A cost center is a unit of activity within the factory to which costs may

be practically and equitably assigned. A cost center may be a department or a

group of workers; it could represent one job, one process, or one machine.
The criteria for a cost center are (1) a reasonable basis on which manufacturing
costs can be traced or allocated and (2) a person who has control over and
is accountable for many of the costs charged to that center.
A variance represents the amount by which
the actual result differs from the budgeted or planned amount. If the actual
amount spent is less than the amount budgeted for, the variance is favorable
(F); if more than budgeted, it is unfavorable

Costs of Goods Sold

Merchandising concerns compute cost of goods sold as follows (the amount
of purchases represents the cost of goods acquired for resale during the
period):
Beginning merchandise inventory
Plus purchases (merchandise)
=Merchandise available for sale
Less ending merchandise inventory
=Cost of goods sold

Beginning finished goods inventory

Plus cost of goods manufactured
Finished goods available for sale
Less ending finished goods inventory
Cost of goods sold
Samson Manufacturing had finished goods inventory of $45,000 on
March 1, March cost of goods manufactured of $228,000, and March 31
finished goods of $53,000. Compute the cost of goods sold for the month of
March. $__________

Inventory Ledgers. Generally, both merchandisers and manufacturers

maintain various subsidiary ledgers, such as those for accounts receivable
and accounts payable. In addition, manufacturers usually maintain subsidiary
ledgers for the general ledger inventory control accounts: Finished
Goods; Work in Process; and Materials. These subsidiary ledgers are
necessary to track the individual raw materials, jobs in process, and finished
jobs on hand. They support the balances in the control accounts, as
illustrated in Figure 1-7, and aid in managing the business on a daily basis.

Factory Overhead
Factory overhead, also known as manufacturing overhead and factory
burden, includes all costs related to the manufacture of a product except
direct materials and direct labor. Thus, factory overhead includes the
previously mentioned indirect materials and indirect labor, plus other
manufacturing expenses, such as depreciation on the factory building and
the machinery and equipment, heat, light, power, maintenance, insurance,
and taxes. As factories have become more automated, factory overhead as a
percentage of total manufacturing cost has increased dramatically.
Summary of Manufacturing Costs
The costs of direct materials and direct labor are sometimes combined and
described as the prime cost of manufacturing a product. Prime cost plus

factory overhead equals the total manufacturing cost. Direct labor cost and
factory overhead, which are necessary to convert the direct materials into
finished goods, can be combined and described as conversion cost

Direct materials issued are charged directly to the work in process control
account because they can be readily traced to the individual jobs, but the
indirect materials are charged to the factory overhead account because
they cannot be easily identified with specific jobs. The factory overhead
account will be used to accumulate various factory expenses that will later
be allocated to individual jobs using some equitable formula.

The wages earned by employees working directly on the product are

charged to Work in Process, while the salaries and wages of the factory
supervisor and the maintenance and custodial personnel, who do not
work directly on the product, are charged to Factory Overhead as
indirect labor. The salaries of nonfactory employees are debited to the
selling and administrative expenses account

The balance in Factory Overhead is transferred to Work in Process by

the following entry:
Work in Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,220
Factory Overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,220

The two basic aspects of materials control are (1) the physical control or
safeguarding of materials and (2) control over the investment in materials,
as illustrated in Figure 2-1. Physical control protects materials from misuse
or misappropriation. Controlling the investment in materials maintains
appropriate quantities of materials in inventory.

Order Point. A minimum level of inventory should be determined for each

type of raw material, and inventory records should indicate how much of
each type is on hand. A subsidiary materials ledger, in which a separate
account is maintained for each material, is needed.

Usage—the anticipated rate at which the material will be used.

2. Lead time—the estimated time interval between the placement of an
order and the receipt of the material.
3. Safety stock—the estimated minimum level of inventory needed to
protect against stockouts (running out of stock). Stockouts may occur
due to inaccurate estimates of usage or lead time or various other
unforeseen events, such as the receipt of damaged or inferior materials
from a supplier or a work stoppage at a supplier’s plant.

If the amount of materials on hand is less than the balance in the

materials control account, as was the case in Figure 2-14, the balance should
be decreased by the following entry: