Unit V - THE ACCOUNTING PROCESS FOR

MANUFACTURING Concern

Manufacturing Concern - buys raw materials and converts them into finished products through formal conversion cycle
operations. Finished goods are in turn sold to wholesaler or directly to consumers.

Three Main Activities

1. Purchase of raw materials
2. Conversion of raw materials into finished products
3. Sale of the finished products to the consumers.
Stages in the manufacturing operations:
1. Raw materials stage – includes materials which are not yet processed.
2. Goods in process stage - materials which are still in process
3. Finished goods stage - materials already processed and completed.
Elements of Manufacturing Costs
 Manufacturing costs include all costs related to the production process.

 3 categories:

 Direct materials - cost of materials become part of a finished product and which can be conveniently
and readily identified or traceable to the finished product. Example: lumber in making furniture; leather
used to make shoes and crude oil used to make gasoline.

 Direct Labor – cost of labor for those employees who work directly on the product manufactured.
Example: Salaries of machine operators.

 Factory Overhead - includes all costs related to the manufacturing of a product except direct materials
and direct labor. It includes:
- indirect materials - materials which cannot be readily identified with any particular item
manufactured.
- indirect labor - wages and salaries of employees who are required for the manufacturing process but
who do not work directly on the units being manufactured.
- other manufacturing expenses such as depreciation of factory building, machinery and equipment,
factory supplies, heat light, power maintenance, insurance, etc.

Manufacturing Inventory Accounts:

1. Finished Goods Inventory – cost of completed goods that have remained unsold at the end of the accounting
period.
2. Work in Process Inventory – cost of goods that are in the manufacturing process but are not yet completed at the
end of the accounting period.
3. Raw Materials Inventory – cost of direct materials on hand that is intended for use in the manufacturing process.
4. Factory supplies inventory – cost of unused indirect materials at the end of the period.

Accounting Systems:

1. Non Cost system - does not provide for a detailed flow of costs in the manufacturing process. This produces a
manufacturing system based on the periodic inventory system .

2. Cost System
- the flow of cost is accounted for in detail so that unit costs and inventory costs can be promptly
determined.

- keeps perpetual records of the cost of raw materials, work-in-process and finished goods inventories.
Flow of manufacturing costs

 All three elements of manufacturing costs are combined into prime costs or conversion costs
Prime costs - consist of direct materials and direct labor
Conversion costs – consist of direct labor and factory overhead.

Direct Materials Work Cost

Direct Labor in Finished Goods of

Factory Overhead Process goods sold

General Classification of Costs

1. Production costs - includes direct materials, direct labor and factory overhead incurred to produce goods.

2. Marketing costs - costs incurred to sell the products. Examples: advertising expense, delivery expense,
commission expense, depreciation of delivery equipment, etc.

3. Administrative costs – costs incurred to run the business other than production and selling costs. Examples:
Office salaries, office rent, office supplies, depreciation expenses – office equipment, etc.

4. Financing Costs - costs incurred as a result of borrowing money. Examples: interest expense, legal fees,
bank charges.

 Period costs – costs that are subtracted from the income of the period. These includes selling costs, administrative
coasts and financing costs.

Pro-forma Journal Entries – (Non-cost system)

1. To record purchases of materials :

Purchases - Direct Materials xx

Indirect Materials xx
Accounts Payable xx

2. to record costs of defective materials returned to vendor:

Accounts Payable xx
Purchase returns and allowances xx

3. To record payment of account within the discount period:

Accounts Payable xx
Purchases discounts xx
Cash xx

4. To record freight and handling costs of materials :

Transportation In xx
Cash xx

5. To record payroll for factory employees:

Direct Labor xx
Indirect Labor xx
Accounts Payable xx
6. To record payment of factory payroll:

Accounts payable xx
Cash xx

7. To record depreciation of factory building/ machinery and equipment:

Depreciation expense xx
Accumulated depreciation xx

8. To record factory utilities:

Factory utilities xx
Cash xx

9. To record sales of finished goods:

Accounts Receivable xx
Sales xx

10. To record sales returns of customer:

Sales returns and allowances xx

Accounts Receivable xx

Problem 1 – Journal entries

MGO Company general ledger contained the following account balances as of December 31, 2021:

Cash P 100,000
Accounts Receivable 60,000
Finished goods 35,000
Work in process 18,000
Direct Materials 50,000
Accounts Payable 10,000
Accrued Payroll 8,000
Common Stock 200,000
Retained Earnings 45,000

During January, 2022, the following transactions were completed:

a) Purchases on account:
Direct materials, P 200,000
Indirect materials, 25,000.
b) Paid the following:
Factory rent P 15,000
Factory utilities 12,000
Utilities – selling & administrative 5,000
c) Other factory overhead incurred, P 4,500.
d) Payroll for the period consist of: direct labor, P 140,000; indirect labor, P 30,000; sales salaries, P 25,000;
and administrative salaries, P 15,000. P 210,000 was paid for payroll.
e) Materials issued: direct materials – P 185,000; indirect, P 15,000.
f) Factory overhead was charged to production.
g) Work finished and placed in stock, P 410,000.
h) Sales on account. Cost of goods sold, P 385,000. The mark up was 40% of cost.
i) Cash collected from customers, P 405,000
j) Payments for liabilities amounted to P 220,000,
REQUIRED: Journal entries to record the above transaction under the non-cost system.

Journal Entries:
a) Purchases - Direct materials 200,000
Indirect materials 25,000
Accounts payable 225,000
Purchases on account

b) Factory Rent 15,000

Factory utilities 12,000
Utilities Expense – selling and administrative 5,000
Cash 35,000
Expenses incurred

c) Factory overhead 4,500

Accounts Payable 4,500
Overhead incurred.

d) Direct Labor 140,000

Indirect labor 30,000
Sales salaries 25,000
Administrative salaries 15,000
Cash 210,000
Payroll for the period

e) No entry

f) No entry

g) No entry

h) Accounts receivable 539,000

Sales 539,000
Sales on account

i) Cash 405,000
Accounts receivable 405,000
Collection of account

j) Accounts Payable 220,000

Cash 220,000
Payment of account.

Statement of Cost of goods Manufactured and Sold

ABC Manufacturing Company

Statement of Cost of Goods Manufactured and Sold
Year ended December 31, 2021

Raw Materials Used:

Raw Materials, Inventory, January 1, 2021 xxx
Add: Net cost of Purchases:
Purchases xxx
Less: Purchase returns and allowances xxx
Purchase discounts xxx xxx
Net Purchases xxx
Add: Freight in xxx xxx
Total raw materials available for use xxx
Less: Raw materials inventory, Dec. 31, 2021 xxxx
 Raw Materials Used xxx
Direct Labor xxx
Factory Overhead:
Indirect labor xxx
Indirect materials xxx
Factory supplies used xxx
Depreciation – machinery xxx
Depreciation – factory building xxx
Heat, light and power xxx
Miscellaneous factory overhead xxx xxx
Total manufacturing costs xxx
Add work in process, inventory, Jan. 1, 2021 xxx
Total cost of goods placed in process xxx
Less: work in process inventory, Dec. 31, 2021 xxx
Cost of Goods manufactured xxx
Add: Finished goods, inventory Jan., 1, 2021 xxx
Total goods available for sale xxx
Less: Finished goods inventory, Dec. 31, 2021 xxx
Cost of Goods Sold xxx
=====

CLOSING ENTRIES PECULIAR TO MANUFACTURING CONCERN:

1. To close manufacturing accounts with credit balances and to record ending inventory for materials and work
in Process:

Raw Materials Inventory end xx

Work in Process Inventory end xx
Purchases returns and allowances xx
Purchases discounts xx
Manufacturing Summary xx

2. To close manufacturing accounts with debit balances:

Manufacturing Summary xx
Raw materials inventory beginning xx
Work in process inventory beginning xx
Purchases - Raw materials xx
Indirect materials xx
Indirect labor xx
Depreciation expense – factory building xx
Depreciation expense – machinery and equipment xx
Factory supplies xx
Factory utilities xx
Miscellaneous factory expenses xx

3. To close manufacturing summary and Finished inventory beginning to income summary:

Income Summary xx
Manufacturing summary xx
Finished goods inventory beginning xx

4. To set up finished goods inventory end

Finished good inventory, end xx

Income summary xx

Note: The other closing entries (other nominal accounts) are the same as those for a merchandising concern.
Problem 2. The following accounts are gathered from the records of Mart Manufacturing for the year 2021:

Sales P 7,500,000
Inventories, January 1:
Direct materials 200,000
Goods in process 240,000
Finished goods 360,000
Inventories, December 31:
Direct materials 280,000
Goods in process 170,000
Finished goods 300,000
Purchases 3,000,000
Direct labor 950,000
Indirect labor 250,000
Factory heat, light and power 320,000
Rent Expense- factory building 120,000
Repair and maintenance - machinery 50,000
Factory supplies used 110,000
Sales salaries 400,000
Advertising 160,000
Depreciation - store equipment 70,000
Office salaries 150,000
Depreciation - office equipment 40,000
Depreciation - machinery 60,000
Sales returns and allowances 50,000
Interest income 10,000
Delivery expenses 200,000
Office expenses 250,000
Freight in 125,000
Sales discounts 25,000
Purchase returns and allowances 35,000
Purchase discounts 18,000
Interest expense 10,000
Indirect materials 180,000
Utilities Expense - factory 32,000
Utilities Expense – selling 11,000
Utilities Expense – administrative 6,500

REQUIRED:
1. Statement of Cost of Goods Manufactured.
2. Income Statement
3. Closing Entries
Schedule: Cost of Goods Manufactured:

Mart Manufacturing
Statement of Cost of Goods Manufactured
Year ended December 31, 2021

Direct Materials Used:

Direct Materials, Inventory, January 1, 2021 P 200,000
Add: Net cost of Purchases:
Purchases P 3,000,000
Less: Purchase returns and allowances P 35,000
Purchase discounts 18,000 53,000
Net Purchases P 2,947,000
Add: Freight in 125,000 3,072,000
Total direct materials available for use P 3,272,000
Less: Direct materials inventory, Dec. 31, 2021 280,000
Raw Materials Used 2,992,000
Direct Labor 950,000
Factory Overhead:
Indirect labor P 250,000
Factory heat, light and power 320,000
Rent Expense- factory building 120,000
Repair and maintenance - machinery 50,000
Factory supplies used 110,000
Depreciation - machinery 60,000
Indirect materials 180,000
Utilities Expense - factory 32,000 1.122.000
Total manufacturing costs P 5,064,000
Add work in process, inventory, Jan. 1, 2021 240,000
Total cost of goods placed in process P 5,304,000
Less: work in process inventory, Dec. 31, 2021 170,000
Cost of Goods manufactured 5,134,000
 Mart Manufacturing
Income Statement
Year ended December 31, 2021

Sales P 7,500,000
Less: Sales returns and allowances P 50,000
Sales discounts 25,000 75,000
Net Sales P 7,425,000
Less: Cost of Goods sold
Cost of Goods manufactured ( Schedule) P 5,134,000
Add: Finished goods, inventory Jan., 1, 2021 360,000
Total goods available for sale P 5,494,000
Less: Finished goods inventory, Dec. 31, 2021 300,000 5,194,000
Gross Income P 2,231,000
Add: other operating income:
Interest income 10,000
Total P 2,241,000
Less: Operating Expenses:
Selling Expenses :
Sales salaries P 400,000
Advertising 160,000
Depreciation - store equipment 70,000
Delivery expenses 200,000
Utilities Expense – selling 11,000 P 841,000
Administrative Expenses:
Office salaries P 150,000
Depreciation - office equipment 40,000
Office expenses 250,000
Utilities Expense – administrative 6,500 446,500 1,287,500
Operating Income P 953,500
Less: Finance cost
interest expense 10,000
Net Income P 943,500

CLOSING ENTRIES

Date Particulars PR Debit Credit

2021
Dec. 31 Direct materials , December 31, 2021 P 280,000
Goods in process, December 31, 2021 170,000
Purchase returns and allowances 35,000
Purchase discounts 18,000
Manufacturing Summary 503,000
To record direct materials and goods in
process ending and close manufacturing accounts
with credit balance.

Manufacturing Summary 5,637,000

Direct materials, January 1, 2021 200,000
Goods in process, January 1, 2021 240,000
Direct Labor 950,000
Purchases 3,000,000
Freight in 125,000
Indirect labor 250,000
Factory heat, light and power 320,000
Rent Expense- factory building 120,000
Repair and maintenance - machinery 50,000
 Factory supplies used 110,000
Depreciation - machinery 60,000
Indirect materials 180,000
Utilities Expense - factory 32,000
To close direct materials, goods in process
and other manufacturing accounts .

Income Summary 5,134,000

Manufacturing summary 5,134,000
To close manufacturing summary to
income summary account.

Finished goods, December 31, 2021 300,000

Sales 7,500,000
Interest income 10,000
Income Summary 7,810,000
To set up finished goods inventory, end
and close nominal accounts with credit balances.

Income Summary 1,732,500

Finished goods, Jan. 1, 2021 360,000
Sales returns and allowances 50,000
Sales discounts 25,000
Sales salaries 400,000
Advertising 160,000
Depreciation - store equipment 70,000
Delivery expenses 200,000
Utilities Expense – selling 11,000
Office salaries 150,000
Depreciation - office equipment 40,000
Office expenses 250,000
Utilities Expense – administrative 6,500
Interest expense 10,000
To close finished goods beginning and
close nominal accounts with debit balance.

Income Summary 943,500

Mart, Capital 943,500
To close income summary to capital.
 Unit III - THE ACCOUNTING PROCESS
(MANUFACTURING Concern)
Activity:
Problem 1: The PRC Manufacturing Company had inventories during the year 2021 as follows:

January 1 December 31
Raw Materials 650,000 500,000
Work in Process 400,000 520,000
Finished goods 480,000 650,000

Additional data were provided as follows:

Sales 8,625,550
Sales returns and allowances 55,000
Sales discounts 25,550
Purchases – Raw materials 2,500,000
Purchases returns and allowances 60,000
Purchases discounts 48,000
Freight in 85,000
Payroll – direct labor 1,940,000
Payroll – indirect labor 360,000
Payroll – factory supervisor 275,000
Repairs and Maintenance :
Machinery 50,000
Delivery Vehicle 25,000
Depreciation Expense:
Building - administrative 45,000
Factory building 150,000
Office Equipment 45,000
Store Equipment 60,000
Machinery 145,000
Delivery Vehicle 80,000
Building – store 55,000
Light and water:
Office 40,000
Store 90,000
Factory 150,000
Salaries :
Office 525,000
Store 580,000
Supplies used:
Office 25,000
Store 35,000
Factory 45,000
Freight out 30,000
Advertising expense 65,000
Factory taxes 15,000
Indirect materials 125,000
Miscellaneous office expense 25,000
Miscellaneous selling expenses 20,000
Doubtful accounts 67,000
Interest expense 10,500
Interest income 6,500

REQUIRED:
1. Statement of Cost of Good Manufactured
2. Income Statement (selling and administrative expenses shown separately)
3. Closing Entries
Problem 2:
All the transactions from January, 2023 to November, 2023 has been recorded and posted to the general ledger. The trial
balance as of November 30, 2023 is given below:

GRT Manufacturing
Trial Balance
November 30, 2023

Debit Credit
Cash on hand 70,200
Cash in bank 843,200
Accounts receivable 785,000
Finished goods inventory, January 1, 2021 1,300,000
Work in Process inventory , January 1, 2021 442,000
Raw materials inventory, January 1, 2021 458,000
Factory supplies 235,000
Factory furniture and equipment 1,325,000
Delivery Equipment 350,000
Office furniture and Equipment 235,000
Accounts payable 625,000
Notes payable 500,000
Santos, Capital 3,088,400
Santos, drawing 120,000
Sales 7,209,695
Sales returns and allowance 13,500
Sales discounts 8,500
Purchases 3,640,000
Purchase returns and allowances 23,400
Purchase discounts 8,650
Freight in 10,000
Direct Labor 495,000
Indirect labor 99,000
Sales salaries 396,000
Office salaries 264,000
Rent Expense 220,000
Employees' benefits 48,945
Light and water expense 71,500
Miscellaneous Expense 25,300 __________
11,455,145 11,455,145

The following transactions were completed for the month of December, 2023:
 Dec. 2 Purchased direct materials from PRT Corporation, P 120,000. Terms: on account; FOB shipping
point, freight paid, P 1,200.
3 Purchased factory supplies from ABC Company, P 12,000. Terms: on account, freight paid P 300.
5 Received a credit memo from PRT Corp. P 1,000 for defective direct materials returned.
15 Sold finished goods to RTD Company , P 96,000 Terms: on account.
20 Partial payment of accounts payable, P 350,000 by issuing a check.
23 Issued a check in payment for the month’s rent, P 20,000.
27 Cash sales, P 224,000
29 Payroll for the month paid:
Direct Labor, P 45,000; Indirect Labor, P 9,000; Sales salaries, P 11,000, office salaries,
P 5,000 less withholding taxes, P 4,300, SSS Contributions , P 3,400, Pag-ibig contributions,
P 900 and Philhealth contributions, P 2,100.
29 Employer’s share:
SSS Contributions , P 5,100, Pag-ibig contributions,P 900 and Philhealth contributions, P 2,100
29 Remittance of employees and employer’s contributions to different agencies.

The following additional information are available for adjusting entries on December 31, 2023:
1. Factory supplies used amounted to P 210,000.
2. Depreciation for the year:
a. Factory furniture and equipment, P 132,500
b. Delivery Equipment, P 35,000
c. Office furniture and Equipment, P 23,500
3. Estimated uncollectible accounts, P 78,500.
4. Accrued interest on notes payable, P 900.
5. Accrued expenses are:
Sales salaries, P 14,300
Light and water, P 6,500
6. Inventories as of December 31, 2023:
a. Direct materials, P 1,235,000
b. Work in process, 725,000
c. Finished goods 850,000

7. The following expenses should be allocated:

Factory Selling & administrative
Rent Expense 50% 50%
Employees Benefits 40% 60%
Light and water expense 70% 30%

REQUIRED:
A. Record the December, 2023 transactions in a two-column journal
B. Prepare :
1. Unadjusted Trial Balance as of December 31, 2023.
2. 12 column Worksheet
3. Adjusting journal entries
4. Adjusted trial balance
5. Statement of Cost of Goods Manufactured
6. Income Statement
7. Statement of Changes in Equity
8. Statement of Financial Position
9. Closing Entries
10. Post Closing Trial Balance
Problem 3 – Multiple Choice Problems:
1. During the month of January, FR Co,’s direct labor cost totaled P 36,000 and direct labor cost was 60% of
prime cost. If total manufacturing costs during January P 85,000, the manufacturing overhead was:
a) P 24,000 b) P 25,000 c) P 49,000 d) P 60,000

2. The following selected information pertains to Ajax Processing Co., direct materials, P 62,500; indirect
materials, P12,500; P 75,000 of direct labor ,P 11,250 of indirect labor; and other factory overhead
incurred, P37,500.

The total conversion cost was:

a) P 136,250 b) P 137,500 c) P 250,000 d) P 273,750

3. The gross margin for Core Company for 2020 was P 325,000 when sales were P 700,000. The Finished
Goods beginning inventory was P 60,000 and the Finished Goods ending inventory was P 35,000. The
cost of goods manufactured was:
a) P 300,000 b) P 350,000 c) P 230,000 d) P 375,000

4 & 5 are based on the following cost data that pertain to Matatag Co. for the month of February, 2020:

Inventories February 1, 2020 February 28, 2020

Materials P40,000 P50,000
Work in process 25,000 35,000
Finished goods 60,000 70,000

February 1-28, 2020

Direct labor cost P 120,000
Factory overhead 108,000
Cost of goods sold 378,000

4. The total amount of direct materials purchases during February, 2020 was:
a. P50,000 b. P170,000 c. P180,000 d. P220,000

5. The cost of goods manufactured for February, 2020 was:

a. P378,000 b. P388,000 c. P398,000 d. P428,000

for items 6 - 7: The following data were taken from the records of FTC Corporation:

Inventories 8/31/2020 9/30/2020

Raw Materials P ? P 50.000
Work in Process P 80,000 P 95,000
Finished Goods P 60,000 P 78,000

 Raw materials purchased amount to P 46,000.

 Factory overhead amount to P 63,000 which is 75% of direct labor cost.
 Selling and Administrative expenses amount to P 25,000 which is 8% of sales.
 Net income for September 2014, P 40,000.

6. The amount of raw materials inventory on August 31, 2020:________________________

7. The cost of good manufactured on August 31, 2020 _______________________________

8 –12 are based on the following information:

 Jan. 1 Jan. 31
Direct materials P 63,000 P 78,000
Work in process 41,000 42,000
Finished goods 34,000 32,000

Purchases - direct materials P 442,800

Indirect materials 7,200
Direct Labor 285,000
Indirect labor 47,000
Miscellaneous factory overhead 36,600

8. The cost of direct materials used is _____________________________

9. The total manufacturing cost is ______________________________
10. The total cost of goods placed in process is ________________________
11. The total cost of goods manufactured is __________________________
12. The cost of goods sold is _____________________________________

13 – 15, are based on the following information:

Materials and supplies used:

Raw materials P 400,000
Manufacturing supplies 18,000
Factory payroll:
Factory workers P 80,000
Factory foreman 30,000
Warehouseman 20,000
Other factory overhead P 125,000

13. How much are direct materials? _______________________

14. How much are the prime costs? _________________________
15. How much are the conversion costs? _______________________