1. HBC 220 – Topic 9 Accounting for Manufacturing

2. Learning Objectives 1.Distinguish between costs and expenses, and understand how different costs are used for different purposes 2.Define and identify the 3 manufacturing cost elements — direct materials, direct labour and factory overhead

3. Learning Objectives (cont’d) 3.Explain the basic nature of absorption costing and a cost allocation based on cost behaviour Identify the essential differences in the financial statements for retail and manufacturing entities

4. Learning Objectives (cont’d) 5.Describe the additional accounts and accounting procedures required for a manufacturing entity. Understand how a manager can use the financial reports for a manufacturing entity for control and decision making

5. Learning Objectives 7.Explain the nature of cost accounting 8.Describe the flow of costs in a job order cost accounting system 9.Explain the accounting procedures used in job order cost systems

6. Learning Objectives (cont’d) 10.Understand how costing and cost accounting are applied in service businesses 11.Understand the basic principles of a just-in- time processing system

7. Lecture References Hoggett, Edwards & Medlin, 6th edition, Chapter 8, 9

8. Cost Classifications LO. 1 Cost –Economic sacrifice of resources made in exchange for a product or service Expense –Consumption or loss of resources

9. Manufacturing Cost Elements LO. 2 Direct materials cost Direct labour cost Factory overhead cost –Allocation of common costs –Assignment of service department costs –Assignment of factory overhead costs

10. Absorption Costing and Cost Behaviour LO. 3 Absorption costing –All direct manufacturing costs treated as product costs Direct costing –Recognises as product costs only manufacturing costs that vary in relation to production levels

11. Absorption Costing and Cost Behaviour (cont’d) Variable costs –Costs which vary directly, or nearly directly, with the volume of production Fixed costs –Costs which remain relatively constant regardless of the production level

12. Financial Statements – Retailing and Manufacturing LO. 4 Cost of Sales Retailing Beginning + Net purchases – Ending = Cost of Inventory of inventory Inventory goods sold Beginning + Net purchases – Ending = Cost of Inventory of inventory Inventory goods sold Manufacturing Beg. finished + Cost of goods – End. finished = Cost of goods inventory manufactured goods inventory goods sold Beg. finished + Cost of goods – End. finished = Cost of goods inventory manufactured goods inventory goods sold

13. A Retail Entity Income Statement Net Sales Revenue$1 000 000 Less: Cost of sales Beginning inventory$ 150 000 Net purchases710 000 Goods available 860 000 Ending inventory160 000 Cost of sales700 000 GROSS PROFIT300 000 EXPENSES Selling & distribution90 000 Administrative 120 000 Finance & other20 000230 000 NET PROFIT BEFORE TAX70 000 Income tax expense28 000 PROFIT $ 42 000 A Retail Entity Income Statement Net Sales Revenue$1 000 000 Less: Cost of sales Beginning inventory$ 150 000 Net purchases710 000 Goods available 860 000 Ending inventory160 000 Cost of sales700 000 GROSS PROFIT300 000 EXPENSES Selling & distribution90 000 Administrative 120 000 Finance & other20 000230 000 NET PROFIT BEFORE TAX70 000 Income tax expense28 000 PROFIT $ 42 000

14. A Manufacturing Entity Income Statement Net Sales Revenue$1 000 000 Less: Cost of sales Beginning finished goods inventory$150 000 Cost of goods manufactured710 000 Goods available 860 000 Ending finished goods inventory160 000 Cost of sales700 000 GROSS PROFIT300 000 EXPENSES Selling & distribution90 000 Administrative 120 000 Finance & other20 000230 000 NET PROFIT BEFORE TAX70 000 Income tax expense28 000 PROFIT $42 000 A Manufacturing Entity Income Statement Net Sales Revenue$1 000 000 Less: Cost of sales Beginning finished goods inventory$150 000 Cost of goods manufactured710 000 Goods available 860 000 Ending finished goods inventory160 000 Cost of sales700 000 GROSS PROFIT300 000 EXPENSES Selling & distribution90 000 Administrative 120 000 Finance & other20 000230 000 NET PROFIT BEFORE TAX70 000 Income tax expense28 000 PROFIT $42 000

15. A Manufacturing Entity Cost of Goods Manufactured Statement Direct materials: Beginning raw materials$48 000 Net purchases of raw materials141 000 189 000 Ending raw materials47 000 Direct materials used$142 000 Direct labour355 000 Factory overhead: Indirect labour56 000 Supplies5 000 Electricity42 000 Rent22 600 Insurance18 000 Rates & taxes28 400 Depreciation32 000 Miscellaneous4 000 Total factory overhead208 000 Manufacturing costs for the period705 000 Beginning work in progress35 000 Total work in progress740 000 Ending work in progress30 000 COST OF GOODS MANUFACTURED$710 000 A Manufacturing Entity Cost of Goods Manufactured Statement Direct materials: Beginning raw materials$48 000 Net purchases of raw materials141 000 189 000 Ending raw materials47 000 Direct materials used$142 000 Direct labour355 000 Factory overhead: Indirect labour56 000 Supplies5 000 Electricity42 000 Rent22 600 Insurance18 000 Rates & taxes28 400 Depreciation32 000 Miscellaneous4 000 Total factory overhead208 000 Manufacturing costs for the period705 000 Beginning work in progress35 000 Total work in progress740 000 Ending work in progress30 000 COST OF GOODS MANUFACTURED$710 000

16. Balance Sheet as at 30 June 2006 A Retail Entity CURRENT ASSETS Cash at bank$50 000 A/C’s receivable100 000 Inventories*237 000 Other50 000 TOTAL CURRENT ASSETS$437 000 * All finished goods A Retail Entity CURRENT ASSETS Cash at bank$50 000 A/C’s receivable100 000 Inventories*237 000 Other50 000 TOTAL CURRENT ASSETS$437 000 * All finished goods A Manufacturing Entity CURRENT ASSETS Cash at bank$50 000 A/C;s receivable100 000 Inventories: Finished goods160 000 Work in progress30 000 Raw materials47 000 Other50 000 TOTAL CURRENT ASSETS$437 000 A Manufacturing Entity CURRENT ASSETS Cash at bank$50 000 A/C;s receivable100 000 Inventories: Finished goods160 000 Work in progress30 000 Raw materials47 000 Other50 000 TOTAL CURRENT ASSETS$437 000

17. Accounting Systems Considerations LO. 5 Periodic inventory system –Additional accounts required Raw materials inventory Raw materials purchases WIP inventory Finished goods inventory Manufacturing plant and equipment

18. Accounting Systems Considerations (cont’d) Periodic inventory system –Additional accounts required Factory payroll Factory overhead Manufacturing summary – Worksheets Additional two columns required to record manufacturing data

19. Accounting Systems Considerations (cont’d) Closing entries –Account balance used to determine cost of goods manufactured closed to ‘Manufacturing Summary’ account –Manufacturing summary closed to Profit and Loss Summary account

20. Accounting Systems Considerations (cont’d) Valuation of inventories –All three types of inventory valued at the end of the accounting period –Raw materials and finished goods Inventory counted and costed –Work in process Judgement required, usually an educated guess.

21. Management Analysis LO. 6 Inventories Raw materials turnover ratio = Cost of raw materials used Average raw materials inventory Raw materials turnover ratio = Cost of raw materials used Average raw materials inventory Control of costs Cost of raw materials ratio = Direct materials cost Cost of goods manufactured Cost of raw materials ratio = Direct materials cost Cost of goods manufactured

22. Cost Accounting LO. 7 Cost information recorded in separate ledger accounts –Product costs used to value WIP and finished goods –Facilitates management decisions Non-manufacturing entities –Used to determine cost of services

23. Cost Accounting (cont’d) Two types of cost accounting systems Job order costing –Used when items produced can be separately identified Process costing –Products manufactured on a continuous basis Cost accounting in non-manufacturing entities

24. Job Order Costing LO. 8 Costs assigned to each job Requires well defined beginning and completion time Can be used for a single product Needs a perpetual inventory system

25. Job Order Costing (cont’d) Cost flows in a job order system –Inventory controlled via general ledger control accounts and subsidiary ledgers –Productions costs: Recorded Assigned to production (WIP) Assigned to finished goods when job completed

27. Job Order Costing (cont’d) Job cost order Control account –Itemised listing of production costs: materials labour overhead –Serves as a subsidiary ledger –Control number assigned to each job started

29. Job Order Costing Procedures LO. 9 Accounting for materials –materials requisition DateRaw Material Inventory42 500 GST Outlays4 250 Accounts Payable46 750 to record raw materials purchased DateRaw Material Inventory42 500 GST Outlays4 250 Accounts Payable46 750 to record raw materials purchased DateWIP Inventory36 550 Factory Overhead1 680 Raw Material Inventory 38 230 to record raw materials requisitioned DateWIP Inventory36 550 Factory Overhead1 680 Raw Material Inventory 38 230 to record raw materials requisitioned

30. Job Order Costing Procedures (cont’d) Accounting for labour DateGeneral Wages & Salaries51 800 Factory Wages & Salaries42 200 Deductions (various)30 000 Wages Payable70 000 to record payroll for January DateGeneral Wages & Salaries51 800 Factory Wages & Salaries42 200 Deductions (various)30 000 Wages Payable70 000 to record payroll for January DateWIP Inventory42 000 Factory Overhead6 200 Factory Wages & Salaries48 200 to assign direct and indirect labour DateWIP Inventory42 000 Factory Overhead6 200 Factory Wages & Salaries48 200 to assign direct and indirect labour

31. Job Order Costing Procedures (cont’d) Accounting for factory overhead –predetermined overhead rate Predetermined = Estimated annual factory overhead cost overhead rate Estimated annual level of production activity Predetermined = Estimated annual factory overhead cost overhead rate Estimated annual level of production activity DateWIP InventoryXX Factory Overhead AppliedXX to record factory overhead applied DateWIP InventoryXX Factory Overhead AppliedXX to record factory overhead applied

32. Job Order Costing Procedures (cont’d) Over/under-applied overhead DateFactory Overhead AppliedXX Factory OverheadXX to transfer overhead applied to overhead a/c DateFactory Overhead AppliedXX Factory OverheadXX to transfer overhead applied to overhead a/c DateFactory OverheadXX Factory Overhead Under/Over-appliedXX to transfer over-applied overhead DateFactory OverheadXX Factory Overhead Under/Over-appliedXX to transfer over-applied overhead DateCost of Goods SoldXX Factory Overhead Under/Over-appliedXX to transfer under-applied overhead to COGS DateCost of Goods SoldXX Factory Overhead Under/Over-appliedXX to transfer under-applied overhead to COGS

33. Job Order Costing Procedures (cont’d) Limitation of direct labour as a cost driver Accounting for the completion of the job DateFinished Goods InventoryXX WIP InventoryXX to record the completion of job XYZ and transfer to finished goods DateFinished Goods InventoryXX WIP InventoryXX to record the completion of job XYZ and transfer to finished goods

34. Job Order Costing Procedures (cont’d) Accounting for the sale of a job DateAccounts ReceivableXX SalesXX GST CollectionsX to record the sale of job XYZ DateAccounts ReceivableXX SalesXX GST CollectionsX to record the sale of job XYZ DateCost of Goods SoldXX Finished Goods InventoryXX to record the cost of sale of job XYZ DateCost of Goods SoldXX Finished Goods InventoryXX to record the cost of sale of job XYZ

35. Cost Accounting in Service Entities LO. 10 Cost information needed to prepare budgets, determine fees and analyse profitability Developing cost application rules –Direct labour costs –General overheads Assigning costs to jobs and setting a price

36. Just-in-time Processing LO. 11 Eliminates holding excess inventory Materials arrive just as needed and go straight into production Finished goods shipped straight to customers on completion Highly automated Little margin for error