Chapter 8

Accounting
for manufacturing

PowerPoint presentation by Anne Abraham

University of Wollongong
©2009 John Wiley & Sons Australia, Ltd

COST CLASSIFICATIONS

• Cost
– Economic sacrifice of resources made in
exchange for a product or service
• Expense
– Consumption or loss of resources

Do you focus much on the split between fixed and variable

costs; or does aussieBum’s cost structure not warrant this? Is
there a strong emphasis on cost management with aussieBum?

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NATURE OF MANUFACTURING
OPERATIONS

• Manufacturing entities and the GST

– GST and ABN registration
– Tax invoices and adjustment notes
– Input credits

Production flows

Inventories — manufacturing and

non-manufacturing

• Non-manufacturing entities
• A service entity does not have inventory
• A retail entity buys finished goods for resale
and so has 1 inventory account
• Manufacturing entities have 3 different
inventory accounts
– Raw materials
– Work in process
– Finished goods
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 Product and period costs

• Product costs are incurred in producing a

product
– All manufacturing costs are treated as
product costs until product is sold
• Period costs are identified with a specific
time period because they are not directly
related to production
– Classified as selling, administration or
finance costs

What role does cost management accounting

information play in the management of
aussieBum?

MANUFACTURING COST ELEMENTS

• Direct materials cost

– Cost of raw materials directly traceable to
the finished product
• Direct labour cost
– Wages and salaries paid to employees
whose time and costs can be traced directly
to products

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MANUFACTURING COST ELEMENTS
continued

• Factory overhead cost

– Allocation of common costs
e.g., rent, depreciation, insurance, rates
– Assignment of service department costs
e.g., maintenance, production control,
inspection, stores, engineering
– Assignment of factory overhead costs
e.g., indirect labour, rent, rates, insurance,
electricity

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ABSORPTION COSTING AND COST

BEHAVIOUR

• Absorption costing
– All direct manufacturing costs treated as
product costs
• Direct costing
– Recognises as product costs only
manufacturing costs that vary in relation to
production levels
– Also called variable or marginal costing

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ABSORPTION COSTING AND COST

BEHAVIOUR continued

• Variable costs
– Costs which vary directly, or nearly directly,
with the volume of production
• Fixed costs
– Costs which remain relatively constant
regardless of the production level

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 Do you find that aussieBum customers are price
sensitive? Is pricing structured around a cost-plus
basis or are prices set according to the market and
then costs are managed within that limit/range?

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FINANCIAL STATEMENTS – RETAILING

AND MANUFACTURING

• Cost of sales
– Calculation by retailing entity
Beginning Net purchases Ending Cost of
inventory + of inventory – inventory = sales

– Calculation by manufacturing entity

Beginning Cost of Ending Cost

finished goods + goods – finished goods = of
inventory manufactured inventory sales

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Income statement

• Cost of sales is treated differently for

retailing and manufacturing entities
• Cost of goods sold manufactured replaces
the purchases of a retail business

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 A Retail Entity
Income Statement
For the year ended 30 June 2010
Net Sales Revenue $1 000 000
Less: Cost of sales
Beginning inventory $ 150 000
Net purchases 710 000
Goods available 860 000
Ending inventory 160 000
Cost of sales 700 000
GROSS PROFIT 300 000
EXPENSES
Selling & distribution 90 000
Administrative 120 000
Finance & other 20 000 230 000
NET PROFIT BEFORE TAX 70 000
Income tax expense 28 000
PROFIT $ 42 000
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A Manufacturing Entity
Income Statement
for the year ended 30 June 2010

Net Sales Revenue $1 000 000

Less: Cost of sales
Beginning finished goods inventory $150 000
Cost of goods manufactured 710 000
Goods available 860 000
Ending finished goods inventory 160 000
Cost of sales 700 000
GROSS PROFIT 300 000
EXPENSES
Selling & distribution 90 000
Administrative 120 000
Finance & other 20 000 230 000
NET PROFIT BEFORE TAX 70 000
Income tax expense 28 000
PROFIT $ 42 000

Cost of goods manufactured statement

• Cost of goods manufactured calculated as:

Cost of goods Direct materials Direct
manufactured = used + labour

Beginning Ending
+ WIP – WIP
inventory inventory

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 A Manufacturing Entity
Cost of Goods Manufactured Statement
for the year ended 30 June 2010

Direct materials:
Beginning raw materials $48 000
Net purchases of raw materials 141 000
189 000
Ending raw materials 47 000
Direct materials used $142 000
Direct labour 355 000
Factory overhead:
Indirect labour 56 000
Supplies 5 000
Electricity 42 000
Rent 22 600
Insurance 18 000
Rates & taxes 28 400
Depreciation 32 000
Miscellaneous 4 000
Total factory overhead 208 000
Manufacturing costs for the period 705 000
Beginning work in progress 35 000
Total work in progress 740 000
Ending work in progress 30 000
COST OF GOODS MANUFACTURED $710 000

Balance sheet

• The balance sheet of a retail entity shows

only one type of inventory, finished goods
• The balance sheet for a manufacturing
entity shows three inventory items
– Raw materials inventory
– Work in process inventory
– Finished goods inventory

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Balance Sheets
as at 30 June 2010

A Retail Entity A Manufacturing Entity

CURRENT ASSETS CURRENT ASSETS

Cash at bank $50 000 Cash at bank $50 000
A/Cs receivable 100 000 A/Cs receivable 100 000
Inventories* 237 000 Inventories:
Other 50 000 Finished goods 160 000
TOTAL CURRENT ASSETS $437 000 Work in progress 30 000
Raw materials 47 000
* All finished goods Other 50 000
TOTAL CURRENT ASSETS $437 000

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 ACCOUNTING SYSTEMS
CONSIDERATIONS

Periodic inventory system

• Additional accounts required
– Raw materials inventory
– Raw materials purchases
– WIP inventory
– Finished goods inventory
– Manufacturing plant and equipment
– Factory payroll
– Factory overhead
– Manufacturing summary 22

ACCOUNTING SYSTEMS
CONSIDERATIONS continued

• Worksheets
– Additional two columns required to record
manufacturing data
• Closing entries
– Account balance used to determine cost of
goods manufactured closed to
‘Manufacturing Summary’ account
– Manufacturing summary closed to Profit
and Loss Summary account

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ACCOUNTING SYSTEMS
CONSIDERATIONS continued

• Valuation of inventories
– All three types of inventory valued at the end
of the accounting period
– Raw materials and finished goods
• Inventory counted and costed
– Work in process
• Judgement required

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 You design and manufacture in Australia. Why have
you continued to manufacture here in Australia when
so many other manufacturers have moved
manufacturing off-shore? What benefits flow from
this?

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MANAGEMENT ANALYSIS

• Inventories
Raw materials Cost of raw materials used
turnover ratio = Average raw materials inventory

• Control of costs

Cost of raw Direct materials cost

materials ratio = Cost of goods manufactured

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