CHAPTER 8

Accounting
for
manufacturing

CONTENTS
8.1 Cost of goods manufactured statement
8.2 Cost of goods sold
8.3 Statement of nancial performance from closing
entries
8.4 Missing data in manufacturing entities
8.5 Manufacturing worksheet
8.1 CHAPTER 8: ACCOUNTING FOR MANUFACTURING

WILEY

Serini Ltds accountant extracted the following data from the companys accounting
records for the year ended 30 June 2002:
Factory overhead is applied at the rate of 110% of direct labour.

Required:

A. Prepare a cost of goods manufactured statement for the year ended 30 June 2002.
B. What was the companys cost of goods sold for the year ended 30 June 2002?
C. What was the companys gross prot for the year ended 30 June 2002?

A.
SERIFINI LTD
Cost of Goods Manufactured Statement
for the year ended 30 June 2002

Direct materials:
Raw materials inventory, 1 July 2001 $64 000
Purchases raw materials 240000
304 000
Less raw materials inventory 30 June 2002 56000
Raw materials issued to production $248 000
Direct labour 142000
Prime costs 390 000
Factory overhead (110% direct labour) 156200
Total manufacturing costs for the period 546 200
Add work in process, 1 July 2001 50 000
596 200
Less work in process, 30 June 2002 48000
Cost of goods manufactured 548 200
Add nished goods, 1 July 2001 96000
644 200
Less nished goods, 30 June 2002 104 000

B.

Cost of goods manufactured and sold $540200

C.

SEREFINI LTD
Statement of Financial Performance (extract)
for the year ended 30 June 2002

Sales $729 500
Cost of goods sold 540200
Gross prot $189300

Sales
Direct labour
Purchases of raw materials
Selling expenses
Administrative expenses
Inventories at 1 July 2001:
Raw materials
Work in process
Finished goods
Inventories at 30 June 2002:
Raw materials
Work in process
Finished goods
$729 500
142 000
240 000
50 000
60 000
64 000
50 000
96 000
56 000
48 000
104 000
ADDITIONAL PROBLEMS
Problem 8.1 Cost of goods manufactured statement
Solution
8.2 CHAPTER 8: ACCOUNTING FOR MANUFACTURING

WILEY

The accountant for Waverley Pty Ltd has compiled information concerning the
companys manufacturing costs for the year ended 30 June 2003. The beginning inven-
tories included raw materials $86 000, work in process $61 200, and nished goods
$104 400. The company incurred direct labour costs of $551 440, and its total cost of
goods manufactured for the year amounted to $2 028 800. Factory overhead costs are
assigned to work in process and nished goods, using the relationship between direct
labour costs and the factory overhead costs incurred. The ending inventories comprised
the following costs:

Required:

A. Determine the amounts for A to D.
B. Prepare a schedule of cost of goods sold for the year ending 30 June 2003.

A.

1. Factory overhead application rate

=

150%

B.

WAVERLEY PTY LTD
Schedule of Cost of Goods Sold
for the year ended 30 June 2003

Beginning nished goods inventory $104 400
Cost of goods manufactured 2028 800
Goods available 2 133 200
Ending nished goods inventory 111 800
Cost of goods sold $2021 400

Raw
materials
Work in
process
Finished
goods
Raw materials
Direct labour
Factory overhead
$80 400
A
B
$27 600
27 920
C
$ 34 000
31 120
46 680
Total ending inventory $80 400 D $111 800

Raw materials Work in process Finished goods

Raw materials
Direct labour
Factory overhead
$80,400
0
________
$27,600
27,920
41,880
$ 34,000
31,120
46,680
Total ending inventory $80,400 $97,400 $111,800
Problem 8.2 Cost of goods sold
Solution
46 680
31 120
----------------
8.3 CHAPTER 8: ACCOUNTING FOR MANUFACTURING

WILEY

Close-Out Manufacturing Co. Ltd, which uses a periodic inventory system, made the
following closing entries on 31 December 2003:

Required:

A. Prepare a cost of goods manufactured statement for year ended 31 December 2003.
B. Prepare a statement of nancial performance for year ended 31 December 2003.

Dec. 31 Manufacturing Summary
Raw Materials Inventory
Work in Process Inventory
Raw Materials Purchases
Freight Inwards
Direct Labour
Factory Overhead
747 100
15 200
43 100
116 400
3 600
316 000
252 800
31 Raw Materials Inventory
Work in Process Inventory
Manufacturing Summary
17 200
42 800
60 000
31 Prot and Loss Summary
Finished Goods Inventory
Selling Expenses
Administrative Expenses
Manufacturing Summary
904 550
38 650
86 500
92 300
687 100
31 Finished Goods Inventory
Sales
Prot and Loss Summary
38 550
986 000
1 024 550
31 Prot and Loss Summary
Retained Prots
120 000
120 000
Problem 8.3 Statement of nancial performance from closing
entries
8.4 CHAPTER 8: ACCOUNTING FOR MANUFACTURING

WILEY

A.

CLOSE-OUT MANUFACTURING CO LTD
Cost of Goods Manufactured Statement
for the year ended 31 December 2003

Direct materials:
Beginning raw materials $15 200
Purchases 116 400
Freight inwards 3600
135 200
Ending raw materials 17200
Direct materials used $118 000
Direct labour 316 000
Factory overhead 252800
Total manufacturing costs for the period 686 800
Beginning work in process 43100
Total work in process 729 900
Ending work in process 42800
Cost of goods manufactured $687100

B.

CLOSE-OUT MANUFACTURING CO LTD
Statement of Financial Performance
for the year ended 31 December 2003

Sales revenue $986 000
Cost of goods sold:
Beginning nished goods inventory $38 650
Cost of goods manufactured 687100
Goods available 725 750
Ending nished goods inventory 38 550
Cost of goods sold 687200
Gross prot 298 800
Operating expenses:
Selling expenses 86 500
Administrative expenses 92300 178 800
Operating prot before tax $120000
Solution
8.5 CHAPTER 8: ACCOUNTING FOR MANUFACTURING

WILEY

Two cases of data concerning production costs, other expenses and sales are presented
below:

Required:

A. Calculate the missing amounts for the letters (a) to (l).
B. Using the data in Case A, prepare a cost of goods manufactured statement.
C. Using the data in Case A, prepare a statement of nancial performance.
D. Using the data in Case B, and additional data consisting of cash at bank $40 000,
accounts receivable $140 000, raw materials inventory $6500 and prepaid expenses
$600, prepare the current assets section of the statement of nancial position.

Case A Case B
Beginning work in process
Ending work in process
Direct materials cost
Direct labour
Factory overhead
Total manufacturing costs
Cost of goods manufactured
Sales
Beginning nished goods inventory
Ending nished goods inventory
Cost of goods available for sale
Cost of goods sold
Gross prot
Operating expenses
Net prot
12 000
(b)
75 000
65 000
55 000
(a)
180 000
270 000
(c)
22 000
219 000
(d)
(e)
38 500
(f)
(h)
33 000
(g)
90 000
45 000
230 000
224 000
(i)
38 500
27 500
(j)
(k)
78 000
(l)
24 000
Problem 8.4 Missing data in manufacturing entities
8.6 CHAPTER 8: ACCOUNTING FOR MANUFACTURING

WILEY

A.

(a) $195 000
(b) 27 000
(c) 39 000
(d) 197 000
(e) 73 000
(f) 34 500
(g) 95 000
(h) 27 000
(i) 313 000
(j) 262 500
(k) 235 000
(l) 54 000

B.

Cost of Goods Manufactured Statement

Case A Case B
Direct materials cost 75000 95000
Direct labour 65000 90000
Factory overhead 55000 45000
Manufacturing costs for period (a) 195000 230000
Beginning work in process 12000 (h) 27000
Total work in process (b) (27000) (33 000)
Cost of goods manufactured $180000 $224000

C.

Statement of Financial Performance

Case A Case B

Sales revenue 270 000 (i) 313 000
Cost of goods sold
Beg inventory (c) 39 000 38 500
Cost of goods 180000 224 000
manufactured
Cost of goods 219 000 262 500
available for sale
End inventory 22000 (d) 197 000 (j) 27500 (k) 235 000
Gross Prot (e) 73 000 78 000
Operating expenses 38500 (i) 54 000
Net prot (f) $34500 $24 000

D.

Statement of Financial Position (Case B)

Current assets:
Cash at bank $40 000
Accounts receivable 140 000
Raw materials inventory 6 500
Work in process 33 000
Finished goods inventory 27 500
Prepaid expenses 600
Total current assets $247600
Solution
8.7 CHAPTER 8: ACCOUNTING FOR MANUFACTURING

WILEY

The listing of the ledger accounts (unadjusted) of Woodworks Manufacturing Co. Ltd on
30 June 2002 is presented below. All ledger balances are normal balances.
Additional information relating to the company is as follows:
1. The inventories as of 30 June 2002 were:
Raw materials $ 3 875
Work in process 10 875
Finished goods 31250
2. On 1 January 2002 the company paid $67 500 for the next 12 months factory rent.
Prepaid rent was debited at the time of the transaction.
3. The Machinery and Equipment account consists of $183 750 of factory machinery
and $61 250 of ofce equipment. All machinery and equipment is depreciated using
a 7-year life, no residual value, and the straight-line method.
4. Expenses incurred as of year-end but not yet recorded are: direct labour, $5000;
indirect labour, $1500; administrative expenses, $875.
5. The light and power, rent and insurance costs are related to factory operations.
6. Allow for company income tax expense at 40% of net prot before tax.

(continued)

WOODWORKS MANUFACTURING CO. LTD
Unadjusted List of Accounts

as at 30 June 2002
Balance
Cash at bank
Accounts receivable
Allowance for doubtful debts
Finished goods inventory, 1/7/01
Work in process, 1/7/01
Raw materials inventory, 1/7/01
Prepaid rent
Machinery and equipment
Accumulated depreciation
Accounts payable
Bills payable
Share capital
Retained prots
Sales
Direct labour
Raw material purchases
Indirect labour
Factory supplies
Light and power
Insurance
Selling expenses
Administrative expenses
Interest expense
Factory rent
$ 18 375
41 250
3 375
28 750
9 375
4 625
67 500
245 000
43 750
22 500
93 750
50 000
46 250
1 075 000
270 000
256 250
88 750
22 500
70 000
20 375
40 000
83 750
28 750
39 375
$2 669 250
Problem 8.5 Manufacturing worksheet
8.8 CHAPTER 8: ACCOUNTING FOR MANUFACTURING

WILEY

Required:

A. Prepare a worksheet including a pair of columns for unadjusted trial balance, adjust-
ments, manufacturing, statement of nancial performance, and statement of nan-
cial position.
B. Prepare a cost of goods manufactured statement.
C. Prepare the closing entries.
D. Calculate the relationship between factory overhead costs and direct labour costs.
Using that relationship, calculate the labour and overhead included in the ending
inventories if work in process ending inventory contains $3000 of raw materials and
$5000 of raw materials is included in the nished goods inventory.
E. Calculate the raw materials turnover ratio and manufacturing costs ratios. What do
these ratios reveal to management? What are the limitations of these ratios for
management control purposes?
8.9 CHAPTER 8: ACCOUNTING FOR MANUFACTURING

WILEY

A.
Solution
W
O
O
D
W
O
R
K
S

M
A
N
U
F
A
C
T
U
R
I
N
G

C
O

L
T
D
W
o
r
k
s
h
e
e
t

f
o
r

t
h
e

y
e
a
r

e
n
d
e
d

3
0

J
u
n
e

2
0
0
2
U
n
a
d
j
u
s
t
e
d

t
r
i
a
l

b
a
l
a
n
c
e
A
d
j
u
s
t
m
e
n
t
s
M
a
n
u
f
a
c
t
u
r
i
n
g
S
t
a
t
e
m
e
n
t

o
f

F
i
n
a
n
c
i
a
l

P
e
r
f
o
r
m
a
n
c
e
S
t
a
t
e
m
e
n
t

o
f

F
i
n
a
n
c
i
a
l

P
o
s
i
t
i
o
n
D
e
b
i
t
C
r
e
d
i
t
D
e
b
i
t
C
r
e
d
i
t
D
e
b
i
t
C
r
e
d
i
t
D
e
b
i
t
C
r
e
d
i
t
D
e
b
i
t
C
r
e
d
i
t
C
a
s
h

a
t

b
a
n
k
1
8
3
7
5
1
8
3
7
5
A
c
c
o
u
n
t
s

r
e
c
e
i
v
a
b
l
e
4
1
2
5
0
4
1
2
5
0
A
l
l
o
w
a
n
c
e

f
o
r

d
o
u
b
t
f
u
l

d
e
b
t
s
3
3
7
5
3
3
7
5
I
n
v
e
n
t
o
r
i
e
s
:



F
i
n
i
s
h
e
d

g
o
o
d
s
2
8
7
5
0
2
8
7
5
0
3
1
2
5
0
3
1
2
5
0



W
o
r
k

i
n

p
r
o
c
e
s
s
9
3
7
5
9
3
7
5
1
0
8
7
5
1
0
8
7
5



R
a
w

m
a
t
e
r
i
a
l
s
4
6
2
5
4
6
2
5
3
8
7
5
3
8
7
5
P
r
e
p
a
i
d

r
e
n
t
6
7
5
0
0
(
1
)
3
3
7
5
0
3
3
7
5
0
M
a
c
h
i
n
e
r
y

a
n
d

e
q
u
i
p
m
e
n
t
2
4
5
0
0
0
2
4
5
0
0
0
A
c
c
.

D
e
p
.
-

M
a
c
h
i
n
e
r
y

a
n
d

e
q
u
i
p
.
4
3
7
5
0
(
2
)
3
5
0
0
0
7
8
7
5
0
A
c
c
o
u
n
t
s

p
a
y
a
b
l
e
2
2
5
0
0
2
2
5
0
0
B
i
l
l
s

p
a
y
a
b
l
e
9
3
7
5
0
9
3
7
5
0
S
h
a
r
e

c
a
p
i
t
a
l
5
0
0
0
0
5
0
0
0
0
R
e
t
a
i
n
e
d

p
r
o

t
s
4
6
2
5
0
4
6
2
5
0
S
a
l
e
s
1
0
7
5
0
0
0
1
0
7
5
0
0
0
D
i
r
e
c
t

l
a
b
o
u
r
2
7
0
0
0
0
(
3
)
5
0
0
0
2
7
5
0
0
0
R
a
w

m
a
t
e
r
i
a
l

p
u
r
c
h
a
s
e
s
2
5
6
2
5
0
2
5
6
2
5
0
I
n
d
i
r
e
c
t

l
a
b
o
u
r
8
8
7
5
0
(
3
)
1
5
0
0
9
0
2
5
0
F
a
c
t
o
r
y

s
u
p
p
l
i
e
s
2
2
5
0
0
2
2
5
0
0
L
i
g
h
t

a
n
d

p
o
w
e
r
7
0
0
0
0
7
0
0
0
0
I
n
s
u
r
a
n
c
e
2
0
3
7
5
2
0
3
7
5
F
a
c
t
o
r
y

r
e
n
t
3
9
3
7
5
(
1
)
3
3
7
5
0
7
3
1
2
5
S
e
l
l
i
n
g

e
x
p
e
n
s
e
s
4
0
0
0
0
4
0
0
0
0
A
d
m
i
n
i
s
t
r
a
t
i
v
e

e
x
p
e
n
s
e
s
8
3
7
5
0
(
4
)
8
7
5
8
4
6
2
5
I
n
t
e
r
e
s
t

e
x
p
e
n
s
e
2
8
7
5
0
2
8
7
5
0
1
3
3
4
6
2
5
1
3
3
4
6
2
5
D
e
p
r
e
c
i
a
t
i
o
n

e
x
p
e
n
s
e

-

f
a
c
t
o
r
y
(
2
)
2
6
2
5
0
2
6
2
5
0
D
e
p
r
e
c
i
a
t
i
o
n

e
x
p
e
n
s
e

-

o
f

c
e
(
2
)
8
7
5
0
8
7
5
0
W
a
g
e
s

p
a
y
a
b
l
e
6
5
0
0
6
5
0
0
A
d
m
i
n
.

e
x
p
e
n
s
e
s

p
a
y
a
b
l
e
8
7
5
8
7
5
7
6
1
2
5
7
6
1
2
5
C
o
s
t

o
f

g
o
o
d
s

m
a
n
u
f
a
c
t
u
r
e
d
8
3
3
0
0
0
8
3
3
0
0
0
8
4
7
7
5
0
8
4
7
7
5
0
I
n
c
o
m
e

t
a
x

e
x
p
e
n
s
e
4
0
%
3
2
9
5
0
3
2
9
5
0
N
e
t

p
r
o

t

a
f
t
e
r

t
a
x
4
9
4
2
5
4
9
4
2
5
1
1
0
6
2
5
0
1
1
0
6
2
5
0
3
8
4
3
7
5
3
8
4
3
7
5
8.10 CHAPTER 8: ACCOUNTING FOR MANUFACTURING

WILEY

B.

WOODWORKS MANUFACTURING CO LTD
Cost of Goods Manufactured Statement
for the year ended 30 June 2002

Direct materials:
Beginning raw materials $4 625
Purchases 256250
260 875
Ending raw materials 3 875
Direct materials used $257 000
Direct labour 275 000
Factory overhead:
Indirect labour 90 250
Factory supplies 22 500
Light and power 70 000
Insurance 20 375
Factory rent 73 125
Depreciation 26250 302 500
Total manufacturing costs for the period 834 500
Beginning work in process 9375
Total work in process 843 875
Ending work in process 10 875
Cost of goods manufactured $833000

C. Closing Entries

June 2002
30 Manufacturing summary 847 750
Work in process inventory 9 375
Raw materials inventory 4 625
Direct labour 275 000
Raw materials purchases 256 250
Indirect labour 90 250
Factory supplies 22 500
Light and power 70 000
Insurance 20 375
Factory rent 73 125
Depreciation expense factory 26 250

To close manufacturing account with debit balances.

30 Work in process 10 875
Raw materials 3 875
Manufacturing summary 14 750

To establish ending inventories of raw materials and work in process.

30 Prot and loss summary 1 056 825
Finished goods inventory 28 750
Selling expenses 40 000
Administrative expenses 84 625
Interest expense 28 750
Depreciation expense - ofce 8 750
Manufacturing summary 833 000
Income tax expense 32 950

To close statement of nancial performance accounts with debit balances.

30 Finished goods inventory 31 250
Sales 1 075 000
Prot and loss summary 1 106 250

To establish the ending nished goods inventory and close the sales account.

30 Prot and loss summary 49 425
Retained prots 49 425

To close net prot after tax to retained prots.
8.11 CHAPTER 8: ACCOUNTING FOR MANUFACTURING

WILEY

D.
Factory overhead and direct labour cost relationships



=

1.10 or 110%
Labour and overhead included in ending inventories.
DL

+

1.10 DL

+

3 000

=

$10 875
2.10 DL

=

$7 875
Direct labour

=

$3 750
Factory overhead

=

$3 750 * 1.10

=

$4 125
Finished goods:
DL

+

1.10 DL

+

5 000

=

$31 250
2.10 DL

=

$26 250
Direct labour

=

$12 500
Factory overhead

=

$12 500 * 1.10

=

$13 750

E.
Raw materials turnover ratio

Cost of raw materials ratio

=



=



=

60.47 times

Manufacturing costs ratios:



=

0.31 r 31%
Direct labour:


=

0.33 or 33%
Factory overhead costs:


=

0.36 or 36%
The raw materials turnover ratio indicates how long inventory items of raw materials
are held on average which is a measure of the entitys exposure to inventory losses due
to shrinkage, deterioration, obsolescence, changes in fashion and price uctuations. The
manufacturing cost ratios can provide some cost control information.
The limitations of these ratios are that, under a periodic inventory system, only aggre-
gate nancial information is available from the nancial statements, and management
must wait until a physical stocktake is performed to give ending inventory values.
Information regarding unit costs of individual products is not available. To be really
useful trends and industry comparisons need to be monitored.
Factory overhead costs
Direct labour cost
-------------------------------------------------------
302 500
275 000
------------------- =
257 000
4 625 3 875 + ( )/2
------------------------------------------
257 000
4 250
------------------- =
257 000
834 500
-------------------
257 000
834 500
-------------------
302 500
834 500
-------------------

Cost of raw materials used
Average raw materials inventory
------------------------------------------------------------------------------