CHAPTER 1
MANUFACTURING
ACCOUNTS
Introduction
• Manufacturing companies have several different
accounts compared to service and merchandising
companies.
• These include three types of inventory accounts:
raw materials inventory
work-in-process inventory
finished goods inventory
Reporting Activities
Merchandisers Manufacturers
Buy finished goods. Buy raw materials.
Sell finished goods. Produce and sell
finished goods.
SaleMart
Manufacturing Company
Raw
Materials
Work in
Process
Finished
Product
COSTS IN MANUFACTURING
Direct materials
Direct labour
Direct expenses Direct / Prime cost
Plus
Indirect / manufacturing overhead Production cost
Plus
Administrative expenses
Selling and distribution expenses
Financial charges Total cost
THE CLASSIFICATION OF COSTS IN
MANUFACTURING BUSINESS
Direct Costs / Prime Costs
Expenditure which can be easily traced or identified in a particular
product.
Consist of three elements:
1) Direct materials
- main materials used in producing
certain product
2) Direct labour
- wages paid to the direct worker
3) Direct expenses
- expenses incurred directly in producing certain
product
DIRECT MATERIALS
STEEL TO PRODUCE A CAR
DIRECT EXPENSES
SPECIAL EQUIPMENT/MACHINERY,
ROYALTY (HONDA, MAZDA)
DIRECT LABOUR
WAGES PAID TO AN ASSEMBLY WORKERS
Indirect costs / manufacturing overheads
Expenditure which cannot be easily traced or
identified in a specific product; i.e.:
factory / production / manufacturing
overheads such as rent of factory, depreciation
of machines
Non-manufacturing Costs
Administrative
Costs
Selling & Financial
Distribution Costs
Costs
All executive,
organizational The cos
t
, and clerical involves
Costs in
costs. getting
necessary to the
fund/cap
get the order ital
Eg: ban
and deliver the k
charges
product.
Types of Cost Classifications
(Classification by Traceability)
Direct costs Indirect costs
Costs traceable to a Costs that cannot be
single cost object. traced to a single cost
object.
Examples: material and
labor cost for a product. Example: A maintenance
expenditure benefiting
two or more
departments.
Raw Materials
Raw materials purchased that will be converted
into finished product.
Direct materials can be physically and directly
Steel used in the
frame of a
associated with the finished product. mountain bike.
Indirect materials:
1. Do not become part of the finished product, or
2. Cannot be traced directly to the product.
3. Part of manufacturing overhead.
Labour
Direct Labour :
Work of factory employees that can be physically and directly
associated with converting raw materials into finished goods.
Example:
Wages paid to a
mountain bike
assembly worker.
Indirect Labour :
Work of factory employees that has no physical association
with the finished product or for which it is impractical to trace to
the goods produced.
Manufacturing Overhead
Costs that are indirectly associated with manufacturing
the product.
Factory costs that cannot be separately or readily traced
directly to products
Includes all manufacturing costs except direct materials
and direct labor.
Examples:
Indirect material – cleaning supplies
Indirect labor – maintenance
Factory utility costs
Supervisory costs
(1) Manufacturing Account
Cost of Goods Completed @
Cost of Goods Manufactured
Work in Process – partially completed units of product.
Total Manufacturing Costs – sum of PRODUCTION COST (direct
material costs, direct labor costs and manufacturing overhead)
all incurred in the current period.
HOW TO CALCULATE MANUFACTURING/
PRODUCTION COST???
1. Calculate the direct materials used in production
Raw materials stock at the beginning of the year
(+) Purchase of raw materials
(- ) Raw materials stock at the end of the year
= COST OF DIRECT MATERIALS USED IN PRODUCTION
‘PLUS’
COST OF DIRECT MATERIALS USED INTO PRODUCTION
2. Add direct labour
(+) Direct labour
3. Add direct expenses
(+) Direct expenses
= DIRECT COST @ PRIME COST
4. Add indirect / manufacturing overhead
(+) Indirect expenses / manufacturing overhead
= TOTAL PRODUCTION COST
= TOTAL PRODUCTION COST
5. Add opening WIP and closing WIP
(+) Opening WIP inventory
(-) Closing WIP inventory
= PRODUCTION COST OF GOODS COMPLETED
@
COST OF GOODS COMPLETED
@
COST OF GOODS MANUFACTURED
p le
a m
Ex
SO 6
(2) Income Statement
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 Goods
= Sold =
p le Cost of Goods sold for a
a m
Ex Merchandiser and Manufacturer
Cost of goods sold for manufacturers differs only
slightly from cost of goods sold for merchandisers.
Merchandising Company Manufacturing Company
Cost of goods sold: Cost of goods sold:
Beg. merchandise Beg. finished
inventory $ 14,200 goods inv. $ 11,200
+ Purchases 234,150 + Cost of goods
= Goods available manufactured 170,500
for sale $ 248,350 = Goods available
- Ending for sale $ 181,700
merchandise - Ending
inventory (12,100) finished goods
= Cost of goods inventory (10,300)
sold $ 236,250 = Cost of goods
sold $ 171,400
(3) Balance Sheet
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.
Manufacturer’s Balance Sheet
p le
a m
Ex
Apportionment of expenses
Expenses:
Indirect manufacturing overhead:-
- to be charged in the manufacturing account section
Administration expenses, to be charged
Selling & distribution expenses, in the
Financial charges Income
Statement
Basis used to apportion expenses:
Rent expense
RM1,000
65% (RM650) 35% (RM350)
Office building Factory i n g
c m
o nt
e tu r
a c
n e se) f
I m
te p en a nu /c
t a M A H)
S t ex O
e n (M
R
FORMAT
ABC Sdn.Bhd
Manufacturing Account for the year ended
2015
MANUFACTURING PART
Stock of Raw Material (opening) xxx
Add: Purchases (raw material) xx
(-) Return Outwards (xx)
(+) Carriage Inwards xx xxx
Less: Stock of Raw Material (Closing) (xx)
Cost of raw material used xxxx
Direct labour xxx
Direct expenses xxx
Prime Cost xxxx
Prime Cost xxxx
(+) Manufacturing Overhead (MOH)/Indirect Manufacturing Cost
General factory Expenses xx
Lighting xx
Rent xx
Insurance xx
Depreciation xx
Indirect labour xx
xxx
Total Cost Of Production/Manufacturing cost xxxx
(+) Work in Progress (Opening) xx
(-) Work In Progress (Closing) (xx)
PRODUCTION COST OF GOODS COMPLETED c/d XXX
ABC Sdn.Bhd
Income Statement for the year ended 2015
Jul 6, 2023
Income Statement For The Year Ended 31 Dec 2015
Sales xxx
(-) Return Inwards (xx)
xxx
Less: Cost of goods sold
Stock of finish goods (opening) xx
(+) PRODUCTION COST OF GOODS COMPLETED b/d XXX
(-) Stock of finish goods (closing) (xx)
Cost of goods sold xx
GROSS PROFIT xxx
GROSS PROFIT XXX
Add: Other Revenues
Discount Received xx
Rent Received xx xx
xxx
Less: EXPENSES
Administrative Expenses xx
Finance expenses xx
Selling & Distribution Expenses xx (xx)
NET PROFIT XXX
