Chapter 9 – Manufacturing Process

• What are the Primary Activities in the Conversion Process?

• Schedule production
• Obtain raw materials (internal transfer)
• Use labor and manufacturing resources to convert raw materials int
finished goods
• Store finished goods until sold (internal transfer)

S&A Exp

Raw Work Finished Cost of

In Goods Selling &
Purchases Materials Goods Admin Costs
Process Sold
Direct Labor Applied Man Overhead
Manufacturing Under / Over-
Overhead applied
 Chapter 9 – Manufacturing Process
 
• Which of the Conversion Process Activities are Accounting Events?
• Obtain raw materials
– Increase work-in-process inventory
– Decrease direct materials inventory
• Use labor and overhead
– Increase work-in-process inventory
• Store finished goods
– Increase finished goods inventory
– Decrease work-in-process inventory

S&A Exp

Raw Work Finished Cost of

In Goods Selling &
Purchases Materials Goods Admin Costs
Process Sold
Direct Labor Applied Man Overhead
Manufacturing Under / Over-
Overhead applied
 Chapter 9 – Manufacturing Process
 
• What is the basic flow of information in the conversion process?

• A customer places an order and production is scheduled.

• Direct materials are requisitioned and recorded.
• Labor is used and recorded
• A cost record is prepared and goods are manufactured.
• Goods are finished and recorded.

S&A Exp

Raw Work Finished Cost of

In Goods Selling &
Purchases Materials Goods Admin Costs
Process Sold
Direct Labor Applied Man Overhead
Manufacturing Under / Over-
Overhead applied
 Chapter 9 – Manufacturing Process
• What is the purpose of the inventory accounts in a manufacturing company and
what types of activities cause the accounts to increase and decrease?

• Direct materials inventory—the cost of direct materials on hand; increases when

direct materials are purchased; decreases when direct materials are issued into
production
• Work-in-process inventory—the cost of products started, but not completed;
increases when direct materials and direct labor are used in production and when
manufacturing overhead is assigned to production; decreases when goods are
finished and transferred out (cost of goods manufactured)
• Finished goods inventory—the cost of products finished, but not sold; increases
when goods are finished and transferred in; decreases when goods are sold (cost of
goods sold)

S&A Exp

Raw Work Finished Cost of

In Goods Selling &
Purchases Materials Goods Admin Costs
Process Sold
Direct Labor Applied Man Overhead
Manufacturing Under / Over-
Overhead applied
 Chapter 9 – Manufacturing Process
• Definitions
– Direct (Raw) Materials Cost
• Physically traceable items / costs to the final product
– Direct Labor Cost
• Costs of employees who actually manufacture the product
– Manufacturing Overhead Costs (Applied)
• Represents indirect (materials and labor) manufacturing costs
– Manufacturing Overhead Costs (Actual)
• The real amount MOH costs us (prob not going to = applied amt)
• Need to adjust in our COGS for accuracy
– Selling & Administrative Costs
• Represents other costs related to selling the item

S&A Exp

Raw Work Finished Cost of

In Goods Selling &
Purchases Materials Goods Admin Costs
Process Sold
Direct Labor Applied Man Overhead
Manufacturing Under / Over-
Overhead applied
 Chapter 9 – Manufacturing Process
• Calculations
I’m headed
Beginning to WIP!!

Raw
Mat
+ Purchases of R.M.
Begin
= Cost of R.M. avail for use

- R.M. Issued into production

= Ending R.M. Inventory

 Chapter 9 – Manufacturing Process
I’m headed
• Calculations to Finished
Goods!!
WIP
Beginning
+ Direct Mat Issued
+Direct Labor Used Begin

+ Applied Manu O.H.

= Cost of goods in Process
-Cost of goods manufactured
=Ending WIP Inventory
 Chapter 9 – Manufacturing Process
• Calculations I’m headed
to COGS!!

Beginning Fin Goods Inv Finished

Goods
+Cost of Goods Manufactured
=Cost of Goods Avail for Sale Begin

-Cost of Goods Sold (COGS)

=Ending Fin Goods Inv
 Chapter 9 – Manufacturing Process
• Calculations
COGS
Beginning COGS
+ Cost of Finished Goods Sold Begin
+ / - Man OH Under / Over Applied
=Total COGS For The Period
 Chapter 9 – Overhead Application
• Overhead… Isn’t it a cost to the manufacturing (WIP)?
– Yes!!! So, how do we “get it into” WIP?
– Overhead occurs differently than DM and DL!
– DM / DL happen regularly… easy to match with WIP
– MOH happens sporadically
• Tough to match directly (that’s why it’s “indirect”) to WIP
• Must “Apply” it to WIP to match it up
• How do we Apply it?
– A “guess-timation” of the MOH costs
– What if we “Apply it” wrong? (which we will, not going to be dead on!)
– Have to adjust our COGS
» Overapplied (too much) needs to decrease COGS
» Underapplied (not enough) needs to increase COGS

• So… what do we do???

– How do we Journalize it?
 Chapter 9 – Manufacturing Process
• Definitions
– Direct Materials Cost
• Physically traceable items / costs to the final product
– Direct Labor Cost
• Costs of employees who actually manufacture the product
– Manufacturing Overhead Costs
• Represents indirect (materials and labor) manufacturing costs
– Selling & Administrative Costs
• Represents other costs related to selling the item