1) Concept Introduction: Direct Costs Direct costs are costs of material, labor and overhead used directly in manufacturing of goods. Material represents the raw materials used for production of goods. It consists of Direct and Indirect material. The cost of raw Materials directly affects the profit as it represents significant portion of the direct costs. To Compute: Cost of raw materials used in production during the year. Solution: Cost of Raw materials used in production = Opening Balance of Raw material Cost+ Purchases (Debits) - Closing Balance of Raw material Cost Opening Balance of Raw material Cost = $ 15,000 Purchases (Debits) = $ 120,000 Closing Balance of Raw material Cost = $ 25,000 Therefore, Cost of Raw Materials used in Production = $15,000 + $120,000 - $25,000 Cost of Raw Materials used in Production = $ 110,000 The Raw materials account is an asset account and therefore has a debit balance. The debit balance increases when raw materials are procured. Hence the purchases represent the debits. The transfer of Raw materials for production reduces the asset balance as the expense is credited. The above calculation shows how the Cost of raw materials is computed. Hence, the cost of raw materials used in production is $ 110,000. 2) Concept Introduction: Direct and Indirect Material Cost Direct costs are costs of material, labor and overhead used directly in manufacturing of goods. Material represents the raw materials used for production of goods. It consists of Direct and Indirect material. Direct material is a primary cost and represents the cost of goods directly used for production. Indirect material is a secondary cost and represents the cost of goods used for ancillary activities such as packing, printing material etc. To Compute: Cost of Indirect materials in the cost of raw materials. Solution: Cost of Indirect material = Cost of Raw materials used for production - Cost of direct Materials Cost of Raw materials used for production = $ 110,000 Cost of direct Materials = $ 90,000 Cost of indirect Materials = $110,000 - $90,000 Cost of indirect Materials = $20,000 The indirect material represents the cost of the packing materials, printing material, wrapping and packaging material costs etc. These are secondary costs and are not included in the cost of raw materials used for production. The work In progress includes an entry of $90,000 of direct materials. The indirect material costs are the difference of the cost of raw materials used for production and cost of direct materials. Hence, the cost of indirect materials for the year is $20,000. 3) Concept Introduction: Direct and Indirect Labor Cost Direct costs are costs of material, labor and overhead used directly in manufacturing of goods. Labor represents the efforts used to convert raw materials into finished goods. It consists of Direct and Indirect labor. Direct labor is a primary cost and represents the cost of labor directly used for production. Indirect labor is a secondary cost and represents the cost of labor used for ancillary activities such as packing, printing, and packaging etc. To Compute: Cost of Indirect labor in the cost of factory labor Solution: Cost of Indirect labor = Cost of factory wages - Cost of direct labor Cost of factory wages = $180,000 Cost of direct labor = $150,000 Cost of indirect labor = $180,000 - $150,000 Cost of indirect labor = $30,000 The indirect labor represents the cost of the labor involved in secondary activities such as packing materials, printing material, wrapping and packaging material for selling and distribution purposes etc. These are secondary costs and are not included in the cost of direct labor used for production. The work In progress includes an entry of $150,000 of direct labor. The indirect labor costs are the difference of the cost of factory wages and cost of direct labor. Hence, the cost of indirect labor for the year is $20,000. 4) Concept Introduction: Cost of Goods Manufactured: The Cost of Goods Manufactured is used to compute the cost of producing goods for a particular period. It comprises of Cost of Materials, Labor and Overhead attributable to goods manufactured. Cost of goods manufactured is the total cost of producing goods that are later sold to realize revenues. It includes direct and indirect materials, labor and overhead. To Compute: Cost of Goods Manufactured Solution: Schedule of Cost of Goods Manufactured Direct Materials Used: Beginning Materials Inventory 15,000 Add: Cost of Raw Materials Purchased 120,000 Total Raw Materials Available 135,000 Less: Closing Materials Inventory (25,000) Total Raw Materials Used 110,000 Direct Labor 150,000 Manufacturing Overhead 240,000 Total Manufacturing Costs 500,000 Add: Beginning Work In Progress Inventory 20,000 Less: Closing Work In Progress Inventory 30,000 Cost Of Goods Manufactured 490,000 The cost of goods manufactured is a sum of the direct material, labor and manufacturing overhead attributable to the product. The direct material is calculated by adding the beginning raw materials inventory to the cost of raw materials purchased and reducing the balance of ending raw materials inventory. The opening and closing balances of Raw materials along with the cost of purchases are given. These are used to calculate the cost of material consumed. Direct labor and Manufacturing Overhead are also given. These along with cost of materials help in ascertaining the total manufacturing costs. The closing balance of Work in progress is calculated as a balancing figure. The cost of manufacturing goods is calculated by adding the beginning Work in progress inventory to the cost of material, labor and overhead and reducing the balance of ending Work in progress inventory. Hence, the cost of goods manufactured is $490,000. 5) Concept Introduction: Cost of Goods Sold The Schedule of Cost of Goods sold is used to compute the cost of goods sold in a particular period. Cost of goods sold comprises of the cost of Goods manufactured along with the effect of the change in inventory of the finished goods. The cost of goods manufactured is a sum of the direct material, labor and manufacturing overhead attributable to the product. To Compute: Cost of Goods Sold Solution: Schedule of Cost of Goods Sold Beginning Finished Goods Inventory 40,000 Cost of Goods Manufactured 490,000 Total Goods Available for Sale 530,000 Ending Finished Goods Inventory 60,000 Cost of Goods Sold 470,000 The cost of Goods sold is calculated by adding the beginning finished goods inventory to the cost of goods manufactured and reducing the balance of ending finished goods inventory. The cost of goods manufactured is a sum of the direct material, labor and manufacturing overhead attributable to the product. The opening and closing balances of finished goods inventory are given in the question. These are used to ascertain the actual cost of goods sold. Hence, the cost of goods sold is $ 470,000. 6) Concept Introduction: Application of Overhead Overhead refers to the various types of costs associated with the costs of production. These can include direct over heads such as factory rent, factory electricity expenses etc or indirect overheads such as depreciation, insurance expenses etc. The application of overhead means allocation of costs of production that are attributable to the goods manufactured in a fixed proportion or method of allocation. To Compute: Pre-determined overhead rate for the application of manufacturing overhead. Solution: Manufacturing Overhead = $ 230,000 (Given) Direct Labor = $150,000 Total Factory Wages Payable = $180,000 (Current year figure) Overhead Application Rate = Direct Labour / Factory Wages Payable Overhead Application Rate = $ 150,000 / 180,000 Overhead Application Rate = $ 0 .83 per unit . The overhead is applied to the work in progress to compute the total cost of production. The overhead application takes place on a pre-determined rate in order to bifurcate the direct and indirect manufacturing overhead. The direct overhead is the per unit application overhead application rate multiplied by the overall manufacturing overhead. The difference between the actual and applied manufacturing overhead is under application or over application of overhead. Hence, the pre-determined overhead application rate is $ 0.83 per unit of goods manufactured. 7) Concept Introduction: Application of Overhead Overhead refers to the various types of costs associated with the costs of production. These can include direct over heads such as factory rent, factory electricity expenses etc or indirect overheads such as depreciation, insurance expenses etc. The application of overhead means allocation of costs of production that are attributable to the goods manufactured in a fixed proportion or method of allocation. The difference between the actual manufacturing overhead and the applied manufacturing overhead is the under application or over application of overhead. To Compute: Whether the overhead was under applied or over applied and by how much. Solution: Direct Labor = $150,000 Total Factory Wages Payable = $180,000 (Current year figure) Overhead Application Rate = Direct Labour / Factory Wages Payable Overhead Application Rate = $ 150,000 / 180,000 Overhead Application Rate = $ 0 .83 per unit . Overhead Applied = Manufacturing Overhead x Overhead Application Rate Overhead Applied = $230,000 x 150,000 / 180,000 Overhead Applied = $191,667 . Manufacturing Overhead = $ 230,000 (given) Under applied overhead = Manufacturing Overhead - Overhead Applied Under applied Overhead = $230,000 - $191,667 Under applied Overhead = $ 38,333 . The application of overhead to work in progress in a pre-determined rate often results in under or over absorption of the overhead. The difference between the applied overhead and the actual overhead is the under or over application of the overhead. When the actual overhead is greater than the applied overhead, it results in under application of the manufacturing overhead. When the actual overhead is less than the applied overhead, it results in over application of the manufacturing overhead. In the given question, since the actual overhead is greater than the applied overhead, it results in under application of the manufacturing overhead by $38,333. Hence, the overhead is under applied, by $ 38,333. 8) Concept Introduction: Calculation of Work in Progress Work in progress refers to the value of those goods that have been converted from raw materials to intermediate goods and are still in the process of production. They are not finished goods as a component of labor and overhead has been applied to raw materials and such goods that are in the production process are known as Work in Progress These are represented as assets in the balance sheet and the cost of these assets is the proportionate cost of material, labor and overhead attributable to such goods. To Compute: Closing Balance of Work in Progress Solution: Opening Balance of Work in Progress = $ 20,000 Add: Direct Materials = $ 90,000 Add: Direct Labor =$ 150,000 Add:Overhead =$ 240,000 Total of Debits =$ 500,000 Less: Total of Credits = $470,000 Closing Balance of Work In Progress = $ 30,000 . The closing balance of work in progress is calculated by taking the difference of the total of the debits and total of credits of the work in progress account. The debits consist of Material, Labor and Overheads attributable to the intermediate goods or work in progress. The credits consist of the work in progress transferred to finished goods. The closing balance of the work in progress is the difference of the total debits and credits of the work in progress account. Hence, the closing balance of the work in progress account is $ 30,000.

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