1. CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 19-1 Elements of Manufacturing Cost

2. CENTURY 21 ACCOUNTING © Thomson/South-Western THREE TYPES OF BUSINESS ENTITIES 1.Service businesses – fulfill people’s wants and needs primarily through the efforts of people providing services, not inventory or merchandise Financial statements do not contain Inventory or Purchases accounts. Ex. Accounting & law firms, medical practices, and beauty/barber shops 2.Merchandising businesses – fulfill people’s wants and needs by providing tangible items called inventory or merchandise These businesses purchase inventory and, without changing the form of the good, resell the products to customers. Financial statements contain Inventory and Purchases accounts. Ex. department stores and grocery stores 2 LESSON 19-1

3. CENTURY 21 ACCOUNTING © Thomson/South-Western THREE TYPES OF BUSINESS ENTITIES 3.Manufacturing businesses – buy materials and use labor and machinery to change the materials into a finished product for sale Sell their finished product to merchandising businesses, who then sell to customers Financial statements contain several Inventory and Purchases accounts: Raw-Materials Inventory, Work-in-Process Inventory, and Finished-Goods Inventory. Examples: auto makers, furniture makers, clothing makers 3 LESSON 19-1

4. CENTURY 21 ACCOUNTING © Thomson/South-Western ELEMENTS OF MANUFACTURING COST A manufacturing business buys materials & uses labor & machinery to change the materials into a finished product A manufacturing company needs to know the costs required to produce finished products that it sells 4 LESSON 19-1

5. CENTURY 21 ACCOUNTING © Thomson/South-Western 5 LESSON 19-1 THREE COST ELEMENTS The manufacturing cost of any finished product includes three cost elements: Direct materials Direct labor Factory overhead page 561

6. CENTURY 21 ACCOUNTING © Thomson/South-Western DIRECT MATERIALS Materials that are of significant value in the cost of a finished product & that become an identifiable part of the product are called direct materials Include all items used in the manufacturing process that have sufficient value to justify charging the cost directly to the product Ex. - Motor used in production of copy machine Dollar amounts that are small & not considered important in decision making may be combined with other amounts in the accounting records & financial statements Ex. – Small gears or screws used in copy machine (cost of all gears will be combined) 6 LESSON 19-1

7. CENTURY 21 ACCOUNTING © Thomson/South-Western DIRECT LABOR Salaries of factory workers who make a product are called direct labor Include salaries only of persons working directly on a product Salaries of supervisors, maintenance workers, & others whose efforts do not apply directly to the manufacture of a product are NOT considered to be direct labor 7 LESSON 19-1

8. CENTURY 21 ACCOUNTING © Thomson/South-Western FACTORY OVERHEAD All expenses other than direct materials & direct labor that apply to making products are called factory overhead Indirect Materials Indirect Labor Other Indirect Costs Depreciation of buildings & equipment Repairs to factory buildings & equipment Insurance on building, equipment, & stock Taxes on property owned Heat, light, & power 8 LESSON 19-1

9. CENTURY 21 ACCOUNTING © Thomson/South-Western FACTORY OVERHEAD Indirect Materials - Materials used in the completion of a product that are of insignificant value to justify accounting for separately are called indirect materials Glue, solder, bolts, & rivets Cleaning supplies & lubricants for the machinery Indirect Labor - Salaries paid to factory workers who are not actually making products are called indirect labor Time clerks, supervisors, maintenance people, receiving clerks, & inspectors 9 LESSON 19-1

10. CENTURY 21 ACCOUNTING © Thomson/South-Western 10 LESSON 19-1 INVENTORIES FOR A MANUFACTURING BUSINESS A manufacturing business has three inventory accounts related to the products it manufactures Materials Work in process Finished goods All three accounts are classified as current assets page 561

11. CENTURY 21 ACCOUNTING © Thomson/South-Western 11 LESSON 19-1 INVENTORIES FOR A MANUFACTURING BUSINESS A Materials inventory account shows the costs of materials on hand that have not yet been used in making a product Includes all products meant for production that have not been used Products that are being manufactured but are not yet complete are called work in process Shows all costs that have been spent on products that are not yet complete page 561

12. CENTURY 21 ACCOUNTING © Thomson/South-Western 12 LESSON 19-1 INVENTORIES FOR A MANUFACTURING BUSINESS Manufactured products that are fully completed are called finished goods Shows the cost of completed products still on hand and unsold Perpetual vs. periodic inventory Perpetual inventory - a system which updates inventory on a continuous basis; an ongoing maintenance of stock Periodic inventory – a system which updates inventory on a periodic basis such as monthly, quarterly or annually page 561

13. CENTURY 21 ACCOUNTING © Thomson/South-Western 13 LESSON 19-1 COST RECORDS/LEDGERS Manufacturing businesses keep detailed cost records for 3 purposes To determine accurate costs for each product made To provide specific cost information to managers who must identify high cost areas so that corrective action can be taken To provide cost summary information for journal entries Three subsidiary ledgers provide the detailed cost information for the three manufacturing inventory accounts Materials ledger Cost ledger Finished goods ledger page 562

14. CENTURY 21 ACCOUNTING © Thomson/South-Western 14 LESSON 19-1 COST RECORDS A ledger containing all records of materials is called a materials ledger Perpetual inventory record provides detailed cost information about each type of material Materials Requisition - prepared to request materials, both direct & indirect, for a specific job Job time Record – prepared to record employee time for each job page 562

15. CENTURY 21 ACCOUNTING © Thomson/South-Western 15 LESSON 19-1 COST RECORDS A ledger containing all cost sheets for products in the process of being manufactured is called a cost sheet/ledger Cost Sheet - Record of all charges for direct materials, direct labor, & factory overhead for each job A ledger containing records of all finished goods on hand is called a finished goods ledger Similar to a materials ledger but for the finished good page 562

16. CENTURY 21 ACCOUNTING © Thomson/South-Western 16 LESSON 19-1 MANUFACTURING COST FLOWS page 562 1 2a 3 4 5 2b 2c Manufacturing costs are recorded on cost forms as costs occur

17. CENTURY 21 ACCOUNTING © Thomson/South-Western 17 LESSON 19-1 TERMS REVIEW direct materials direct labor factory overhead indirect materials indirect labor work in process finished goods materials ledger cost ledger finished goods ledger page 564