2. Accounting for Manufacturing Activities
Chapter 26
Accounting for Manufacturing Activities
Section 1: Accounting for
Manufacturing Activities
Section Objectives
Chapter 25 introduced the topic of managerial accounting. Chapter 26 continues this topic with a discussion of accounting for manufacturing activities—an area that requires regular financial information for managerial decision making relating to operating efficiency. Section 1 Explains how to prepare a statement of cost of goods manufactured for a business which makes a product. In addition, the section describes the basic components of manufacturing cost and how to prepare an income statement and balance sheet for a manufacturing business.
Prepare a statement of cost of goods manufactured.
Explain the basic components of manufacturing cost.
Prepare an income statement for a manufacturing business.
Prepare a balance sheet for a manufacturing business.
McGraw-Hill
© 2009 The McGraw-Hill Companies, Inc. All rights reserved.

3. Manufacturing Businesses
Comparison
Manufacturing Businesses
Merchandising Businesses
Merchandising businesses purchase goods to be resold in the same condition and form but at a profit.
Manufacturing businesses purchase and convert raw materials into finished goods to be sold at a profit.
A manufacturing business makes a product from raw materials and then sells it to retailers or merchandisers, who in turn sell the goods to consumers.

4. Prepare a statement of cost of goods manufactured.
Objective 1
Prepare a statement of cost of goods manufactured.
The biggest difference between a merchandiser’s income statement and a manufacturer’s income statement is the cost of goods sold section. Merchandisers use: “Merchandise Inventory” and the “Purchases” account to figure the cost of goods sold. Manufacturers use: “Finished Goods Inventory” and “Cost of Goods Manufactured”. In the first objective of this chapter, we will see how to prepare a Cost of Goods Manufactured Statement.

5. Statement of Cost of Goods Manufactured
Work in Process Inventory, Jan. 1
11,900.00
Raw Materials
Raw Materials Inventory, Jan. 1
27,000.00
Materials Purchases
159,700.00
Less Purchases Discounts
Net Purchases
156,700.00
Total Materials Available
183,700.00
Less Raw Materials Inventory, Dec. 31
24,500.00
Raw Materials Used
159,200.00
Direct Labor
95,000.00
Manufacturing Overhead
Indirect Labor
5,000.00
Payroll Taxes—Factory
9,000.00
Utilities—Factory
Repairs and Maintenance—Factory
6,500.00
Indirect Materials and Supplies
7,200.00
Depreciation—Factory Building
7,500.00
Depreciation—Factory Equipment
Insurance—Factory
3,900.00
Property Taxes—Factory
8,418.00
Total Manufacturing Overhead
61,518.00
Total Manufacturing Cost
315,718.00
Total Work in Process for Year
327,618.00
Less Work in Process Inventory, Dec. 31
11,500.00
Cost of Goods Manufactured
316,118.00
Parisian Manufacturing Inc.
Statement of Cost of Goods Manufactured
Year Ended December 31,20--
(3,000.00)
The Cost of Goods Manufactured line item replaces the Purchases line item on the income statement.
Accounting for the cost of raw materials used to make products and the labor and overhead required to turn raw materials into finished products are key elements of an accounting system for a manufacturing concern. The Statement Of Cost Of Goods Manufactured summarizes these costs for a company. The statement of Cost of Goods Manufactured is similar to the Cost of Goods Sold section of an income statement for a merchandiser.
There are four parts of the statement: raw materials, direct labor, manufacturing overhead, and work in process.
Each section reports the costs associated with its phase of the manufacturing process.
The new manufacturing costs for the period are then added to beginning work in process, and the ending work in process is subtracted from total manufacturing costs.
At the bottom of the statement, we see the line item, Cost of Goods Manufactured of $316,118. The Cost of Goods Manufactured line item replaces the Purchases line item on the merchandiser’s income statement.

6. Explain the basic components of manufacturing cost.
Objective 2
Explain the basic components of manufacturing cost.
Before we can really understand the manufacturing financial statement, we must become comfortable with terms like raw materials, direct labor, indirect labor, work in process, and manufacturing overhead used in manufacturing accounting. Some of these are the basic components needed to make a product.

7. Manufacturing Costs Consist of Three Components
Raw
Materials
Direct
Labor
Manufacturing
Overhead
The three basic components needed to manufacturer a product, whether it is a can of green beans or a Ferrari, are:
Raw Materials
Direct Labor and
Manufacturing Overhead.

8. Raw Materials Raw materials consist of direct and indirect materials.
Examples of direct materials are wood, glue, varnish, or hardware for a furniture maker.
Indirect materials are used to work on the products, but do not become a part of the product.
Raw Materials
If we were making a chair, what would be the materials that would go into making it?” (material/leather, screws, metal, wood, glue, steel wool, cleaning fluid, etc.)
Materials can be either:
direct materials (the materials that actually become part of the product—material, screws, metal) or
indirect materials (materials or supplies that are used in the manufacturing process but don’t become part of the product—steel wool, cleaning fluid).
Some businesses treat insignificant direct materials, such as glue, as indirect materials as well.
Indirect material is treated as manufacturing overhead.

9. Raw Materials and the Statement of Cost of Goods Manufactured
Work in Process Inventory, Jan. 1
11,900.00
Raw Materials
Raw Materials Inventory, Jan. 1
27,000.00
Materials Purchases
159,700.00
Less Purchases Discounts
Net Purchases
156,700.00
Total Materials Available
183,700.00
Less Raw Materials Inventory, Dec. 31
24,500.00
Raw Materials Used
159,200.00
Parisian Manufacturing Inc.
Statement of Cost of Goods Manufactured
Year Ended December 31,20--
(3,000.00)
On the statement of cost of goods manufactured, determining the amount of raw materials used is the first thing that needs to be calculated. Let’s examining how data about the cost of raw materials appears on the statement. The beginning inventory of raw materials, $27,000 is added to net purchases of raw materials, $156,700. Net purchases is materials purchases minus purchases discounts ($159,700 - $3,000). The result is total materials available, $183,700. The ending raw materials inventory, $24,500, is subtracted to determine the raw materials used, $159,200.
Compute raw materials used.
1. Compute total materials available.

10. What are direct labor costs?
QUESTION:
What are direct labor costs?
Direct labor costs are costs of the personnel who work directly on the manufactured product.
ANSWER:
Direct labor costs are costs of the personnel who work directly on the manufactured product.

11. Examples of Direct Labor Costs
Salaries of workers who shape the lumber.
Salaries of workers who assemble the pieces into tables.
Labor costs for workers who paint the final products.
Just like materials, labor can be classified as direct labor or indirect labor.
The personnel who actually worked on the product to put it together are direct laborers.

12. Indirect Labor
Costs of personnel who support production but are not directly involved in manufacturing (supervisors, janitors, maintenance staff).
Indirect labor are the costs of personnel who support production but do not directly work with the product to put it together. Good examples are: supervisors, janitorial staff, repair and maintenance, etc..
Indirect labor is treated as manufacturing overhead.

13. Manufacturing Overhead
Manufacturing overhead includes all of the costs other than direct labor and direct materials.
Manufacturing overhead may include the following:
Indirect labor - Costs attributable to personnel who support the production process.
Utilities
Depreciation
Repair and maintenance
Property taxes
Insurance
The third component of manufacturing cost is manufacturing overhead. Manufacturing overhead includes all manufacturing costs that are not direct materials or direct labor.
Remember that indirect labor as well as indirect materials are included in manufacturing overhead.
What would be some manufacturing overhead costs incurred in the manufacturing process to make a classroom chair? Electricity, depreciation on production equipment, property taxes on the factory, supervisory salaries, insurance on the factory and equipment, etc. are few that might be incurred.

14. Work in Process
Products in the production process, but not yet completed.
Accounted for in the cost of goods manufactured section of the income statement.
As materials are requested from the raw materials inventory warehouse and labor costs arise as factory personnel work, the costs are accumulated and recorded in an account called Work in Process.
Work in process refers to partially completed units in the production process. Work in process is accounted for in the cost of goods manufactured section of the income statement.

15. Accounting for Work in Process on the Income Statement
Work in Process Inventory, Jan. 1
11,900.00
Raw Materials
Raw Materials Inventory, Jan. 1
27,000.00
Materials Purchases
159,700.00
Less Purchases Discounts
Net Purchases
156,700.00
Total Materials Available
183,700.00
Less Raw Materials Inventory, Dec. 31
24,500.00
Raw Materials Used
159,200.00
Direct Labor
95,000.00
Manufacturing Overhead
Indirect Labor
3,600.00
Payroll Taxes—Factory
9,917.75
Utilities—Factory
9,000.00
Repairs and Maintenance—Factory
6,500.25
Indirect Materials and Supplies
7,200.00
Depreciation—Factory Building
8,000.00
Depreciation—Factory Equipment
5,000.00
Insurance—Factory
4,300.00
Property Taxes—Factory
Total Manufacturing Overhead
61,518.00
Total Manufacturing Cost
315,718.00
Total Work in Process for Year
327,618.00
Less Work in Process Inventory, Dec. 31
11,500.00
Cost of Goods Manufactured
316,118.00
Parisian Manufacturing Inc.
Statement of Cost of Goods Manufactured
Year Ended December 31,20--
(3,000.00)
At the end of each period, an estimate is made of the costs of raw materials, direct labor, and manufacturing overhead for the work in process. For Parisian Manufacturing Company, the beginning inventory of work in process was $11,900, and the ending inventory of work in process was $11,500. On the statement of cost of goods manufactured, the beginning work in process amount of $11,900 is added to $315,718 of total manufacturing cost. The result is total work in process for the year of $327,618. The ending work in process of $11,500 is subtracted from the total work in process for the year to arrive at the cost of goods manufactured of $316,118.
An estimate is made of the costs of raw materials, direct labor, and manufacturing overhead that apply to work in process at the end of the period.

16. Prepare an income statement for a manufacturing business.
Objective 3
Prepare an income statement for a manufacturing business.
The objective of this section will be to prepare and income statement for a manufacturing business.

17. Income Statement for a Manufacturing Concern
Revenue
Sales
625,000.00
Less Sales Returns & Allowances
5,000.00
Net Sales
620,000.00
Cost of Goods Sold
Finished Goods Inventory, Jan. 1
32,500.00
Cost of Goods Manufactured
316,118.00
Total Goods available for Sale
348,618.00
Less Finished Goods Inventory, Dec. 31
29,000.00
319,618.00
Gross Profit on Sales
300,382.00
Operating Expenses
Selling Expenses (Control)
83,500.00
Administrative Expenses (Control)
95,090.00
Total Operating Expenses
178,590.00
Income Tax Expense
30,448.00
Parisian Manufacturing Inc.
Income Statement
Year Ended December 31,20--
Net Income Before Income Taxes
121,792.00
91,344.00
Figure taken from the cost of goods manufactured statement
The Cost of Goods Manufactured line is similar to the Purchases line in a merchandising income statement. The difference is that a merchandising firm purchases finished goods to resell, while a manufacturer purchases raw material and turns it into finished products. Recall, that the cost of goods manufactured amount of $316,118, was taken from the cost of goods manufactured statement.
It is important to understand that when a good is completed, it is transferred out of the work-in-process inventory account and into the finished goods inventory account.
The actual cost of goods sold is calculated in the same way as for a merchandising business.

18. Prepare a balance sheet for a manufacturing business.
Objective 4
Prepare a balance sheet for a manufacturing business.
A manufacturing business’s balance sheet is the next statement we will look at.

19. Inventories and the Balance Sheet for a Manufacturing Business
Raw Materials
24,500.00
Work in Process
11,500.00
Finished Goods
29,000.00
65,000.00
PARISIAN MANUFACTURING INC.
Partial Balance Sheet
December 31, 20--
One big difference in the balance sheets for a manufacturing business vs. a merchandising business is the current asset section. A merchandiser has one account for inventory— Merchandise Inventory. A manufacturer has three inventory accounts—Raw Materials, Work in Process and Finished Goods
The balance sheet for a manufacturing business contains three inventory categories.

20. Inventory
Managers need frequent and reliable information on inventory.
Perpetual inventory systems are used to update all additions to and deletions from inventory as they occur.
A physical inventory is taken annually to verify the perpetual inventory records.
Has anyone ever started to cook or bake something at home and discovered that you were out of butter or eggs or flour, etc.? What did you do? (Go to the store, borrow from neighbor, substitute something else, etc.)
When a business manufacturers a product, they need to keep careful track of the inventory they have:
Raw materials need to be readily on hand for the manufacturing process.
Work-in-process needs to be monitored to insure that inventory is completed on schedule and to control costs.
Finished goods on hand needs to be adequate to be able to meet sales demands but not too excessive as to incur excess costs.
Some companies keep perpetual records of their inventory so that reliable information is available on a daily basis.

21. Accounting for Manufacturing Activities
Chapter 26
Accounting for Manufacturing Activities
Section 2: Completing the
Accounting Cycle
Section Objectives
In section 2 of chapter 26, we will complete the accounting cycle for a manufacturer--
Prepare a worksheet for a manufacturing business.
Record the end-of-period adjusting entries for a manufacturing business.
Record closing entries for a manufacturing business.
Record reversing entries for a manufacturing business.
McGraw-Hill
© 2009 The McGraw-Hill Companies, Inc. All rights reserved.

22. Prepare a worksheet for a manufacturing business.
Objective 5
Prepare a worksheet for a manufacturing business.
The fifth objective of this chapter is to prepare a worksheet for a manufacturing business.

23. The Accounting Cycle for a Manufacturing Business
The steps in the accounting cycle do not change for a manufacturing business.
The worksheet must be constructed to facilitate preparation of the cost of goods manufactured statement.
The worksheet has two new columns:
Cost of Goods Manufactured Debit column
Cost of Goods Manufactured Credit column
The steps in the accounting cycle do not change for a manufacturing business. However, in the worksheet, two new columns are added. We add a cost of goods manufactured debt and credit column.

24. The worksheet of a manufacturing business contains several new accounts:
Raw Materials Inventory
Work in Process Inventory
Finished Goods Inventory
Direct Labor
Various Manufacturing Overhead Accounts
Manufacturing Summary
The worksheet of a manufacturing business contains several new accounts. Those new accounts include:
Raw materials inventory
Work in process inventory
Finished goods inventory
Direct labor
Various manufacturing overhead accounts; and
Manufacturing summary

25. It is similar to the Income Summary account.
QUESTION:
What is the Manufacturing Summary account?
The Manufacturing Summary account is the account to which all items on the statement of cost of goods manufactured are closed.
ANSWER:
What is the manufacturing summary account? The manufacturing summary account is the account to which all items on the statement of cost of goods manufactured are closed. It is very similar to the income summary account used in sole proprietorship accounting.
It is similar to the Income Summary account.

26. Adjusting Inventory Accounts
Raw Materials
Work in Process
Finished Goods
DR Manufacturing Summary
CR Raw Materials Inventory for beginning inventory amount
DR Manufacturing Summary
CR Work in Process Inventory for beginning inventory amount
5. DR Income Summary
CR Finished Goods Inventory for beginning inventory amount
DR Raw Materials Inventory
CR Manufacturing Summary for ending inventory amount
DR Work in Process Inventory
CR Manufacturing Summary for ending inventory amount
6. DR Finished Goods Inventory
CR Income Summary for ending inventory amount
In this slide, we examine the various adjusting journal entries made for the raw materials, work in process and finished goods inventory accounts for both beginning and ending inventory.

27. Adjusting Entries on the Worksheet
Inventory
Uncollectible accounts
Expired insurance
Supplies on hand
Depreciation
Accrued salaries
Payroll taxes on accrued payroll
Income tax payable
As with sole proprietorship accounting, we also make adjusting journal entries on the manufacturing worksheet for:
Uncollectible accounts
Expired insurance
Supplies on hand
Depreciation
Accrued salaries
Payroll taxes, and
Income taxes

28. Preparing Financial Statements From the Worksheet
Three sets of columns exist for the financial statements:
Cost of Goods Manufactured
Balance Sheet
Income Statement
When preparing the financial statement for a manufacturing business from a worksheet, we use three sets of columns. Those columns are the Cost of Goods Manufactured, the Balance Sheet and the Income Statement.

29. Objective 6
Record the end-of-period adjusting entries for a manufacturing business.
The sixth objective of this chapter is to record the end-of-period adjusting entries for a manufacturing business.

30. Adjusting Entries for a Manufacturing Business
2010
Dec. 31
Manufacturing Summary ,000.00
Raw Materials Inventory ,000.00
(Adjustment a)
Raw Materials Inventory ,500.00
Manufacturing Summary ,500.00
(Adjustment b)
Manufacturing Summary ,900.00
Work in Process Inventory ,900.00
(Adjustment c)
Work in Process Inventory ,500.00
Manufacturing Summary ,500.00
(Adjustment d)
Income Summary ,500.00
Finished Goods Inventory ,500.00
(Adjustment e)
Finished Goods Inventory ,000.00
Income Summary ,000.00
(Adjustment f) 31
In this slide we make the adjusting entries for raw materials, work in process, and finished goods inventory for a manufacturing business. Notice the inventory accounts are credited for the beginning inventory, and debited for the ending inventory.
Inventory accounts are credited for beginning inventory and debited for ending inventory.

31. Adjusting Entries for a Manufacturing Business
Record uncollectible accounts expense
2010
Dec. 31
Administrative Expense (Control) ,240.00
Allowance for Doubtful Accounts ,240.00
(Adjustment g)
Insurance—Factory ,900.00
Administrative Expense (Control)
(Adjustment h)
Supplies on Hand
Indirect Materials and Supplies
(Adjustment i)
Depreciation—Factory Building ,500.00
Depreciation—Factory Equipment ,000.00
(Adjustment j)
Administrative Expense (Control) ,000.00
Accumulated Depr.—Factory Building ,500.00 31
Prepaid Insurance ,000.00
Accumulated Depr.—Factory Equipment ,000.00
Accumulated Depr.—Office Equipment ,000.00
Record expired insurance amount
Record supplies on hand
In this slide, entries are shown to record uncollectible accounts expense, expired insurance, supplies expense and depreciation. These entries are similar to what are recorded in sole proprietorship accounting.
Record depreciation expense

32. Adjusting Entries for a Manufacturing Business
2010
Dec. 31
Direct Labor ,000.00
Salaries and Wages Payable ,500.00
(Adjustment k)
Payroll Taxes—Factory
Social Security Tax Payable
(Adjustment l)
Income Tax Expense ,025.00
Income Tax Payable ,025.00
(Adjustment m) 31
Indirect Labor
Medicare Tax Payable
Record accrued wages
Record payroll taxes on accrued wages
In this slide adjusting journal entries are made for accrued wages, payroll taxes on accrued wages, and estimated income tax expense.
Record estimated income tax

33. Record closing entries for a manufacturing business.
Objective 7
Record closing entries for a manufacturing business.
The seventh objective of this chapter is to record closing entries for a manufacturing business.

34. Closing Entries Close accounts to Manufacturing Summary.
Close revenue and expense accounts to Income Summary.
Close Manufacturing Summary to Income Summary.
Close Income Summary to Retained Earnings.
There are four closing entries need for a manufacturing business. First, accounts are closed to the manufacturing summary. Second, revenue and expense accounts are closed to income summary. Third, the manufacturing summary account is closed to income summary. Finally, the income summary is closed to retained earnings.

35. Record reversing entries for a manufacturing business.
Objective 8
Record reversing entries for a manufacturing business.
The eight objective of this chapter is to record reversing entries for a manufacturing business.

36. Reversing Entries
Reversing entries may be made for adjustments for accruals.
Reversing entries are also made for expenditures which were initially debited to expense accounts.
Reversing entries are optional.
Reversing entries for a manufacturing business are very similar to sole proprietorship accounting. First, reversing entries are optional. Second, reversing entries may be made of accruals and for expenditures which were initially debited to an expense account.

37. College Accounting, 12th Edition
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