs., or 230,000 lbs. were used at £0.65 per pound of direct materials (£149,500 ÷ 230,000
lbs.). (The direct material costs of £149,500 are direct materials used, not purchased.) Therefore,
the ending inventory of direct materials is 2,300 lbs.  £0.65 = £1,495.

2.
Manufacturing Costs for 115,000 units
Variable   Fixed  Total  
Direct materials costs £149,500 £ – £149,500
Direct manufacturing labor costs 34,500 – 34,500
Plant energy costs 6,000 – 6,000
Indirect manufacturing labor costs 12,000 17,000 29,000
Other indirect manufacturing costs 7,000 27,000 34,000
Cost of goods manufactured £209,000 £44,000 £253,000

Average unit manufacturing cost: £253,000 ÷ 115,000 units

= £2.20 per unit
Finished goods inventory in units: = £15,400 (given)
£2.20 per unit
= 7,000 units

3. Units sold in 2020 = Beginning inventory + Production – Ending inventory

= 0 + 115,000 –7,000 = 108,000 units
Selling price in 2020 = £540,000 ÷ 108,000
= £5.00 per unit

2-29
4.
Office Essentials
Income Statement
Year Ended December 31, 2020
(in thousands)

Revenues (108,000 units sold × £5.00) £540,000

Cost of units sold:
Beginning finished goods, Jan. 1, 2020 £ 0
Cost of goods manufactured 253,000
Cost of goods available for sale 253,000
Ending finished goods, Dec. 31, 2020 15,400 237,600
Gross margin 302,400
Operating costs:
Marketing, distribution, and customer-service costs
(£126,000 + £47,000) 173,000
Administrative costs 58,000 231,000
Operating income £ 71,400

Note: Although not required, the full set of unit variable costs is:
Direct materials cost (£0.65 × 2 lbs.) £1.300
Direct manufacturing labor cost (£34,500 ÷ 115,000) 0.300
Plant energy cost (£6,000 ÷ 115,000) 0.052
Indirect manufacturing labor cost (£12,000 ÷ 115,000) 0.104 = £1.817 per unit manufactured
Other indirect manufacturing cost (£7,000 ÷ 115,000) 0.061

Marketing, distribution, and customer-service costs £1.096 per unit sold

2-47 (20-25 min.) Classification of costs; ethics.

1. Warehousing costs per unit = per unit

If the $3,570,000 is treated as period costs, the entire amount would be expensed during
the year as incurred. If it is treated as a product cost, it would be “unitized” at $17 per unit and
expensed as each unit of the product is sold. Therefore, if only 190,000 of the 210,000 units are
sold, only $3,230,000 ($17 per unit × 190,000 units) of the $3,570,000 would be expensed in the
current period. The remaining $3,570,000 – $3,230,000 = $340,000 would be inventoried on the
balance sheet until a later period when the units are sold. The value of finished goods inventory
can also be calculated directly to be $340,000 ($17 per unit × 20,000 units).

2-30
2. No. With respect to classifying costs as product or period costs, this determination is
made by GAAP. It is not something that can be justified by the plant manager or plant controller.
Even though these costs are in fact related to the product, they are not direct costs of
manufacturing the product. GAAP requires that research and development, as well as all costs
related to warehousing and distribution of goods, be classified as period costs and expensed in
the period they are incurred.

3. Adalard Müller would improve his personal bonus and take-home pay by 8% × $340,000 =
$27,200.

4. The controller should not reclassify costs as product costs just so the plant can reap short-
term benefits, including the increase in Müller’s personal year-end bonus. Research and
development costs, costs related to the shipping of finished goods, and costs related to
warehousing finished goods are all period costs under GAAP and must be treated as such.
Changing this classification on New Time’s financial statements would violate GAAP and would
likely be considered fraudulent. The idea of costs being classified as product costs versus period
costs is to properly reflect on the income statement those costs that are directly related to
manufacturing (costs incurred to transform one asset, direct materials into another asset, finished
goods) and to properly reflect on the balance sheet those costs that will provide a future benefit
(inventory). The controller should not be intimidated by Müller. Müller stands to personally
benefit from the reclassification of costs. The controller should insist that he must adhere to
GAAP so as not to submit fraudulent financial statements to corporate headquarters. If Müller
insists on the reclassification, the controller should raise the issue with the chief financial officer
after informing Müller that he is doing so. If, after taking all these steps, there is continued
pressure to modify the numbers, the controller should consider resigning from the company
rather than engage in unethical behavior.

2-31
 2-48 (20–25 min.) Finding unknown amounts.

Let G = given, I = inferred

Step 1: Use gross margin formula Case 1 Case 2

Revenues $64,500 G $57,600 G
Cost of goods sold A 38,500 I 33,400 G
Gross margin $26,000 G C $24,200 I

Step 2: Use schedule of cost of goods manufactured formula

Direct materials used $14,500 G $20,200 G
Direct manufacturing labor costs 5,200 G 7,300 G
Indirect manufacturing costs 10,400 G D 9,800 I
Manufacturing costs incurred 30,100 I 37,300 I
Add beginning work in process, 1/1 4,600 G 2,800 G
Total manufacturing costs to account for 34,700 I 40,100 I
Deduct ending work in process, 12/31 2,300 G 5,500 G
Cost of goods manufactured 32,400 I 34,600 I

Step 3: Use cost of goods sold formula

Beginning finished goods inventory, 1/1 6,600 G 5,100 G
Cost of goods manufactured 32,400 I 34,600 I
Cost of goods available for sale 39,000 I 39,700 I
Ending finished goods inventory, 12/31 B 500 I 6,300 G
Cost of goods sold 38,500 I 33,400 G

For case 1, do steps 1, 2, and 3 in order.

For case 2, do steps 1, 3, and then 2.

Try It! 2-1

The following table shows the total costs of gasoline and insurance and the cost per mile if the
truck is driven (a) 25,000 miles and (b) 50,000 miles.

Number of Miles Variable Gasoline Fixed Insurance

Driven Costs Costs Total Costs Cost per Mile
(1) (2) = $0.25 × (1) (3) (4) = (2) + (3) (5) = (4) ÷ (1)
25,000 $6,250  $5,500 $ 11,750 $0.47
50,000 12,500 5,500 18,000 0.36

2-32
Try It! 2-2

We first calculate the cost of direct materials used and then total manufacturing costs incurred in
2020.

The cost of direct materials used is:

Beginning inventory of direct materials, January 1, 2020 $10,000

+ Purchases of direct materials in 2020 90,000
− Ending inventory of direct materials, December 31, 2020    2,000
= Direct materials used in 2020 $98,000

Total manufacturing costs incurred refers to all direct manufacturing costs and manufacturing
overhead costs incurred during 2020 for all goods worked on during the year. Carolyn
Corporation classifies its manufacturing costs into the three categories described earlier:

(i) Direct materials used in 2020 $  98,000

(ii) Direct manufacturing labor costs in 2020 32,000
(iii) Manufacturing overhead costs in 2020     39,000
Total manufacturing costs incurred in 2020 $169,000

Try It! 2-3

(a) Cost of goods manufactured refers to the cost of goods brought to completion, whether they
were started before or during the current accounting period. Some of the manufacturing costs
incurred during 2020 are held back as the cost of the ending work-in-process inventory.
The cost of goods manufactured in 2020 for Carolyn Corporation is calculated as follows:
Beginning work-in-process inventory, January 1, 2020 $   13,000
 Total manufacturing costs incurred in 2020  169,000
 Total manufacturing costs to account for 182,000
 Ending work-in-process inventory, December 31, 2020       6,000
 Cost of goods manufactured in 2020 $176,000

(b) The cost of goods sold is the cost of finished goods inventory sold to customers during the
current accounting period. Cost of goods sold is an expense that is matched against revenues.
The cost of goods sold in 2020 for Carolyn Corporation is calculated as follows:
Beginning inventory of finished goods, January 1, 2020 $  13,000
 Cost of goods manufactured in 2020 176,000
 Ending inventory of finished goods, December 31, 2020    16,000
 Cost of goods sold in 2020 $173,000

2-33