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Accounting for

Topic Manufacturing
Operations

8 100 Shares

Manufacturing?
$1 par value

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Learning
Learning Objectives
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

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Nature
Nature of
of business:
business:
Merchandisers
Merchandisers vs.
vs. Manufacturers
Manufacturers
Merchandisers . . . Manufacturers . . .
 Buy finished goods.  Buy raw materials.
 Sell finished goods.  Produce and sell
finished goods.

SaleMart

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Cost
Cost Accounting
Accounting Concepts
Concepts
Behavior
Traceability
Controllability
Relevance
Function
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Classification
Classification by
by Behavior
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.
 Total variable costs
change in proportion
to activity changes.

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Classification
Classification by
by Behavior
Behavior

Cost behavior means


how a cost will react to
Cost

changes in the level of


business activity.
Activity  Total fixed costs do
not change when
activity changes.
 Total variable costs
Cost

change in proportion
to activity changes.

Activity
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Classification
Classification by
by Traceability
Traceability
Direct costs Indirect costs
 Costs incurred for the  Costs incurred for the
benefit of one specific benefit of more than
cost object. one cost object.
 Examples: material and  Example: maintenance
labor cost for a product. expenditures benefiting
two or more
departments.

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

M
or
ol

e
ntr

Co
Co

nt
ro
re

l
Mo

Very little control


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Classification
Classification by
by Relevance:
Relevance:
Opportunity
Opportunity Costs
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.

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Classification
Classification by
by Relevance:
Relevance:
Sunk
Sunk Costs
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.

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Classification
Classification by
by Function:
Function:
Product
Product Costs
Costs

Direct Direct Manufacturing


Labor Material Overhead

The
Product

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Classification
Classification by
by Function:
Function:
Period
Period Costs
Costs

Period costs are expenses


not charged to the product.

Administrative Costs
Selling Costs
Non-manufacturing costs
Costs incurred to obtain
of staff support and
customer orders and to
administrative functions –
deliver finished goods
accounting, data processing,
to customers –
personnel, research
advertising and shipping.
and development.

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

2007 Costs Cost of


Incurred Sales
Inventory
Sold in 2007
Product Costs 2007 Balance 2008 Income
(Inventory) Sheet Inventory Statement
Raw Materials
Inventory Not Cost of
Work in Process
Sold in 2007 Sales
Finished Goods
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Potential
Potential Multiple
Multiple Cost
Cost Classifications
Classifications

Cost Item Behavior Traceability Function


Material Variable Direct Product

Assembly Wages Variable Direct Product

Advertising Fixed Indirect Period

Production Manager's Salary Fixed Indirect Product

Office Depreciation Fixed Indirect Period

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

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Manufacturing
Manufacturing costs
costs
Direct
Direct Labor
Labor
Labor
Labor costs
costs that
that are
are clearly
clearly traceable
traceable
to,
to, or
or readily
readily identifiable
identifiable with,
with, the
the
finished
finished product.
product.

Example:
Example:
Wages
Wagespaid
paidto
toan
an
automobile
automobileassembly
assembly
worker.
worker.

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

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Manufacturing
Manufacturing costs
costs

Manufacturing costs are often


combined as follows:
Direct Direct Manufacturing
Material Labor Overhead

Prime Conversion
Cost Cost

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Question
Question
The
The primary
primary distinction
distinction between
between product product
and
and period
period costs
costs is
is .. .. ..

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

a.
a. Product
Product costs
costs are
are expensed
expensed in in the
the period
period
incurred.
incurred.
b.
b. Product
Product costs
costs are
are directly
directly traceable
traceable to to
product
product units.
units.
c.
c. Product
Product costs
costs are
are inventoriable.
inventoriable.
d.
d. Period
Period costs
costs are
are inventoriable.
inventoriable.
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Flow
Flow of
of Manufacturing
Manufacturing Activities
Activities
Materials Production activity Sales activity
activity
Work in Process Finished Goods
Raw Beginning Inventory Beginning Inventory
Materials
Beginning Cost of Goods
Inventory Direct Labor
Manufactured

Raw Factory
Materials Overhead Finished
Purchases Cost
Raw Materials Goods of
Ending
Used Sales
Inventory

Raw Materials Work in Process


Ending Inventory Ending Inventory
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Statement
Statement of
of Cost
Cost of
of Goods
Goods
Manufactured
Manufactured
Cost of all goods completed and transferred from
work in process to finished goods during a
reporting period.

Direct Materials Used


+ Direct Labor
+ Factory Overhead
= Total Manufacturing Costs
+ Beginning Work in Process
– Ending Work in Process
= Cost of Goods Manufactured
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Product
Product Cost
Cost Flows
Flows
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials


materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
– Ending raw materials
inventory
= Raw materials used As
As items
itemsare
are removed
removedfrom
fromrawraw
in production materials
materialsinventory
inventoryandandplaced
placedinto
into
the
theproduction
production process,
process, they
they are
are
called
called direct
direct materials.
materials.
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Product
Product Cost
Cost Flows
Flows

Manufacturing W
Raw Materials Costs In P
Conversion
Conversion
Beginning raw Direct materialscosts
costsarearecosts
costs
materials inventory + Direct labor incurred
incurredto to
+ Raw materials + Mfg. overhead convert
convert the
the
purchased direct
directmaterial
= Total manufacturing material
= Raw materials costs into
into aafinished
finished
available for use product.
product.
in production
– Ending raw materials
inventory
= Raw materials used
in production
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Product
Product Cost
Cost Flows
Flows
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in


materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending raw materials
inventory
= Raw materials used
in production All
All manufacturing
manufacturing costs
costs incurred
incurred
during
during the
theperiod
period are
are added
addedto tothe
the
beginning
beginning balance
balanceof
of work
work in
in
process.
process.

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Product
Product Cost
Cost Flows
Flows
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in


materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending work in
process inventory
= Cost of goods
Costs
Costsassociated
associatedwith
withthe
the goods
goods that
that manufactured
are
arecompleted
completed during
duringthe
the period
period are
are
transferred
transferredto
tofinished
finished goods
goods
inventory.
inventory.
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Product
Product Cost
Cost Flows
Flows

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

Let’s take a look


at Rocky
Mountain Bikes’
Statement of Cost
of Goods
Manufactured.

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

ROCKY MOUNTAIN BIKES


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

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Statement
Statement of
ofCostCost
Computation of of Directof
Cost of Goods
Goods
Material Used

Manufactured
Manufactured
Beginning raw materials inventory $ 8,000Exh.
18-16
Add: Purchases of raw materials 86,500
Cost of raw materials available for use $ 94,500
Less: Ending raw materials inventory 9,000
ROCKY
Cost of direct MOUNTAIN
materials used inBIKES
production $ 85,500
STATEMENT OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED 31 DECEMBER 2006
Direct materials used in production $ 85,500
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period $ 175,500
Beginning work in process inventory 2,500
Total cost of work in process $ 178,000
Ending work in process inventory (7,500)
Cost of goods manufactured $ 170,500

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Statement
Statement of
of Cost
Cost of
of Goods
Goods
Manufactured
Manufactured
Include all direct labor
costsMOUNTAIN
ROCKY incurred during the
BIKES
current
STATEMENT OF COST OF GOODS period.
MANUFACTURED
FOR THE YEAR ENDED 31 DECEMBER 2006

Direct materials used in production $ 85,500


Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period $ 175,500
Beginning work in process inventory 2,500
Total cost of work in process $ 178,000
Ending work in process inventory (7,500)
Cost of goods manufactured $ 170,500

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Computation of Total Manufacturing Overhead
Indirect labor $ 9,000
Manufacturing
Manufacturing Statement
Factory supervision Statement
6,000
Factory utilities 2,600
Property taxes, factory building 1,900
ROCKY MOUNTAIN BIKES
Factory supplies used 600
STATEMENT
Factory insuranceOF COST OF GOODS MANUFACTURED
expired 1,100
FOR building
Depreciation, THE YEAR ENDED
and 31 DECEMBER 2006 5,300
equipment
Other
Direct factory overhead
materials used in production 3,500
$ 85,500
Totallabor
Direct factory overhead costs $ 30,000 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period $ 175,500
Beginning work in process inventory 2,500
Total cost of work in process $ 178,000
Ending work in process inventory (7,500)
Cost of goods manufactured $ 170,500

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Statement
Statement of
of Cost
Cost of
of Goods
Goods
Manufactured
Manufactured
Beginning work in
ROCKY MOUNTAIN BIKES process inventory is
carried over from the
STATEMENT OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED 31 DECEMBER 2006prior period.

Direct materials used in production $ 85,500


Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period $ 175,500
Beginning work in process inventory 2,500
Total cost of work in process $ 178,000
Ending work in process inventory (7,500)
Cost of goods manufactured $ 170,500

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

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Balance
Balance Sheet
Sheet of
of aa Manufacturer
Manufacturer

Work in
Raw Process Finished
Materials Goods

Manufacturing
Inventory
Classifications

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Balance
Balance Sheet
Sheet of
of aa Manufacturer
Manufacturer

Work in
Raw Process Finished
Materials Goods

Partially complete
Materials products. Completed
waiting to be products
processed. Material to which for sale.
some labor and/or
overhead have
been added.
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Balance
Balance Sheet
Sheet of
of aa Manufacturer
Manufacturer

MERCHANDISER MANUFACTURER

Current Assets Current Assets


 Cash 
Cash
 Receivables 
Receivables
 Merchandise 
Inventories
Inventory Raw Materials
Work in Process
Finished Goods

The only difference is inventory.


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Income
Income Statement
Statement of
of aa Manufacturer
Manufacturer
Merchandiser Manufacturer

Beginning Beginning
Merchandise Finished Goods
Inventory Inventory
+ +
Cost of Goods The major Cost of Goods
Purchased difference Manufactured
_ _
Ending Ending
Merchandise Finished Goods
Inventory Inventory

= Cost of Sales =
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Income
Income Statement
Statement of
of aa Manufacturer
Manufacturer
Cost of goods sold for manufacturers differs only
slightly from cost of goods sold for merchandisers.
Merchandising Company Manufacturing Company
Cost of Sales
Cost of Sales
Beg. finished
Beg. merchandise
goods inv. $ 14,200
inventory $ 14,200
+ Cost of goods
+ Purchases 234,150
manufactured 234,150
= Goods available
= Goods available
for sale $ 248,350
for sale $ 248,350
- Ending
- Ending
merchandise
finished goods
inventory (12,100)
inventory (12,100)
= Cost of Sales $ 236,250
= Cost of Sales $ 236,250

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Income
Income Statement
Statement
 Sales x
(-) COGS
Beginning Finished goods x
COGM x
CGAFS x
(-) Ending finished goods (x)
COGS (x)
Gross Profit x
Operating expenses (x)
Net Profit x
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End of Chapter 8

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