CHAPTER 13

MANUFACTURING OPERATIONS

LEARNING OBJECTIVES:

The students should be able to:

1. Differentiate the nature of manufacturing firms from service and trading
companies.
2. Enumerate and define elements of manufacturing costs.
3. Classify costs as to direct or indirect costs and as to direct materials, direct labor,
and manufacturing overhead.
4. Prepare financial statements for a manufacturing business.

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5. Understand the importance of accuracy in the classification and computation of

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costs and its effect in the business firm.

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Nature of Manufacturing Business

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A manufacturing business is engaged in transforming of raw materials into new

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products called finished goods. In converting the materials into another item, labor is
applied and other costs are incurred. Direct materials, direct labor and factory overhead
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are called manufacturing costs or product costs or factory costs. Most of the things that
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we are using now are manufactured products.

Examples of manufactured products: toothpaste, soap, textile, dresses, shoes,

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bags, cabinets, tables, chairs, computers, airplanes, automobile, gasoline, soft drinks,
cement, and many more.
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Manufactured products can also be used as raw materials in making another

product.
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Example: textile dresses; flour cake and bread; leather bags, belt,
shoes, wallets, and others.
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Transactions Related to the Manufacturing Process

1. Investment by the owner
2. Procurement of factory equipment
3. Constructing or renting of factory plant
4. Procurement of raw materials
5. Handling of raw materials
6. Payroll
7. Incurrence of other factory costs
8. Incurrence of operating expenses
9. Selling of finished goods.
10. Collection of receivables due to sales on account.

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 ILLUSTRATION OF THE TRANSACTIONS RELATED TO THE MANUFACTURING OPERATIONS
OWNER ASSETS, LIABILITIES MANUFACTURING COST REVENUE AND
CREDITORS AND EQUITY EXPENSES
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CASH PAYROLL DIRECT FINISHED SALES
ON LABOR GOODS
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RAW MATERIALS
(unused)
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MATERIALS
WORK IN
PROCESS
COST OF
GOODS SOLD
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FACTORY OVERHEAD:
PROPERTY,
Indirect materials,
Indirect labor, EN
PLANT & EQUIPT. Depreciation, Electricity,
Rentals, and Others UD OPERATING
EXPENSES:
WORK IN
ST Selling expenses
Administrative Expenses
PROCESS Unfinished work U
FINISHED GOODS Unsold finished goods CP
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RECEIVABLE Sales on account
Cash sales
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LIABILITIES
OWNER’S PROFIT OR LOSS FOR
EQUITY THE PERIOD
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Elements of Manufacturing Costs

Prime Cost Conversion Cost

Direct Materials Direct Labor Factory Overhead

1. Direct Materials – are all materials that form an integral part of the finished goods.
Example of direct materials: thread used in manufacturing textile; textile used in
making dresses, curtains, bed sheets; and lumber to make furniture.

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2. Direct Labor – is the labor cost that incurred in converting direct materials into

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finished product and can be assigned specifically to a product.

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Example: wages of carpenter in making furniture; salary of sewer and cutter in
making dresses; salary of machine or equipment operators.

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3. Factory Overhead – also known as manufacturing overhead or factory burden, are

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those costs incurred in the conversion process which are not classified as direct
materials nor direct labor.
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Example:
a. Indirect materials – materials used in production which may form an integral
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part of the product but the cost and quantity is insignificant such as glue used
in making furniture; thread used in sewing dresses.
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b. Indirect labor – salary of persons necessary in the production but not directly
the one who performed the job in making the product such as the salary of the
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foreman, supervisor, factory clerk, helpers, maintenance workers and material

handlers.
c. Depreciation expenses of factory equipment, factory plant, factory
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machineries.
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d. Electricity – electric consumption in the factory plant.

e. Allocated costs – costs that are not traceable as to which product will be
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charged. They are common costs to be allocated to production and

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administration. Ex. Telephone expenses, insurance, rent, and others.

Financial Statements of a Manufacturing Enterprise

The accounting principles and procedures applied in service and trading are
basically the same with that of a manufacturing business. The financial statements
prepared are also the same.

The Income Statement

The income statement is a formal report which shows the results of the business
operations. It contains revenues and expenses or nominal accounts. There are several
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accounts peculiar to the manufacturing firms that composed the cost of goods sold
compared to the merchandising business. In the manufacturing business, the cost of
goods sold includes manufacturing costs and cost of goods manufactured.

Maligaya Company
Income Statement
For the Year Ended December 31, 2019

Sales Note 4 P850,000

Cost of Goods Sold Note 5 (304,000)
Gross Profit 546,000
Operating Expenses
Selling Expenses Note 6 (128,000)

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Administrative Expenses Note 7 (130,000)

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Total Operating Expenses (258,000)

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Profit for the period before 288,000
Income Taxes (100,800)
Profit for the period after tax P187,200

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Statement of Changes in Equity

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Statement of Changes in Equity is a formal report which shows the changes in the
capital or equity of the owner. The beginning equity is increased by the additional
investment and profit for the period but decreased by the drawing and loss for the period.
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Maligaya Company
Statement of Changes in Equity
For the Year Ended December 31, 2019
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Beginning balance P250,000

Additional investment 100,000
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Profit (Loss) for the period 187,200

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Drawing (50,000)
Net Change in Equity 237,200
Ending balance P487,200
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The Statement of Financial Position

Statement of Financial Position is a formal report which shows the financial

condition of the business. It contains real accounts such as assets, liabilities and equity.
In the manufacturing business, there are three classes of inventories: raw materials, work
in process and finished goods.

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 Maligaya Company
Statement of Financial Position
December 31, 2019

ASSETS

Current Assets: Notes

Cash (8) P157,000
Accounts Receivable (9) 90,000
Inventories (10) 159,100
Prepaid Expenses (11) 33,000 P439,100
Non Current Assets:
Property, Plant and Equipment 275,000

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Total Assets (12) P714,100

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LIABILITIES
Current Liabilities
Trade and Other Payables (13) P226,900

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OWNER’S EQUITY
Maligaya, Capital 487,200
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Total Liabilities and Owner’s Equity P714,100
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Notes to Financial Statements
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The financial statements must be accompanied with notes, including a summary

of significant accounting policies and other explanatory notes.
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Note 1 – Name of the Company, address, nature of business, if corporation state the
holdings.
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Note 2 – Statement of compliance with PFRS (Philippine Financial Reporting Standard).

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Note 3 – Significant Accounting Policies. (refer to IFRS)

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Note 4 – Net Sales

Sales 900,000
Sales Returns and Allow (45,000)
Sales Discounts (5,000) (50,000)
Net Sales 850,000

Note 5 – Cost of Goods Sold:

Raw Materials, Beg 50,000
Purchases 230,000
Purchase Returns and Allow (15,000)
Purchase Discounts (5,000)

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 Balance 210,000
Freight in 10,000
Net Purchases 220,000
Total Materials Available for Use 270,000
Raw, Materials, End (58,000)
Direct Materials Used 212,000
Direct Labor 118,000
Factory Overhead
Indirect Labor 45,300
Factory Insurance 3,000
Factory Utilities 8,900
Factory Depreciation 17,900
Total Factory Overhead 75,100

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Manufacturing Cost 405,100

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Work in Process, beg -

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Total 405,100
Work in Process, end (55,500)
Total Cost of Goods Manufactured 349, 600

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Finished Goods, beg -

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Total Goods Available for Sale 349,600
Finished Goods, end (45,600)
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Cost of Goods Sold 304, 000
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Note 6 – Selling Expenses

Salaries 50,000
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Commission 65,000
Freight Out 3,000
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Advertising 8,000
Store Supplies 2,000
128,000
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Note 7 – Administrative Expenses

Salaries 60,000
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Insurance 15,000
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Staff Benefits 20,000

Depr’n Expense 10,000
Utilities Expense 20,000
Transportation Expense 5,000
130,000
Note 8 – Cash and Cash Equivalents
Cash on Hand 5,000
Cash in Bank 50,000
Petty Cash Fund 2,000
BSP Treasury Bill 100,000
157,000

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Note 9 – Trade and Other Receivables
Accounts Receivable 40,000
Notes Receivable 50,000
90,000
Note 10 – Inventories
Raw Materials 58,000
Work in Process 55,500
Finished Goods 45,600
159,100
Note 11 – Prepaid Expenses
Office Supplies Unused 3,000
Prepaid Advertising 15,000
Prepaid Rent 10,000

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Prepaid Insurance 5,000

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33,000

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Note 12 – Property, Plant and Equipment
Land 100,000
Building 150,000

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Machinery and Equipment 30,000

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Furniture and Fixture 15,000
Accumulated Depreciation (20,000)
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275,000
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Note 13 – Trade and Other Payables

Notes Payable 150,000
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Accounts Payable 60,000

Accrued Expenses 16,900
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226,900
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Exercise 13-1. Classify the items described
A- Direct materials D- Selling expenses
B- Direct labor E- Administrative expenses
C- Factory overhead F- Other classification

1. Wages of carpenter in a furniture shop

2. Depreciation of office furniture and fixtures
3. Leather used in making bags
4. Equipment used in factory
5. Office supplies used
6. Salary of plant manager
7. Salary of office employees
8. Thread used in fabrication of cloth

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9. Thread used in dressmaking shops

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10. Cost of electricity used in a printing company

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11. Paper used in a printing company
12. Tin used in a sardines processing company
13. Rental for the use of a machine in factory

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14. Advertising materials used for promoting manufactured goods

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15. Depreciation of sewing machine used in garment factory
16. Salary of the president of the manufacturing company
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17. Commission on sales of manufactured products
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18. Salary of baker in bakery
19. Plywood used in furniture factory
20. Overtime pay of factory workers
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Exercise 13-2. Multiple Choice- Theory. Write the correct letter answer

1. Direct materials and direct labor are considered to be:

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a. Selling expenses b. prime cost c. administrative expenses d. conversion cost

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2. Depreciation on factory buildings and equipment is classified as:

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a. Selling exp b. administrative exp c. factory overhead d. indirect materials

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3. A type of employee whose wages are not component of indirect labor is a(n):
a. Inspector b. supervisor c. assembler d. maintenance worker

4. The term “prime costs” refers to:

a. The sum of direct labor costs and all factory overhead costs
b. The sum of direct material costs and direct labor costs
c. Manufacturing costs incurred to produce units of output
d. All costs associated with manufacturing other than direct labor and direct material
costs

5. The term “conversion costs” refers to:

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 a. Costs that are associated with marketing, shipping, warehousing, and billing
activities
b. The sum of direct labor costs and all factory overhead costs
c. The sum of direct materials costs and direct labor costs
d. Manufacturing costs incurred to produce units of output

6. Direct labor is a:
Conversion cost Manufacturing cost Prime cost
a. Yes yes yes
b. No yes yes
c. No no no
d. No no yes
e. Yes yes no

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7. Prime cost and conversion cost share what common element of total cost?

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a. Direct labor
b. Commercial expense
c. Fixed overhead

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d. Variable overhead

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e. Direct materials T
8. Factory overhead includes:
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a. Indirect materials but not indirect labor
b. Indirect labor but not indirect materials
c. Prime costs
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d. All manufacturing costs, except direct materials and direct labor

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9. The element of manufacturing cost that supports time tickets is:

a. Materials
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b. Labor
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c. Factory overhead
d. Al of the above
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e. None of the above

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10. The element of manufacturing cost that supports depreciation schedules is:
a. Materials
b. Labor
c. Factory overhead
d. All of the above
e. None of the above

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 BIBLIOGRAPHY

Accounting Standards Council. Philippine Accounting Standards and Philippine

Financial reporting standards. Manila: Made Easy Books

De Leon, G. and De Leon, N. (2019) Cost Accounting. Manila: GIC Enterprises and Co.

Millan, Zeus Vernon B, (2019 edition) Intermediate Accounting 1A Based on Philippine

Reporting Standards:

Valix, C. & Peralta, J. (2019). Financial, Accounting, Vol.1. Manila: GIC Enterprises

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and Co., Inc.

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Valix, C. & Peralta, J. (2019). Financial Accounting, Vol.2. Manila: GIC Enterprises and
Co., Inc.

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Valix, C. & Peralta, J. (2019). Financial Accounting, Vol.3. Manila: GIC Enterprises and

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Co., Inc. T
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httptl historicconections.webs.com
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