© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Manufacturing Accounting Chapter 25

Learning Objective 1 Preparing a cost of goods manufacturing schedule © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

Manufacturing Accounting Specialized accounting concepts and techniques required to record, report, and control the operations of a manufacturing company © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

Costs Separate Manufacturing from Administrative Manufacturing Costs ◦ Raw materials ◦ Direct labor ◦ Overhead Administrative Costs ◦ Selling ◦ Administrative © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

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

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

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

Cost of Goods Sold 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 Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1 Different from a merchandise co. Purpose is to properly match manufacturing costs with sales Must include beginning & ending finished goods

Raw materials used Factory overhead Direct labor Cost of goods sold Cost of Goods Manufactured Work-in- Process inventory Finished Goods Inventory © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

Cost of Goods Manufactured Cost of Raw Materials Used: Beginning raw materials inventory + Purchases of Inventory - Ending raw material inventory © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

Cost of Goods Manufactured Total manufacturing costs incurred: Cost of raw materials used + Direct labor + Factory Overhead © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

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

Problem 25B-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1 Total manufacturing costs Work-in-process Inventory, 7-31 Total Cost of Goods Manufactured

Learning Objective 2 Journalizing transactions recording the manufacturing process © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

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 Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

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 Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

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 Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

Flow of Manufacturing Costs © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Cost of Goods Sold Labor Raw Materials Indirect Finished Goods Factory Overhead Direct Applied Work-in- Process

Overhead Application Two accounts ◦ Overhead – Control: debit to accumulate all actual overhead costs ◦ Overhead – Applied: credit to apply overhead to production © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

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

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

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

Problem 25B-2 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Work-in-Process 70,000 75,000 LO-2

Problem 25B-2 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Work-in-Process 70,000 75,000 60,000 LO-2

Problem 25B-2 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Work-in-Process 70,000 75,000 60, ,000 Bal. 25,000 LO-2

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

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 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

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 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

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 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

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

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

Reports Prepared from the Worksheet Balance Sheet © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater End of Chapter 25