Chapter 25

Manufacturing Accounting

© 2010 Prentice Hall Business

Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Learning Objective 1
Preparing a cost of goods manufacturing
schedule

© 2010 Prentice Hall Business

LO-1
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Manufacturing Accounting
Specialized accounting concepts and
techniques required to record, report, and
control the operations of a manufacturing
company

© 2010 Prentice Hall Business

LO-1
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Costs
Separate Manufacturing from
Administrative
Manufacturing Costs
◦ Raw materials
◦ Direct labor
◦ Overhead
Administrative Costs
◦ Selling
◦ Administrative
© 2010 Prentice Hall Business
LO-1
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Manufacturing Costs
Raw materials – material that is to be processed
into a finished product

Direct labor – wages of those person whose

efforts directly affect the quality or other
characteristics of the products manufactured

© 2010 Prentice Hall Business

LO-1
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Manufacturing Costs
Overhead – all other manufacturing costs not
included in raw material or direct labor
◦ Maintenance wages/supplies
◦ Production supervision & expenses
◦ Depreciation expense of manufacturing assets
◦ Rent expense for buildings/machinery
◦ Electricity for manufacturing
◦ Insurance expense for manufacturing
◦ Indirect labor
◦ Manufacturing clerical wages

© 2010 Prentice Hall Business

LO-1
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Manufacturing Inventories
Raw materials inventory – cost of items of raw
material being held for production + freight
costs
Work-in-process inventory – cost of products
being processed
Finished goods inventory – manufacturing cost
of products that have been completed and are
awaiting shipment to customers

© 2010 Prentice Hall Business

LO-1
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Cost of Goods Sold
• Different from a merchandise co.
• Purpose is to properly match
manufacturing costs with sales
• Must include beginning & ending finished
goods
Beginning Finished Goods Inventory
+ Cost of Goods Manufactured
= Cost of Good Available for Sale
- Ending Finished Goods Inventory
= Cost of Goods Sold

© 2010 Prentice Hall Business

LO-1
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Cost of Goods Manufactured
Raw materials
used Finished
Goods
Inventory

Work-in-
Direct
Process
labor
inventory

Cost of
Factory goods sold
overhead

© 2010 Prentice Hall Business

LO-1
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Cost of Goods Manufactured
Cost of Raw Materials Used:

Beginning raw materials inventory

+ Purchases of Inventory
- Ending raw material inventory

© 2010 Prentice Hall Business

LO-1
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Cost of Goods Manufactured
Total manufacturing costs incurred:

Cost of raw materials used

+ Direct labor
+ Factory Overhead

© 2010 Prentice Hall Business

LO-1
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Cost of Goods Manufactured
Cost of goods manufactured:

Total manufacturing costs

+ Beginning work-in-process inventory
- Ending work-in-process inventory

© 2010 Prentice Hall Business

LO-1
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Problem 25B-1

Total manufacturing costs

Work-in-process Inventory, 7-31
Work-in-process Inventory, 7-31
Total Cost of Goods Manufactured

© 2010 Prentice Hall Business

LO-1
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Learning Objective 2
Journalizing transactions recording the
manufacturing process

© 2010 Prentice Hall Business

LO-2
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Source Documents
Required data are submitted to cost
accountants.
Timely receipt of legible documents is
often a problem.
Employees must be aware of importance.

© 2010 Prentice Hall Business

LO-2
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Source Documents
Receiving reports - prepared by receiving
department; acknowledges receipt of
materials & supplies from vendors
Material requisitions - documents initiated
by manufacturing personnel or other users to
request material from inventory warehouse
Clock card - card used by each hourly
employee, collected each week by payroll
department

© 2010 Prentice Hall Business

LO-2
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Source Documents
Lot tickets - (move tickets) documents
written by dept. mgrs. to reflect
movement of products or parts of
products from one dept. to another
Labor distribution report –

by-product of payroll allocated to direct &

maintenance labor, etc…
Bills of lading - documents that show
shipment of products to consumers
© 2010 Prentice Hall Business LO-2
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Flow of Manufacturing Costs
Raw
Materials

Applied Finished
Factory Work-in-
Overhead Process Goods
Indirect

Cost of
Direct
Labor Goods
Sold
© 2010 Prentice Hall Business
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Overhead Application
Two accounts
◦ Overhead – Control: debit to accumulate all
actual overhead costs
◦ Overhead – Applied: credit to apply
overhead to production

LO-2
© 2010 Prentice Hall Business
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Overhead Application Rate
Annual overhead / Annual activity base
$250,000/$750,000 = 33%
Activity base examples
◦ Direct labor hours
◦ Direct labor costs
◦ Machine hours

LO-2
© 2010 Prentice Hall Business
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Overhead Application Rate
Overhead based on direct labor hours:
Annual overhead / Annual direct labor hours

$250,000 / 150,000 hours = $1.67/hr

Direct labor hours for month = 1,500 hrs

1,500 x $1.67 = $2,505

LO-2
© 2010 Prentice Hall Business
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Overhead Application Rate
Overhead based on machine hours:
Annual overhead / Annual machine hours

$250,000 / 60,000 machine hours = $4.17/hr

Machine ran 2,000 hours

$4.17 x 2,000 = $8,333.33

LO-2
© 2010 Prentice Hall Business
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Problem 25B-2

Work-in-Process
70,000
75,000

© 2010 Prentice Hall Business

LO-2
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Problem 25B-2
Work-in-Process
70,000
75,000
60,000

LO-2
© 2010 Prentice Hall Business
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Problem 25B-2

Work-in-Process
70,000 180,000
75,000
60,000
Bal. 25,000

LO-2
© 2010 Prentice Hall Business
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Learning Objective 3
Preparing a worksheet for a
manufacturing company

LO-3
© 2010 Prentice Hall Business
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Worksheet for Manufacturing Company
New set of columns for statement of cost
of goods manufactured
◦ Beginning balances of raw materials and
work-in-process are listed in debit column
◦ Ending balance are entered in credit column
◦ Manufacturing expenses in debit column

LO-3
© 2010 Prentice Hall Business
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Worksheet for Manufacturing Company
Income Statement columns
◦ Beginning balance of finished goods in debit
column
◦ Ending balance in credit column
◦ Revenues are credited and expenses are
debited

LO-3
© 2010 Prentice Hall Business
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Worksheet for Manufacturing Company
Balance Sheet columns
◦ Is done similar to a traditional balance sheet
◦ Assets is debited and liabilities and owner’s
equity are credited

LO-3
© 2010 Prentice Hall Business
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Reports Prepared from the Worksheet
Statement of Cost of Goods Manufactured-

© 2010 Prentice Hall Business LO-3

Publishing, College Accounting: A
Practical Approach, 11e by Slater
 Reports Prepared from the Worksheet
Income Statement
Samolis Manufacturing
Income Statement
For Month Ended March 31, 20XX

Net Sales: $ 398,000

Cost of Goods Sold
Finished Goods Inventory (Beg.) $ 40,000
Cost of Goods Manufactured 267,000
Cost of Goods Available for Sale $ 307,000
Less: Finished Goods Inventory (End.) 28,000
Cost of Goods Sold: $ 279,000
Gross Profit on Sales $ 119,000

Operating Expenses:
Selling Expense $ 15,450
Admistrative Expense 9,560
Total Operating Expenses $ 25,010
Net Income (before taxes) $ 93,990
© 2010 Prentice Hall Business
Publishing, College Accounting: A LO-3
Practical Approach, 11e by Slater
 Reports Prepared from the Worksheet
Balance Sheet
SAMOLIS MANUFACTURING
BALANCE SHEET SAMOLIS MANUFACTURING
MARCH 31, 20XX
BALANCE SHEET
ASSETS MARCH 31, 20XX
Current Assets
Cash $ 350,000
Liabilities and Stockholders' Equity
Accounts Receivable $ 245,000
Less: Allowance for Doubtful Accounts 130,000 $ 115,000 Current Liabilities

Inventories
Raw Materials $ 96,000
Notes Payable $ 145,000
Work-in-Process 18,000 Accrued Payroll Payable 21,000 $ 166,000
Finished Goods 28,000 $ 142,000

Prepaid Expenses
Stockholder's Equity
Factory Supplies 2,500 Common Stock, $100 par 2,000 shares $ 200,000
Prepaid Factory Insurance 3,000 $ 5,500 Retained Earnings 305,000 $ 505,000
Total Current Assets $ 612,500

Plant and Equipment: Total Liab. & Stockholders' Equity $ 671,000

Factory Machinery $ 78,000
Less: Accum. Deprec., Factory Machinery 19,500 $ 58,500
Total Assets $ 671,000
LO-3
© 2010 Prentice Hall Business
Publishing, College Accounting: A
Practical Approach, 11e by Slater
 End of Chapter 25

© 2010 Prentice Hall Business

Publishing, College Accounting: A
Practical Approach, 11e by Slater