You are on page 1of 41

Topic

8
Wnwa 2008

Accounting for Manufacturing Operations
100 Shares

Manufacturing?
$1 par value

1

Learning Objectives Learning Objectives
 Describe the environment for manufacturing operation
 Describe cost accounting concepts useful in classifying costs.  Explain how the financial statements for manufacturing and merchandising companies differ.  Compute cost of goods sold for a manufacturer.  Prepare a statement of cost of goods manufactured

Wnwa 2008

2

Nature of business: Nature of business: Merchandisers vs. Manufacturers Merchandisers vs. Manufacturers
Merchandisers . . .
 Buy  Sell

Manufacturers . . .
 Buy

finished goods. finished goods.

raw materials.

 Produce

and sell finished goods.

SaleMart

Wnwa 2008

3

Cost Accounting Concepts Cost Accounting Concepts

Behavior Traceability Controllability Relevance Function
Wnwa 2008

4

Classification by Behavior Classification by Behavior
Cost behavior means how a cost will react to changes in the level of business activity.
 Total

fixed costs do not change when activity changes. variable costs change in proportion to activity changes. 5

 Total

Wnwa 2008

Classification by Behavior Classification by Behavior
Cost behavior means how a cost will react to changes in the level of business activity.
Activity
 Total

Cost

fixed costs do not change when activity changes. variable costs change in proportion to activity changes. 6

Cost

 Total

Activity
Wnwa 2008

Classification by Traceability Classification by Traceability
Direct costs

Indirect costs

Costs incurred for the benefit of one specific cost object. Examples: material and labor cost for a product.

Costs incurred for the benefit of more than one cost object. Example: maintenance expenditures benefiting two or more departments.

Wnwa 2008

7

Classification by Controllability Classification by Controllability
The degree of control depends on the level of management in the organization.

e or M

Co ntr ol

l ro nt Co

Mo re
Very little control
Wnwa 2008

8

Classification by Relevance: Classification by Relevance: Opportunity Costs Opportunity Costs
The potential benefit that is given up when one alternative is selected over another. Example: If you were not attending college, you could be earning $20,000 per year. Your opportunity cost of attending college for one year is $20,000.
Wnwa 2008

9

Classification by Relevance: Classification by Relevance: Sunk Costs Sunk Costs
All costs incurred in the past that cannot be changed by any decision made now or in the future. Sunk costs should not be considered in decisions.

Example: You bought an automobile that cost $15,000 two years ago. The $15,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $15,000 cost.

Wnwa 2008

10

Classification by Function: Classification by Function: Product Costs Product Costs
Direct Labor Direct Material Manufacturing Overhead

The Product
Wnwa 2008

11

Classification by Function: Classification by Function: Period Costs Period Costs
Period costs are expenses not charged to the product.

Selling Costs Costs incurred to obtain customer orders and to deliver finished goods to customers – advertising and shipping.
Wnwa 2008

Administrative Costs
Non-manufacturing costs of staff support and administrative functions – accounting, data processing, personnel, research and development.

12

Period and Product Costs Period and Product Costs in Financial Statements in Financial Statements
Period Costs (Expenses) 2007 Income Statement Operating Expenses

2007 Costs Incurred Product Costs (Inventory)

Inventory Sold in 2007

Cost of Sales 2007 Balance Sheet Inventory Raw Materials Work in Process Finished Goods 2008 Income Statement Cost of Sales

Inventory Not Sold in 2007
Wnwa 2008

13

Potential Multiple Cost Classifications Potential Multiple Cost Classifications
Cost Item
Material Assembly Wages Advertising Production Manager's Salary Office Depreciation

Behavior
Variable Variable Fixed Fixed Fixed

Traceability
Direct Direct Indirect Indirect Indirect

Function
Product Product Period Product Period

Wnwa 2008

14

Manufacturing costs Manufacturing costs
Direct Materials Direct Materials Materials that are clearly and easily Materials that are clearly and easily identified with a particular product. identified with a particular product.
Example: Example: Steel used to Steel used to manufacture manufacture the automobile. the automobile.

Wnwa 2008

15

Manufacturing costs Manufacturing costs
Direct Labor Direct Labor Labor costs that are clearly traceable Labor costs that are clearly traceable to, or readily identifiable with, the to, or readily identifiable with, the finished product. finished product.
Example: Example: Wages paid to an Wages paid to an automobile assembly automobile assembly worker. worker.
Wnwa 2008

16

Manufacturing costs Manufacturing costs
Factory Overhead Factory Overhead
All factory costs except All factory costs except direct material and direct labor. direct material and direct labor. Factory costs that cannot be Factory costs that cannot be traced directly to specific units produced. traced directly to specific units produced.
Examples: Indirect labor – maintenance Indirect material – cleaning supplies Factory utility costs Supervisory costs
Wnwa 2008

17

Manufacturing costs Manufacturing costs
Manufacturing costs are often combined as follows:
Direct Material Direct Labor Manufacturing Overhead

Prime Cost
Wnwa 2008

Conversion Cost 18

Question Question
The primary distinction between product The primary distinction between product and period costs is .. .. .. and period costs is
a. Product costs are expensed in the period a. Product costs are expensed in the period incurred. incurred. b. Product costs are directly traceable to b. Product costs are directly traceable to product units. product units. c. Product costs are inventoriable. c. Product costs are inventoriable. d. Period costs are inventoriable. d. Period costs are inventoriable.
Wnwa 2008

19

Question Question Question
The primary distinction between product The primary distinction between product and period costs is .. .. .. and period costs is
a. Product costs are expensed in the period a. Product costs are expensed in the period incurred. incurred. b. Product costs are directly traceable to b. Product costs are directly traceable to product units. product units. c. Product costs are inventoriable. c. Product costs are inventoriable. d. Period costs are inventoriable. d. Period costs are inventoriable.
Wnwa 2008

20

Flow of Manufacturing Activities Flow of Manufacturing Activities
Materials activity Raw Materials Beginning Inventory Raw Materials Purchases Production activity Work in Process
Beginning Inventory

Sales activity
Beginning Inventory

Finished Goods Cost of Goods Manufactured Finished Goods
Ending Inventory

Direct Labor Factory Overhead Raw Materials Used

Cost of Sales

Raw Materials
Ending Inventory
Wnwa 2008

Work in Process
Ending Inventory

21

Statement of Cost of Goods Statement of Cost of Goods Manufactured Manufactured
Cost of all goods completed and transferred from work in process to finished goods during a reporting period. + + = + – =
Wnwa 2008

Direct Materials Used Direct Labor Factory Overhead Total Manufacturing Costs Beginning Work in Process Ending Work in Process Cost of Goods Manufactured
22

Product Cost Flows Product Cost Flows
Raw Materials
Beginning raw materials inventory Raw materials purchased Raw materials available for use in production Ending raw materials inventory Raw materials used in production

Manufacturing Costs
Direct materials

Work In Process

+ =

– =

As items are removed from raw As items are removed from raw materials inventory and placed into materials inventory and placed into the production process, they are the production process, they are called direct materials. called direct materials. 23

Wnwa 2008

Product Cost Flows Product Cost Flows
Raw Materials
Beginning raw materials inventory Raw materials purchased Raw materials available for use in production Ending raw materials inventory Raw materials used in production

+ =

Manufacturing W Costs In P Conversion Conversion costs are costs Direct materialscosts are costs incurred to incurred to + Direct labor + Mfg. overhead convert the convert the direct material = Total manufacturing material direct into a finished costs into a finished product. product.

– =

Wnwa 2008

24

Product Cost Flows Product Cost Flows
Raw Materials
Beginning raw materials inventory Raw materials purchased Raw materials available for use in production Ending raw materials inventory Raw materials used in production

Manufacturing Costs
Direct materials + Direct labor + Mfg. overhead = Total manufacturing costs

Work In Process
Beginning work in process inventory + Total manufacturing costs = Total work in process for the period

+ =

– =

All manufacturing costs incurred All manufacturing costs incurred during the period are added to the during the period are added to the beginning balance of work in beginning balance of work in process. process. 25

Wnwa 2008

Product Cost Flows Product Cost Flows
Raw Materials
Beginning raw materials inventory + Raw materials purchased = Raw materials available for use in production

Manufacturing Costs
Direct materials + Direct labor + Mfg. overhead = Total manufacturing costs

Work In Process
Beginning work in process inventory Total manufacturing costs Total work in process for the period Ending work in process inventory Cost of goods manufactured

+ =

– =

Costs associated with the goods that Costs associated with the goods that are completed during the period are are completed during the period are transferred to finished goods transferred to finished goods inventory. inventory.
Wnwa 2008

26

Product Cost Flows Product Cost Flows

Wnwa 2008

27

Statement of Cost of Goods Statement of Cost of Goods Manufactured Manufactured

Let’s take a look at Rocky Mountain Bikes’ Statement of Cost of Goods Manufactured.
Wnwa 2008

28

Statement of Cost of Goods Statement of Cost of Goods Manufactured Manufactured
ROCKY MOUNTAIN BIKES STATEMENT OF COST OF GOODS MANUFACTURED FOR THE YEAR ENDED 31 DECEMBER 2006 Direct materials used in production Direct labor Total factory overhead costs Total manufacturing costs for the period Beginning work in process inventory Total cost of work in process Ending work in process inventory Cost of goods manufactured $ 85,500 60,000 30,000 $ 175,500 2,500 $ 178,000 (7,500) $ 170,500

Wnwa 2008

29

Computation of Cost Material Used Statement of Cost of Directof Goods Statement of Cost of Goods Beginning raw materials inventory $ Manufactured Manufactured Add: Purchases of raw materials Cost of raw materials available for use Less: Ending raw materials inventory

8,000Exh. 18-16 86,500

$ 94,500 9,000 $ 85,500

ROCKY MOUNTAIN production Cost of direct materials used inBIKES STATEMENT OF COST OF GOODS MANUFACTURED FOR THE YEAR ENDED 31 DECEMBER 2006 Direct materials used in production Direct labor Total factory overhead costs Total manufacturing costs for the period Beginning work in process inventory Total cost of work in process Ending work in process inventory Cost of goods manufactured $ 85,500 60,000 30,000 $ 175,500 2,500

$ 178,000 (7,500) $ 170,500

Wnwa 2008

30

Statement of Cost of Goods Statement of Cost of Goods Manufactured Manufactured
Include all direct labor ROCKY MOUNTAIN BIKES costs incurred during the STATEMENT OF COST OF GOODS period. current MANUFACTURED
FOR THE YEAR ENDED 31 DECEMBER 2006 Direct materials used in production Direct labor Total factory overhead costs Total manufacturing costs for the period Beginning work in process inventory Total cost of work in process Ending work in process inventory Cost of goods manufactured $ $ $ $ 85,500 60,000 30,000 175,500 2,500 178,000 (7,500) 170,500

Wnwa 2008

31

Computation of Total Manufacturing Overhead Indirect labor Factory supervision Factory utilities Property taxes, factory building ROCKY MOUNTAIN BIKES Factory supplies used

Manufacturing Statement Manufacturing Statement 6,000
2,600 1,900

$

9,000

600 STATEMENT OF COST Factory insurance expired OF GOODS MANUFACTURED 1,100
FOR THE YEAR ENDED 31 DECEMBER 2006 5,300 Depreciation, building and equipment Other factory used in production 3,500 85,500 Direct materialsoverhead $ Total factory overhead costs $ 30,000 60,000 Direct labor Total factory overhead costs Total manufacturing costs for the period Beginning work in process inventory Total cost of work in process Ending work in process inventory Cost of goods manufactured $ $ $ 30,000 175,500 2,500 178,000 (7,500) 170,500

Wnwa 2008

32

Statement of Cost of Goods Statement of Cost of Goods Manufactured Manufactured
Beginning work in ROCKY MOUNTAIN BIKES process inventory is carried STATEMENT OF COST OF GOODS MANUFACTUREDover from the FOR THE YEAR ENDED 31 DECEMBER 2006 prior period.
Direct materials used in production Direct labor Total factory overhead costs Total manufacturing costs for the period Beginning work in process inventory Total cost of work in process Ending work in process inventory Cost of goods manufactured $ $ $ $ 85,500 60,000 30,000 175,500 2,500 178,000 (7,500) 170,500

Wnwa 2008

33

Statement of Cost of Goods Statement of Cost of Goods Manufactured Manufactured
Ending work in process inventory ROCKY MOUNTAIN BIKES contains the cost of unfinished STATEMENT OFgoods, GOODS MANUFACTURED the current COST OF and is reported in FOR THE YEAR ENDED 31 DECEMBER 2006 assets section of the balance sheet.
Direct materials used in production Direct labor Total factory overhead costs Total manufacturing costs for the period Beginning work in process inventory Total cost of work in process Ending work in process inventory Cost of goods manufactured $ $ $ $ 85,500 60,000 30,000 175,500 2,500 178,000 (7,500) 170,500

Wnwa 2008

34

Balance Sheet of a Manufacturer Balance Sheet of a Manufacturer
Raw Materials Work in Process Finished Goods

Manufacturing Inventory Classifications
Wnwa 2008

35

Balance Sheet of a Manufacturer Balance Sheet of a Manufacturer
Raw Materials Work in Process Finished Goods

Materials waiting to be processed.

Partially complete products. Material to which some labor and/or overhead have been added.

Completed products for sale.

Wnwa 2008

36

Balance Sheet of a Manufacturer Balance Sheet of a Manufacturer
MERCHANDISER Current Assets
  

MANUFACTURER Current Assets
  

Cash Receivables Merchandise Inventory

Cash Receivables Inventories
Raw Materials Work in Process Finished Goods

The only difference is inventory.
Wnwa 2008

37

Income Statement of a Manufacturer Income Statement of a Manufacturer
Merchandiser Beginning Merchandise Inventory Manufacturer Beginning Finished Goods Inventory The major difference Cost of Goods Manufactured

+
Cost of Goods Purchased

+

_

_

Ending Merchandise Inventory

Ending Finished Goods Inventory Cost of Sales

=
Wnwa 2008

=
38

Income Statement of a Manufacturer Income Statement of a Manufacturer
Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.
Merchandising Company
Cost of Sales Beg. merchandise inventory + Purchases = Goods available for sale - Ending merchandise inventory = Cost of Sales

Manufacturing Company
Cost of Sales Beg. finished goods inv. + Cost of goods manufactured = Goods available for sale - Ending finished goods inventory = Cost of Sales

$ 14,200 234,150 $ 248,350

$ 14,200 234,150 $ 248,350

(12,100) $ 236,250

(12,100) $ 236,250

Wnwa 2008

39

Income Statement Income Statement
 Sales (-) COGS Beginning Finished goods x COGM x CGAFS x (-) Ending finished goods (x) COGS Gross Profit Operating expenses Net Profit
Wnwa 2008

x

(x) x (x) x

40

End of Chapter 8

Wnwa 2008

41