MANUFACTURING

OPERATIONS

MODULE 7 PART 1

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INTRODUCTION
Manufacturing businesses comprise the world’s economy and based on February, 2020
data, the top ranking manufacturing countries are:
1. China – 28.7% Global Manufacturing Output
 One of the world’s oldest civilization, the world’s most populous country with around 1.4 billion inhabitants, China has an
entrepreneurial economy and is one of the best places to do business due to its low costs. It heads the world’s
manufacturing powerhouse responsible for nearly 30% of the country’s economic output.

2. United States – 16.8% Global Manufacturing Output

 Manufacturing is a critical component of the U.S. GDP. This industry was responsible for 11.6% of the total U.S. economic
output, while comprising half the country’s total exports.  

3. Japan – 7.5% Global Manufacturing Output

 A culturally rich country, famous for its animation, arts and crafts, cuisine, music, and many other industries. Japan produced
$1 trillion from manufacturing in 2019.

4. Germany – 5.3% Global Manufacturing Output

 Germany has emerged as one of the leading nations for importers and exporters. The German economy promotes the free
market in the business and consumer goods sectors.
5. India – 3.1% Global Manufacturing Output
 India has grown into a reliable country for many business sectors because it has both the workforce and resources.
based on 2019 output:
6. South Korea – 3% Global Manufacturing Output
 With a focus on high-tech, service-based economy, it has turned into one of the fastest growing developed nations in the world with 
major exports such as electrical equipment, vehicles, petroleum oils, parts, and accessories for vehicles. 

7. Italy – 2.1% Global Manufacturing Output

 Italy is commonly known as one of the most industrialized countries in the world with a reliable and developed production industry
which makes them a prime location for manufacturing.  

8. France – 1.9% Global Manufacturing Output

 France is one of the global leaders in manufacturing including for industries such as aerospace, automotive, railway, luxury goods
and cosmetics, one of the most important agricultural producers in Europe and a global forerunner in the industrial power sector,
classified as high income and wealthy nation by the World Bank.

9. United Kingdom – 1.8% Global Manufacturing Output

 United Kingdom is a sovereign state that includes England, Scotland, Wales, and Northern Ireland. London, the capital city of
England, is a dominant international financial center and rates amongst the world’s best cities for business. 

10. Indonesia – 1.6% Global Manufacturing Output

 main export products are mineral fuels, mineral oils and products of their distillation, mineral waxes, etc..
L A R G E S T M A N U FA C T U R I N G C O M PA N I E S B Y R E V E N U E :

2021 2020
1. Apple (Electronics) 1. Volkswagen Group (auto)
2. Toyota Group (various ) 2. Toyota Group (various)
3. Volkswagen Group Automotive 3. Apple (electronics)
4. Samsung (Electronics) 4. Samsung( Electronics)
5. Foxconn (Electronics) 5. Daimler (automotive)
6. Daimler (Automotive) 6. Foxconn (electronics)
7. Cardinal Health (Pharma)China 7. Ford (Automotive)
8. Railway and Engineering Group 8. Cardinal Health (pharma)
9. Huawei (Telecoms, equipment) 9. Honda (Automotive)
10. Ford (Automotive) 10. Generals Motors (automotive
OVERVIEW OF A MANUFACTURING BUSINESS
• A manufacturing business is -
any business that uses components, parts or raw materials to make a finished good.
Automotive companies, such as Ford and GM, are classic examples of manufacturing
businesses that utilize advanced technology, assembly lines, and human skills to
create a finished product.
•  Manufacturing businesses in today's world are normally comprised of machines,
robots, computers, and humans that all work in a specific manner to create a
product.
• Manufacturing plants often use an assembly line, which is a process where a
product is put together in sequence from one work station to the next.
• By moving the product down an assembly line, the finished good can be put
together quicker with less manual labor. It's important to note that some
industries refer to the manufacturing process as fabrication.
LEARNING OBJECTIVES

At the end of this module, the students should be able to:

1. discuss the concept of manufacturing operations;
2. identify account titles used in manufacturing accounting;
3. describe the elements of costs;
4. identify the different cost systems;
5. discuss cost of goods manufactured as part of the financials.
DEFINITION
Manufacturing – is engaged in buying and selling goods by changing the physical form of the product
through a certain process. It is a type of business wherein raw materials undergo a certain process
and convert it into finished products based on consumers’ demand.
MANUFACTURING PROCESS

Raw Conversion
Fin Goods
Materials Process

Consumer or End user

Manufacturing is further defined as the mechanical, physical, or chemical transformation of materials,
substances or component into new products.
 COMPARED TO MERCHANDISING
Merchandising - is a type of business wherein the merchandiser buy goods from the manufacturer or
trader and sell the same goods to consumers at a profit.

MERCHANDISING PROCESS

Products Mark-up Sales

The biggest challenge in a merchandising business is how to get people to buy products.
MANUFACTURING VS. MERCHANDISING
The most significant difference between a manufacturing company and a merchandising business
MANUFACTURER – makes or create goods to sell and it begins with raw materials
MERCHANDISER – buys or acquires goods for resale without changing the physical form of the product. Inventory account is called Merchandise Inventory.

Inventory in Manufacturing business compose of:

1.) Raw Materials Inventory – holds the cost of direct materials on hand for conversion purposes.

2) Work-in-process Inventory- It refers to the semi-finished goods, which should be included in the cost of
goods manufactured.

3) Finished Goods Inventory –the inventory of products that the manufacturer actually sell to the merchandisers
or end-users at wholesale price or retail cost.

4) Factory Supplies Inventory-the cost of unused indirect materials at the end of the period.
ELEMENTS OF MANUFACTURING COSTS
Manufacturing costs are all costs related to the production process.
CATEGORIES:
1. Direct materials(DM)-these are materials that became part of the
finished products.
2. Direct labor(DL)- the composition of employees or workers who
physically convert the product.
3. Manufacturing Overhead(MOH)-all manufacturing costs that
cannot be classified as direct materials or direct labor.

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UNDERSTANDING THE ELEMENTS OF COSTS
1. Direct materials
• Costs of the materials used during the period.
• Include the purchase price of the raw materials and the acquisition costs
related to the purchase.
Examples: Purchase of raw materials PLUS
Carrying costs/ freight charges on raw materials
2. Direct labor
• Wages paid to the people who are directly involved in the manufacturing
process.
• Example: Direct labor, Direct wages, Factory wages, Production wages,
Manufacturing wages
UNDERSTANDING...
3. Manufacturing / Factory Overhead-Cost incurred in the manufacturing process, but they
cannot be traced directly to the goods being produced.
Classification of Manufacturing Overhead:
 Indirect materials and supplies – Cost or materials that do not directly form part of the product being
assembled or manufactured but it supplement the production process.
Examples :Glue, thread, nails, rivets, lubricants, small tools, nuts, bolts, washers, etc.
 Indirect labor costs- costs of labor of people that do not directly nor physically assemble or manufacture
the products .
Examples: salaries of plant managers or supervisors, wages of forklift operators, machine helpers ,
maintenance costs, etc. not directly related to the job.
 Other indirect manufacturing costs-all other costs that cannot be classified as indirect labor or
indirect materials .
Examples: plant property taxes, building maintenance, depreciation, utilities expense, property
insurance, etc.
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• These major cost elements are at times combined into prime costs or conversion costs.
o Prime costs . defined as the expenditures directly related to creating finished products
consisting of direct materials and direct labor.
o Conversion costs. Expenses incurred when converting raw materials into a product consist
of direct labor and manufacturing overhead.

OTHER COSTS:
Product costs: refers to the cost incurred to create a product which includes direct labor, direct
materials, consumable production supplies, and factory overhead.
Period costs : any cost that cannot be capitalized into prepaid expenses, inventory, or fixed assets.
It is associated with passage of time than with a transactional event. It is typically included within the
selling and administrative section of the Income Statement. It is also known as period expense.
Variable costs: Costs that vary in direct proportion to particular activity level.
Fixed Costs: Costs that remain constant regardless of the changes in activity level or volume of
production.
ACCOUNTING ACTIVITIES OF A MANUFACTURING
CONCERN
COST ACCOUNTING
is the collection, allocation and control of costs to produce or supply a product
or service.
deals with accumulation and explanation of actual and projected cost data to
lower costs and increase profits.
it is viewed as the intersection between managerial and financial accounting in
the sense that both uses “product costs” data accumulated be it revenue or
inventory related.
The two basic cost accounting systems are: Job order cost accounting system
and the Process costing system.
COST ALLOCATION SYSTEM IN MANUFACTURING
Cost allocation system –is the process of determining the cost of the finished product.

The following cost system that a manufacturing concern may adopt:

1. Actual cost system

2. Normal cost system
3. Absorption or full-cost system
4. Variable or direct cost system
5. Standard cost system

In this introductory course, only actual and normal cost systems are discussed.
ACTUAL COST SYSTEM
• The cost of finished product includes the actual direct material costs (DM), the actual direct
labor costs (DL) and the actual factory overhead incurred (FOH).
 Actual cost of DM and DL are directly entered to the work-in-process account.
 Actual cost of FOH are accumulated in the factory overhead control account and only
transferred to the Work-in-Process account at the end of the period or once the product is
completed.
So, the cost of Finished Goods (FG) = sum of actual cost of DM, DL and FOH
Example: Yoona Manufacturing Co. uses the actual cost system in producing 8,500 units of products
during the month. The actual costs incurred are as follows:
Direct Materials P407,500
Direct Labor 250,000
Factory Overhead 150,000
Total P807,500 costs for P8,500 units;
= P95 per unit.
NORMAL COST SYSTEM
• In normal cost system, the cost of FG include the actual costs of DM, DL and an estimated FOH
based on pre-determined factory overhead rate.
Pre-determined FOH rate = Total Budgeted FOH at specified activity level
Total Volume of Activity level
Total Budgeted Overhead is determined based on the past year’s experience of the business .
Specified activity level is usually determined based on the relationship of activity level to factory overhead.
Different activity levels that a manufacturing business may use:
DL costs, Direct labor hours, Machine hours or No. of units produced..
Example: Z Company , estimated based on its past year’s experience that the total FOH budgeted cost is P400,000 based on
160,000 direct labor hours.
Compute: 1)Predetermined FOH rate = P400,000/160,000hrs = P2.50 per direct labor hours. Therefore, P2.50 is charged as FOH
for every unit produced.
2) Estimated Overhead costs = P12,500 ( If in case 5,000 units were produced x 2.50 per unit ). This amount is technically called as
Applied factory overhead.

In this system, the Factory Overhead Control account is debited for the actual FOH incurred and credited for the Applied FOH.
NOTE: In most instances, the actual FOH is not equal to the applied FOH, thus an over – or – under application of overhead
account will arise. This account is properly disposed or closed at the end of the period.
COST ACCUMULATION PROCEDURES
A procedure which refers to the process of assigning cost to the product.

• The different cost accumulation procedures are:

Job order costing
most widely used and considered to be traditional methods
Process costing

Activity based costing

considered to be the innovative approach discussed in
Backflush costing higher accounting
DEFINITION:
A. JOB ORDER COSTING
-a costing method which is used to determine the cost of manufacturing each product usually adopted
when the manufacturer produces a variety of products which are different from one another and needs to
calculate the cost for doing an individual job.
Importance:
 To determine profitability of the job
 To make data-driven decisions
 To monitor machine usage

B. PROCESS COSTING
-a term used to describe one method for collecting and assigning manufacturing costs to units of
production in companies producing large quantities of homogenous products, that is, when nearly
identical units are mass produced.
Easy to determine process costs periodically at short intervals, simple and less expensive.
JOB ORDER COSTING VS. PROCESS COSTING
JO B O R D E R C O S T IN G ( AC T U A L ) P RO C E S S C O S T I N G
It follows intermittent manufacturing process. It follows continuous manufacturing process.

TYPES: PROCESS FLOW SHOP or CONTINUOUS MFG.

1. Job order shop-the manufacture of customized or especially designed the manufacture of standard products for stock or
products according to orders of customers.
continuing customer’s orders without interruption.
EX: yatch, customized boat, airplane, or other special products not
stocked after production. it requires special equipment , and that all steps in the
2. Batch order Manufacturing-production of standard products for stocking production cycle proceed smoothly.
and to be later sold to customers. They are process in small economic
batches. They compiled different components of a product through a step products are constantly made based on demand
by step process. planning.
EX: Soap, toothpaste, shampoos, automobiles
non-stop approach to manufacturing products and
3. Discrete Manufacturing – an IKEA styled-approach to manufacturing. It
concerns anything that uses component parts or sub-assemblies such as
applies to workflows such as repetitive and continuous
bikes or skateboards that can easily be taken apart. manufacturing.
products and the manufacturing route is standardized,
Intermittent – a manufacturing process wherein products are made based on
easily allowing for large-scale manufacturing.
customer’s order or production covers make to order (MTO), irregular
production schedules to create several different products in one production line.
Finished goods might be varied from product to product usually low-volume,
high variety products for either mass customization or bespoke manufacturing. EX. Cement production, chalk, paper mills, erasers,
mineral water , softdrinks, gasoline, chemicals, processed
IKEA STYLE-a Swedish, multinational conglomerate that designs and sells foods.
ready-to-assemble furnitures, kitchen appliances and home accessories, largest
furniture retailer founded by a 17 yr old Ingvar Kamprad, farm Elmtaryd and
village of Agunnaryd.
For accounting purposes, Cost System and Non-Cost system may be
used:
COST SYSTEM-keeps perpetual records of the costs of Raw
Materials, Work in Process and Finished Good Inventory.

NON-COST SYSTEM-an accounting system based on periodic

inventory system, wherein Raw Materials, Work In Process and
Finished Goods are based on physical count of the quantities on hand
at the end of a specific period.
ILLUSTRATION
Dong-wook Furniture Manufacturing Co. manufactures furniture for the elite class. They design
and build office tables, dining tables and other types of furniture. During the month they received
orders for five (5) conference tables. Costs incurred are as follows:
Opening stock of timber P 2,500
Purchase of timber during the week 100,000
Closing stock of timber 12,500
Glass purchased for table tops 25,000
Labor hrs worked 100 hrs
Wages per hour 2,000 per hr.
Design engineer salary allocated to the job 125,000
Indirect materials and utilities cost allocation 150,000
Compute for:
1) Direct materials costs: 2,500+100,000-12,500=P90,000 + 25,000 = P115,000
2) Direct Labor costs: 200,000
3) MOH : 125,000 + 150,000 275,000
Total manufacturing costs 590,000

Prime costs = 115,000 + 200,000 = 315,000

Conversion costs=200,000 + 275,000 = 475,000
Cost per table = P590,000/5 = P118,000 per table.
SEATWORK NO. 10
Mod 7 Problem 1:
Calculate costs based on the following data of Bo-young’s Manufacturing Co. for January 2017. The
company made 1,000 units of tables during the month and there are no beginning and ending inventories.

Factory insurance P 44,000

Machine lubricants used in Factory 7,000
Plant office rent 20,000 REQUIRED:
Wood used in production 325,000
Factory cleaning supplies 12,000 Classify and compute for the following :
Depreciation expense-factory building 120,000 1. Manufacturing Overhead costs
Labor cost production line 350,000 2. Cost of Direct Labor
Sales Office rent 50,000
Salaries of company president 300,000 3. Cost of Direct Materials
Plant security personnel 60,000 4. Period costs
Steel Bars for production line 115,000 5. Prime costs
Quality inspection supervisor’s salary 35,000 6. Total cost of 1,000 tables
Cost of nails and screws 8,000
Cost of glue 3,000 7. Cost of table per unit
Varnish and painting materials 20,000
Interest expense 45,000
Depreciation office equipment 15,000
Wages of workers 135,000
Utility expense-70% plant ; 30% Administration 210,000