CHAPTER 10 – MANUFACTURING OPERATIONS

 Merchandising and Manufacturing entities earn revenues by selling goods.

 A manufacturer buys raw materials and processes them into finished goods that it sells to customers.
 The main difference between the merch. and manuf. Is the way they acquire inventory for sale.

ELEMENTS OF MANUFACTURING COSTS

Manufacturing costs include all costs related to the production process. They are classified into three
categories:

DIRECT MATERIALS – Physical part of a finished product. (Ex: For Basketball Shoes; leather uppers, rubber, plastic
soles, and laces)
DIRECT LABOR – Compensation of employees or workers who PHYSICALLY convert raw materials into finished
goods. (Ex: For Basketball Shoes; machine operators, persons who assemble the shoes)
FACTORY OVERHEAD (Manufacturing Overhead) – Includes all manufacturing costs that cannot be classified as
direct materials or direct labor
 Indirect materials and supplies (Glue, thread, nails, rivets, lubricants and small tools)
 Indirect labor costs (salaries of plant managers and engineers, wages of forklift operators, maintenance and
inspection labor, and machine helpers)
 Property taxes, property insurance, rent expense, utilities expense and depreciation on property and
equipment.

These major costs elements are at times combine into prime costs or conversion costs.
PRIME COSTS – Direct materials + Direct Labor
CONVERSION COSTS – Direct Labor + Factory overhead

MANUFACTURING INVENTORY ACCOUNTS

 Merchandisers need only one category of inventory for the finished goods they buy and sell. In contrast;
 Manufacturers have various inventory accounts
FINISHED GOODS INVENTORY – Cost of completed goods that have remain unsold at the end of accounting
period. This inventory is what the manuf. sell to the merchandisers.
WORK IN PROCESS INVENTORY – Gives the cost of the goods that are in the manufacturing process but are not
yet complete at the end of accounting period.
RAW MATERIALS INVENTORY – Holds the cost of direct materials on hand that is intended for use in the
manufacturing process.
FACTORY SUPPLIES INVENTORY – Cost of unused indirect materials at period end.

These inventories are assets to the manufacturers and are reported as current assets in the statement of
financial position.

ACCOUNTING FOR MANUFACTURING ACTIVITIES

Two accounting systems may be used in manufacturing activities – cost and non-cost.
COST SYSTEM – keeps perpetual records of the costs of RM, WIP and FG inventories. It provides more timely
information about those inventories and changes in their level.
NON-COST SYSTEM – produces a system based on the periodic inventory system. The costs of RM, WIP and FG
inventories are based on physical counts of the quantities on hand at the end of each period.

*NORMAL JOURNAL ENTRIES and CLOSING ENTRIES: SEE FAR BOOK PAGE 10-4 – 10-6*
STATEMENT OF COST OF GOODS MANUFACTURED

Direct Materials Used:

Raw materials inventory, beginning xxx
ADD: Net cost of Purchases:
Purchases – Raw materials xx
LESS: Purchases returns and allowances xx
Purchases Discounts xx xx
Net Purchases xx
ADD: Transportation in xx xxx
Raw Materials Available for Use xxx
LESS: Raw materials Inventory, end xxx xxx
Direct Labor xxx
Factory Overhead
Indirect Labor xxx
Indirect Materials xxx
Depreciation Expense – Factory Bldg. xxx
Repairs and Maintenance – Factory Bldg. xxx
Amortization of Patents xxx
Real Property Taxes xxx
Factory Utilities xxx
Tools Used xxx
Employer’s Payroll Contributions – Factory xxx
Factory Supplies Expense xxx
Miscellaneous Factory Expense xxx xxx
Total Manufacturing Costs xxx
ADD: Work in process, beginning xxx
Total Cost of Goods Put into process (Placed in process) xxx
LESS: Work in process, end xxx
COST OF GOODS MANUFACTURED xxx

STATEMENT OF COST OF GOODS SOLD

The difference in the income statement of a merchandising and a manufacturing entity lies in the cost of
goods sold sections

Manufacturing Entity

Finished Goods Inventory, Beg xxx

Add: Cost of Goods Manufactured xxx
Goods Available for Sale xxx
Less: Finished Goods Inventory, End xxx
Cost of Goods Sold xxx
CHAPTER 11 – PAYROLL

ACCOUNTING FOR PAYROLL

Definition of Terms

Employee – refers to any individual who is a recipient of salaries or wages.

Employer – means a person for whom an individual performs or performed any service, of whatever nature, as the
employee of such person.
Payroll – refers to the total amount of paid to employees for services provided during a period.
Payroll Period – means a period for which an employer ordinarily makes payment of salaries or wages to the
employees.

Gross Pay
The total earning of an employee for a payroll period before taxes and other deductions are taken out, is
called gross pay.

Salary – is usually applied to managerial, supervisory and administrative services. The rate of salary is expressed in
terms of a month or a year.
Wages – Remuneration/payment for skilled or unskilled labor. The rates are stated on an hourly or piecemeal basis

Employee Benefits

Social Security Systems – provides for a replacement of income lost on account of aforementioned contingencies.
Employee’s Compensation Program (EC) – aims to assist workers who suffer work related sickness or injury
resulting in disability or death.
National Health Insurance Program (NHIP) – Formerly known as the Medicare, is a health insurance program for
SSS members and their dependents whereby the healthy subsidize the sick who may find themselves in need of
financial assistance when they get hospitalized.
Pag-IBIG Fund – Promotes home ownership through the establishment of an affordable and adequate housing credit
system for its members. It also provides small and short-term loans.

Employees’ Payroll Deductions and Employer’s Payroll Expenses

1. Contributions – The monthly contributions are based on the compensation – basic monthly salary plus cost
of living allowance – of the member and payable under the three programs as follows:
SSS – 8.4% of average monthly compensation not exceeding P12,000 and payable by both
employer (5.04%) and employee (3.36%)
Philhealth Benefits – 2.75% computed straight based on the monthly basic salary, with a salary
floor of P10,000 and ceiling of P40,000, to be equally shared by the employee and their employer
Employee’s Compensation Benefits – 1% of average monthly compensation not exceeding P1,000
and payable only by the employer
To simplify, a contribution schedule is provided to help determine the monthly contributions of a member based on
his monthly salary credit.

Pag-IBIG Fund Contributions

Employees earning not more than P1,500 per month – 1% or
Employees earning more than P1,500 per month – 2%

Employers – 2% of the monthly compensation of the contributing employee.

*FURTHER READINGS, SEE FAR BOOK PAGE 11-4*
CHAPTER 12 – PARTNERSHIP: BASIC CONSIDERATIONS AND FORMATION
BRIEF HISTORY
The idea of partnership is quite ancient. In 2200 B.C., Hammurabi, King of Babylon, provided for the regulation of
partnerships. In ancient Rome, the partnership was called societa.
In the Philippines, before the effectivity of the new Civil Code on Aug 30, 195, there are two types of partnership:
commercial and civil. Commercial or mercantile partnerships were governed by the Code of Commerce. The old Civil
Code governed the civil or non-commercial partnerships.
DEFINITION
- In a contract of partnership – two or more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profit among themselves. Two or more persons
may also form a partnership for the exercise of a profession (Civil Code of the Philippines, Article 1767).
Partnerships of this nature are called general professional partnerships.
- An association of two or more persons to carry on, as co-owners, a business for profit (Uniform Partnership
Act, Section 6)
- The partnership has a juridical personality separate and distinct from that of each of partners (Civil Code of
the Philippines, Article 1768).
- Partnerships resemble sole proprietorships, except that there are two or more owners of the business. Each
owner is called a partner.
CHARACTERISTICS OF A PARTNERSHIP
Mutual Contribution – There cannot be partnership without contribution of money, property or industry to a common
fund.
Division of Profits or Losses – The essence of partnership is that each partner must share in the profits or losses
of the venture.
Co-Ownership of Contributed Assets – All assets contributed into the partnership are owned by the partnership by
virtue of its separate and distinct juridical personality.
Mutual Agency – Any partner can bind the other partners to a contract if he is acting within his express or implied
authority.
Limited Life – A partnership has a limited life. It may be dissolved by the admission, death, insolvency, incapacity,
withdrawal of a partner or expiration of the term specified in the partnership agreement.
Unlimited Liability – All partners (except limited partners), including industrial partners, are personally liable for all
debts incurred by the partnership. If the partnership can not settle its obligations, creditors’ claims will be satisfied
from the personal assets of the partners.
Income Taxes – Partnerships, except general professional partnerships, are subject to tax at the rate of 30% (per
R.A. no. 9337) of taxable income.
Partners’ Equity Accounts – Accounting for partnerships are much like accounting for sole proprietorships. The
difference lies in the number of partners’ equity accounts. Each partner has a capital account and a withdrawal
account.

ADVANTAGES AND DISADVANTAGES OF A PARTNERSHIP

Advantages versus Proprietors

1. Brings greater financial capability to the business
2. Combines special skills, expertise and experience of the partners.
3. Offers relative freedom and flexibility of action in decision-making.
Advantages versus Corporations
1. Easier and less expensive to organize
2. More personal and informal

Disadvantages
1. Easily dissolved and thus unstable compared to corporation
2. Mutual agency and unlimited liability may create personal obligations to partners.
3. Less effective than a corporation in raising large amounts of capital.

PARTNERSHIP DISTINGUISHED FROM CORPORATION

Manner of Creation – Partnership is created by mere agreement of the partners; Corporation is created by operation
of law
Number of Persons – Two or more persons (partnership); at least five (5) persons, not exceeding fifteen (15).
Commencement of Juridical Personality – In a partnership, juridical personality commences from the execution of
the AOP; corporation from the issuance of certificate of incorporation by the Securities and Exchange Commission.
Management – In a partnership, every partner is an agent of the partnership if the partners did not appoint a
managing partner; corporation, management is vested on the board of directors
Extent of Liability – In a partnership, each of the partner except a limited partner is liable to the extent of his
personal assets; in corporation, stockholders are liable only to the extent of their interest or investment in the corp.
Right of Succession – Partnership, there is no right of succession; corporation, there is right of succession.
Terms of Existence – Partnership, for any period of time stipulated by the partners; Corporation, not to exceed fifty
(50) years but subject to extension.

CLASSIFICATIONS OF PARTNERSHIPS
1. According to object:
a. Universal Partnership of all present property. All contributions become part of the partnership
fund
b. Universal Partnership of profits. All that the partners may acquire by their industry or work during
the existence of the partnership and the use of whatever the partners contributed at the time of the
institution of the contract belong to the partnership.
c. Particular Partnership. The object of the partnership is determinate – its use or fruit, specific
undertaking, or the exercise of a profession or vocation.
2. According to liability:
a. General. All partners are liable to the extent of their separate properties
b. Limited. The limited partners are liable only to the extent of their personal contributions. In a limited
partnership, the law states that there shall be at least one general partner.
3. According to duration:
a. Partnership with a fixed term or for a particular undertaking.
b. Partnership at will. One in which no term is specified and is not formed for any particular
undertaking.
4. According to purpose:
a. Commercial or trading partnership. One formed for the transaction of business.
b. Professional or non-trading partnership. One formed for the exercise of profession.
5. According to legality of existence:
a. De jure partnership. One which has complied with all the legal requirements for its establishments.
 b. De facto partnership. One which has failed to comply with all the legal requirements for its
establishments.

KINDS OF PARTNERS

1. General partner – One who is liable to the extent of his separate property.
2. Limited partner – One who is liable only to the extent of his capital contribution. He is not allowed to
contribute industry or services only.
3. Capitalist partner – One who contributes money or property to the common fund of the partnership.
4. Industrial partner – One who contributes his knowledge or personal service to the partnership.
5. Managing partner – One whom the partners has appointed as manager of the partnership.
6. Liquidating partner – One who is designated to wind up or settle the affairs of the partnership after
dissolution.
7. Dormant partner – One who is does not take active part in the business of the partnership and is not
known as the partner.
8. Silent partner – One who does not take active part in the business of the partnership though may be known
as a partner.
9. Secret partner – One who takes active part in the business but is not known to be a partner by outside
parties.
10. Nominal partner or partner by estoppel – One who is actually not a partner but who represents himself as
one.

ARTICLES OF PARTNERSHIP
A partnership may be constituted orally or in writing. In the latter case, partnership agreements are
embodied in the Articles of Partnership. The following essential provisions (FAR 12-7)

SEC REGISTRATION (FAR 12-7)

ACCREDITATION TO PRACTICE PUBLIC ACCOUNTANCY (FAR 12-8)

ACCOUNTING FOR PARTNERSHIPS

Owners’ Equity Accounts

For a proprietorship, there is only a single owner. Therefore, there is only one capital account and one
drawing account. On the other hand, since a partnership has two or more owners, separate capital and drawing
accounts are established for each partner.

Opening Entries of a Partnership Upon Formation

A partnership may be formed in any of the following ways:
1. Individual with no existing business form a partnership
2. Conversion of a sole proprietorship to a partnership.
a. A sole proprietor and an individual without an existing business form a partnership
b. Two or more sole proprietors form a partnership.
3. Admission or retirement of a partner (to be covered in another accounting subject).

Individual with No Existing Business Form a Partnership

Debit the assets contributed, and to credit the liabilities assumed and the capital account of each partner.
 Illustration: On July 1, 2019, Nilo Burgos and Rey Fernan Refozar agreed to form a partnership. The
partnership agreement specified that Burgos is to invest cash oh P700,000 and Refozar is to contribute land with a
fair market value of P1,300,000 with P300,000 mortgage to be assumed by the partnership.

Cash 700,000
Land 1,300,000
Mortgage Payable 300,000
Nilo, Burgos, Capital 700,000
Rey Fernan Refozar, Capital 1,000,000

A Sole Proprietor and Another Individual Form a Partnership

A sole proprietor may consider forming a partnership with an individual who has no existing business. Under this type
of formation, the assets and the liabilities of the proprietorship will be transferred to the newly formed partnership at
values agreed upon by all the partners or at their current fair prices.

New books for the Partnership (required per National Internal Revenue Code)
The following procedures may be used in recording the formation of the partnership:

Books of Partner A (Proprietor):

1. Adjust the assets and liabilities of Partner A in accordance with the agreement. Adjustments are to be made
to his capital account.
2. Close the books

Books of the Partnership:

1. Record the investment of Partner A
2. Record the investment of Partner B

EXAMPLE @ FAR 12-15

Two or More Sole Proprietors Form a Partnership

New books for the Partnership (required per National Internal Revenue Code)
The following procedures may be used in recording the formation of the partnership:

Books of Partner A (proprietor) and Partner B (proprietor):

1. Adjust the accounts of both parties in accordance with the agreement
Adjustments are to be made to their respective capital accounts.
2. Close the books.

Books of the Partnership:

1. Record the investment of Partner A
2. Record the investment of Partner B

EXAMPLE @ FAR 12-20