Course Code: ACC 102

Module #18

Name: _____________________________________ Class number: _________________

Section: _________ Schedule: _________________ Date: ________________________

Lesson title: Manufacturing Operations Materials:

Objectives: Module #18
1. Compare the activities prevalent to merchandising and
manufacturing entities; References:
2. Identify the elements of manufacturing costs; Fundamentals of Financial
3. List the manufacturing inventory accounts. Accounting and Reporting by
Win Ballada

Productivity Tip:
Have you tried practice testing? According to research, this is one of the most effective strategies
that consist of studying and reviewing by answering questions and actively bringing information
back to mind. When this is done, information is reconsolidated, new connections are created, and
memory and understanding are strengthened.

A. LESSON PREVIEW/REVIEW
1) Introduction (2 mins)

Merchandising and manufacturing entities earn revenues by selling goods. A merchandising entity
normally buys a product that is ready for resale when it is received. A manufacturer buys raw materials
and processes them into finished goods that it sells to customers. Therefore, the main difference
between the two is the way they acquire inventory for resale.

2) Activity 1: What I Know Chart, part 1 (3 mins)

Try answering the questions below by writing your ideas under the What I Know column. You may use
key words or phrases that you think are related to the questions. Answer the What I learned section
after reading the Concept notes

What I Know Questions: What I Learned

Differentiate merchandising from
manufacturing.

What are the elements of

Manufacturing Costs?

Compare product costs to period

costs.

1
FLM 1.0
 Course Code: ACC 102
Module #18

Name: _____________________________________ Class number: _________________

Section: _________ Schedule: _________________ Date: ________________________

B. MAIN LESSON
1) Activity 2: Pre-Printed Content Notes (13 mins)

MANUFACTURING BUSINESS – a business that buys raw materials and converts them into finished
goods.

Operating Cycle of Manufacturing Business

Collection of Cash Purchase of Raw

Receivables Materials

Accounts Raw
Receivable Materials

Sales Finished Work-in-Progress

Goods

Comparing Merchandising and Manufacturing Activities

Comparison is helpful for appreciation of our subject matter. Below is the Venn diagram
showing the difference between manufacturing and merchandising activities:

 Manufacturer -
 Merchandiser - buys raw
buys a product Earn revenues materials and
that is ready for by selling goods processes them
resale to into finished
costumers goods that it
sells to
customers.

Both merchandising and manufacturing entities earn revenues by selling goods. The main
difference between the two is the way they acquire inventory for resale.

2
FLM 1.0
 Course Code: ACC 102
Module #18

Name: _____________________________________ Class number: _________________

Section: _________ Schedule: _________________ Date: ________________________

To illustrate, PureGold Duty Free, like other merchandisers, buy ready-make inventory to resale to customers.
Determining PureGold’s cost the shoes is relatively easy. Cost is the price that the merchandiser paid for the
shoes plus incidental costs.

Entities that supply athletic shoes to merchandisers utilize their laborers and factory assets to convert raw
materials into finished goods. Their manufacturing processes begin with materials such as cloth, rubber and
plastics. These materials are cut, glued, stitched, and formed into athletic rubber plastics. The process of
converting materials into finished products makes it more difficult to measure the inventory cost of a
manufacturer.

ELEMENTS OF MANUFACTURING COSTS

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

1. Direct Materials. These materials become physical part of a finished product. Their cost can
conveniently and economically traceable to the finished product.

Think of it!
Consider your own pair of rubber shoes as finished product. What are the materials you can
trace directly from your shoes? (Leather uppers, the rubber and plastic soles, and the laces are
among its direct materials)

2. Direct Labor. It is the compensation of employees or workers who physically convert raw materials
into finished goods. Direct labor includes the wages of the machine operators and the person who
assemble the shoes. The efforts of these persons direct traceable to the finished product.

3. Manufacturing Overhead. This includes all manufacturing costs that cannot be classified as direct
materials or direct labor. Major classifications of this cost follow:
 Indirect material and supplies. Glue, thread, nails, rivets, lubricants and small tools.
 Indirect labor cost. Salaries of plant managers and engineers, wages of forklift operators.
 Other indirect manufacturing costs. Includes building, machinery and tools maintenance, real
property taxes, property insurance, rent expense, utilities expenses and depreciation on property and
equipment.

These major cost elements are at times combined into prime costs or conversion costs. Prime
costs consist of direct materials and direct labor. Conversion costs consist of direct labor and
manufacturing overhead.

Prime Costs Conversion Costs

direct materials direct labor manufacturing overhead

3
FLM 1.0
 Course Code: ACC 102
Module #18

Name: _____________________________________ Class number: _________________

Section: _________ Schedule: _________________ Date: ________________________

PRODUCT COST VS. PERIOD COST

 Product cost is an inventoriable cost that is subject to allocation between sold units (expense –
Cost of Goods Sold) and unsold units (asset – Inventory). Example: Manufacturing costs
 Period Cost is a cost that is charged as fully expense in the period incurred, regardless of sale
performance. Example: Administrative and Selling costs and expenses

MANUFACTURING INVENTORY ACCOUNTS

Accounting for inventory differs between merchandisers and manufacturers Merchandisers
need only one category of inventory for finished goods they buy and sell. In contrast manufacturers
have various inventory accounts, as follows:

1. Finished Goods Inventory. It is the cost of completed goods that are remained unsold at the
end of accounting period. This inventory is what the manufacturers sell to the merchandisers.

2. Work in Process Inventory. This account gives the cost of the goods that are in the
manufacturing process but are not yet complete at the end of the accounting period.

3. Raw Materials Inventory. This account holds the cost direct materials on hand that is intended
for use of manufacturing process.

4. Factory Supplies Inventory. It is the cost of unused indirect materials at period end.

The abovementioned inventory accounts are classified as assets to manufacturers and are
reported as assets in the statement of financial position

2) Activity 3: Skill-building Activities (with answer key) (18 mins + 2 mins checking)

Directions: Try this exercise and see how well do you understand the concepts about manufacturing. In
the spaces provided, write T if the statement below is true otherwise F if it is false.

_____ 1) Manufacturing overhead includes all manufacturing costs except direct labor and direct
materials
_____ 2) Product costs are all deducted from revenue in the period in which they are incurred.
_____ 3) Raw materials inventory refers to the direct materials on hand and available for use in the
manufacturing process.
_____ 4) Prime costs consist of direct material and direct labor. Conversion cost is essentially direct
labor.
_____ 5) Finished goods inventory is an asset, but inventories of raw materials and work in process
are not considered assets until production is completed.
_____ 6) All costs and expenses incurred by a manufacturing company are considered product costs
rather than period costs.
4
FLM 1.0
 Course Code: ACC 102
Module #18

Name: _____________________________________ Class number: _________________

Section: _________ Schedule: _________________ Date: ________________________

_____ 7) The wages paid to supervisors are an example of indirect labor

_____ 8) A manufacturing company usually has three separate inventories: raw materials, work
inprocess and finished goods.
_____ 9) Product costs are the costs of purchasing or manufacturing inventory and considered as
assets until the goods are sold.
_____ 10) Manufacturing costs are regarded as expenses of the current period and are expensed when
incurred.

3) Activity 4: What I Know Chart, part 2 (2 mins)

Now, I really would like to discover What You Know NOW by referring to the third column of the
Chart contained in your Activity 1.

4) Activity 5: Check for Understanding (5 mins)

Direction: Encircle the letter of the correct answer. You may refer to the Key to Corrections for feedback
once you are done.

1. Which of the following is not likely to be treated as a product cost?

a. Depreciation of the factory
b. Interest paid on notes payable
c. Wages paid to factory workers
d. Portion of the cost of running the quality control department

2. Which of the following is to be treated as a product cost?

a. Salaries of the administrative officers
b. Finance cost or interest on loans payable
c. Factory Supplies Expense
d. Office Supplies Expense

3. Manufacturing costs would not include

a. depreciation on factory equipment
b. indirect materials used
c. sales salaries expense
d. indirect labor costs

4. Each of the following is true with respect to product costs, except:

a. product costs are deducted from revenue when the manufacturing process is completed
b. product costs are not regarded as expenses of the current period
c. product costs represent inventoriable costs
d. direct labor is an example of product cost

5. Conversion costs consist of

a. direct labor
5
FLM 1.0
 Course Code: ACC 102
Module #18

Name: _____________________________________ Class number: _________________

Section: _________ Schedule: _________________ Date: ________________________

b. manufacturing overhead
c. a only
d. both a and b

6. Prime costs consist of

a. direct labor only
b. direct materials only
c. both direct labor and materials
d. either direct labor or direct materials

7. Period cost is
a. inventoriable cost
b. fully expense in the period incurred
c. allocated between sold and unsold
d. none of the above

A. LESSON WRAP-UP
1) Activity 6: Thinking about Learning (5 mins)
Congratulations for finishing this module! Shade the number of this module that you have finished.

b) Think about your learning by filling up your “My Learning Tracker” below. Write your learning targets,
your scores, and learning experience for this session and deliberately plan for our next learning
session.

Date Learning Target/Topic Scores Action Plan

What module# did you do? What
What’s the date
were the learning targets? What
today?
activities did you do?
What contributed to the quality of your performance today?
What were your scores
What will you do next session to maintain your performance or
in the activities?
improve it?

6
FLM 1.0
 Course Code: ACC 102
Module #18

Name: _____________________________________ Class number: _________________

Section: _________ Schedule: _________________ Date: ________________________

FAQs

1. What are the advantages of a manufacturing type of business?

Answer:
 Mass production can lead to a better pricing policy due to decrease unit cost of product
(often called ‘economies of scale’
 High growth potential because manufacturing business can tap into a wider market and can
produce in large quantities
 Manufacturing businesses have the opportunity to establish a brand that could last longer
than lifetime (Millan, Zues Vernon B., 2018, Financial Accounting and Reporting)

2. Is worksheet for manufacturing company the same with merchandising?

Answer: The worksheet for a manufacturing entity is basically the same as that of a merchandising
entity except that it includes a pair of columns for a cost of goods manufactured. All the accounts
that comprise the statement of cost of goods manufactured are extended of these columns.
Beginning raw materials inventory and work in process are debited in the manufacturing columns
while the related ending inventories are credited.

KEY TO CORRECTION

Activity 3
1. T
2. F – not all product costs will be deducted once incurred since costs shall be recognized as inventory
and cost of goods sold (upon sale of inventory)
3. T
4. F – conversion costs include direct labor and overhead.
5. F – raw materials inventory, work in process, and finished goods inventory are all classified as asset
under the Inventory account of the statement of financial position.
6. F – manufacturing companies incurs both product costs and period costs in the production of goods.
7. T
8. F
9. T
10. F – manufacturing costs are not expensed out, rather capitalized as cost of

Activity 5
1. B
2. C
3. C
4. A
5. D
6. C
7. B
7
FLM 1.0