Cost Flow Introduction 1-Control account: is found in general ledger and include aggregate of many sub -homogeneous accounts.

EX. inventory control account. Cost flow- General Fact Pattern Lippy Company's beginning and ending inventories for the month of November are as follows: Description Stores control (D.M) Work-in-process control (WIP) Finished goods control (F.G) Indirect materials control November,1 $ 67,000 145,000 85,000 10,000 November,30 $ 62,000 171,000 78,000 5,000

Other data for the month of November follows: Description Direct labor (D.L) Actual factory overhead (actual factory O.H) (see details later) Direct materials purchased on credit Transportation in Purchase returns and allowances Indirect materials purchased during November Amount $200,000 132,000 163,000 4,000 2,000 45,000

Lippy uses two factory overhead accounts, one for actual O.H (called factory O.H control) and the other for O.H applied and charges factory overhead to production (DR WIP & CR factory O.H applied) at 70% of direct labor cost (D.L is considered the factory O.H cost driver in this case). The company does not formally recognize over/under applied factory overhead until year-end. Assume also sales revenue during November amounted to $750,000 also selling expenses $80,000 detailed later, Administration Expenses $29,000 detailed later and income tax rate is 30%

Description Utilities expense-heat , light and air

Factory O.H 2,750

Marketing Administrative and selling Expenses expenses 3,000 1,250

Total 7,000

conditioning Depreciation expense-equipments and vehicles Depreciation expense- buildings Property taxes and insurance expenses Fringe benefits Maintenance and repairs expense Rent expense Power Indirect materials used Wages and salaries (other than D.L) Total

13,400 5,600 2,250 4,500 6,500 2,000 50,000 45,000 132,000

23,000 4,000 7,000 26,000 3,500 3,000 500 10,000 80,000

9,600 400 2,750 7,000 1,800 700 500 5,000 29,000

46,000 10,000 12,000 33,000 9,800 10,200 3,000 50,000 60,000 241,000

Direct labor are wages paid to machine operators only, but factory supervisors salary is considered indirect labor and included in factory O.H. Also wages paid to all production service workers like machinery mechanics are considered indirect labor and included in factory O.H Direct labor costs are assumed to be variable, unless otherwise stated specifically. Direct Costs: are costs that can be feasibly and specifically identified with specific cost object. Accordingly: A) Direct materials used and direct labor both are direct costs because they can be specifically identified with the production of finished goods. B) Direct materials used and direct labor costs can be associated with specific product (traceable) hence, D.M. used and D.L. costs are product costs. C) Prime Costs = D.M. used + Direct Labor costs Thus both D.M. used and D.L costs are Variable costs, direct costs, product costs and prime costs

Factory O.H. includes all indirect costs (both variable components and fixed components) related to manufacturing activity and total factory O.H is considered product cost under full absorption costing approach, while fixed factory O.H is considered period cost under variable costing approach.

On the other hand total marketing costs such as salaries of sales personnel, commissions, advertising and total administrative expenses are period costs and are expensed in income statement as incurred. Cost of D.M. used= Beg. D.M. Plus Net D.M. purchased Minus Ending D.M. Cost of D.M used = 67 Plus 165 Minus 62 = 170 Prime cost = D.M used 170 Plus D.L 200 = 370 Conversion cost (C.C) = D.L 200 Plus Factory O.H applied 140 =340 Total Factory O.H applied to production = $200 70% = $140 Over applied O.H = $8 Manufacturing costs during the period =D.M used 170 Plus D.L 200 Plus Factory O.H applied 140 = 510 Total manufacturing costs (T.M.C) = BWIP 145 Plus Manufacturing costs during the period 510 = 655 Cost of goods Manufactured (COGM) = Total manufacturing costs (T.M.C) 655 Minus EWIP 171 = 484 Cost of goods available for sale = beginning F.G 85 Plus COGM 484 = 569 Cost of goods sold (COGS) = Cost of goods available for sale569 Minus Ending F.G inventory 78 = 491 Gross profit (gross Margin) = sales revenue 750 Minus COGS 491 = 259