Manufacturing Accounting

Chapter 26
Manufacturing
Accounting
Comparison of Merchandising
Firm to Manufacturing Firm
Merchandising Firm Manufacturing Firm

Buys goods in a Buys raw materials
finished condition
Transforms them into
Later sells them at a finished goods
higher price in the
same condition Later sells the
finished goods
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Comparison of Merchandising
Firm to Manufacturing Firm (contd)
Now, lets look at a comparison of the income

statements for a merchandising firm and a
manufacturing firm.

Statement of Cost
of Goods Manufactured
Includes the beginning work-in-process
inventory, plus the cost of raw materials used,
plus direct labor, plus factory overhead, less the
ending work-in-process inventory
Prepared before the income statement
Cost of Goods Manufactured
Beginning Work-in-Process Inventory
+ Cost of Raw Materials Used
+ Direct Labor
+ Factory Overhead
- Ending Work-in-Process Inventory
= Cost of Goods Manufactured

Statement of Cost of Goods
Manufactured: An Example
Park Manufacturing Company, Inc.

Elements of Manufacturing Costs
Raw materials
Direct labor
Factory overhead
Indirect labor
Indirect materials
Royalty-Free/Digital Vision

Raw Materials
The materials that enter directly into and become

a part of the finished product
Also called direct materials
Examples:
The plastic used to make a television frame
The wood or paint used to make cabinets or
boomerangs

Direct Labor
Wages paid to factory

employees who work
with machines or
hand toolsdirectly
on raw materials to
convert them into
finished products
Royalty-Free/Digital Vision

Factory Overhead
All manufacturing costs that cannot be traced

directly to products being manufactured
Examples:
Heat, light, and power
Repairs and maintenance
Depreciation expense, factory equipment
Factory insurance expired
Workers compensation insurance
Payroll taxes on factory employees
Indirect labor
Indirect materials
Indirect Labor
The cost of work performed by workers who

keep the plant in operation rather than by
workers who are directly occupied with
production
Examples of such workers:

Operations personnel
Factory maintenance workers
Timekeepers
Considered part of factory overhead

Indirect Materials
Factory supplies, such as oil, grease, and

cleaning fluids, used to keep the plant in
operation
Considered part of factory overhead
Balance of Factory Supplies Used reveals the

cost of these materials

Manufacturing Summary Account
Used to make adjustments to Raw Materials

Inventory and Work-in-Process Inventory
accounts
For beginning inventory amounts:

Debit Manufacturing Summary.
Credit the Inventory account.
For counted and valued inventory amounts:

Debit the Inventory account.
Credit Manufacturing Summary.

A Work Sheet for a
Manufacturing Enterprise
Contains an extra pair of columns entitled
Statement of Cost of Goods Manufactured
Manufacturing costs are recorded in the Trial

Balance Debit column

Adjustments for Raw Materials
Use the Manufacturing Summary account.
Debits in the Manufacturing Summary account:
Represent beginning balances of Raw Materials
Are listed in the Statement of Cost of Goods
Manufactured Debit column
Credits in the Manufacturing Summary account:

Represent ending balances of Raw Materials
Are listed in the Statement of Cost of Goods
Manufactured Credit column

Cost of Goods Manufactured
The difference between the Statement of Cost

of Goods Manufactured Debit and Credit columns
is the amount of the cost of goods manufactured.
Recorded as a credit to balance off the columns
Also recorded in the Income Statement Debit column

Adjusting Raw Materials and Work-in-
Process Inventories: An Example
Data
a.- b. Raw Materials Inventory at Dec. 31, $100,000
c.- d. Work-in-Process Inventory at Dec. 31,
$130,000
e.- f. Finished Goods Inventory at Dec. 31,
$250,000
Each account balance is transferred to

Manufacturing Summary.

Adjusting Raw Materials and Work-in-
Process Inventories: An Example (contd)
T Accounts

Steps in the Closing Process
1. Close the costs that appear in the statement

of cost of goods manufactured into the Manufacturing
Summary account.
2. Close the Manufacturing Summary account into the

Income Summary account (by the amount of cost of
goods manufactured).
3. Close the revenue account into the Income Summary

account.
Lets look at a T account example for step 2.

T Account for Step 2

Steps in the Closing Process (contd)
4. Close expense accounts into the Income

Summary account.
5. Close Income Tax Expense into the Income

Summary account.
6. Close the Income Summary account into the

Retained Earnings account (by the amount of
net income).

Determining the Value of
Ending Raw Materials Inventory
Raw materials are in their original form; nothing
has been done to them.
Determine the quantities on hand and the unit costs.
Calculate the value of ending inventory by:
FIFO
LIFO
Weighted-average method

Inventory Systems for
Raw Materials Inventory
Perpetual inventory system
Debit Raw Materials Inventory when materials are
purchased.
Credit Raw Materials Inventory when materials are
put into production.
The perpetual inventory system provides a
continuous running balance of the inventory.
Periodic inventory system

Verify the balance of the account by counting the
goods on hand.
Adjust by debiting or crediting Inventory and Cost of
Goods Sold.
Determining the Ending Inventory
Value of Work-in-Process Inventory
Record the cost and amount of raw materials
placed in production.
Record the cost of direct labor expended on the

ending work-in-process inventory.
Estimate the cost of factory overhead.

Use a percentage of the direct labor cost.

Job-Order Cost Accounting
Product costing system used by companies

making products in batches
Raw materials, direct labor, and factory overhead

costs assigned to specific job orders
Each batch of units given a job-order number
Examples:
Custom furniture builder
Custom print shop

Journal Entries for Job-Order Cost
Accounting System: An Example
a) Purchased raw materials, $100,000, paying
cash.

Accounting System: An Example (contd)
b) Placed $80,000 of raw materials into production.
c) Issued checks for direct labor, $40,000.

Accounting System: An Example (contd)
d) Applied factory overhead at the rate of 70
percent of direct labor.
e) Transferred completed production to Finished

Goods Inventory.

Control Accounts
and Subsidiary Ledgers
The costs of production (raw materials, direct
labor, and factory overhead) are debited to the
account for that job-order number in the work-in-
process subsidiary ledger.
When the job is completed, the Finished Goods

Inventory account is debited and the Work-in-
Process Inventory account is credited.

T Accounts for Journal Entries

Process Cost Accounting System
A product costing system used by companies

that maintain a continuous production flow
The output consists of homogeneous units.
The production flows from one department to another
department.
Manufacturing costs assigned to departments

that complete successive stages of production
Examples:
Cement manufacturer
Snack food manufacturer
Journal Entries for
a Process Cost Accounting System
To record the costs used by the department:
Debit that departments Work-in-Process Inventory
account.
To record the passing on of production from one
department to another:
Debit the second departments Work-in-Process Inventory
account.
Credit the first departments Work-in-Process Inventory
account.
Upon completion of the last stage of production:
Debit Finished Goods Inventory.
Credit the last departments Work-in-Process Inventory
account.

Demonstration Problem
Create the statement of cost of goods manufactured

for Simpson Manufacturing Company, Inc.
Journalize the adjusting entries for the raw materials

inventory and the work-in-process inventory.
Journalize the closing entries for manufacturing

costs.
Close Manufacturing Summary to Income Summary.

Simpson Manufacturing Company, Inc.
For Year Ended December 31, 20
Work-in-Process Inventory, January 1, 20 $ 140,000.00
Raw Materials:
Raw Materials Inventory, January 1, 20 $ 90,000.00
Raw Materials Purchases (net) 230,000.00
Cost of Raw Materials Available for Use $ 320,000.00
Less Raw Materials Inventory, December 31, 20 100,000.00
Cost of Raw Materials Used $ 220,000.00

Raw Materials:
Direct Labor 565,000.00

Raw Materials:
Factory Overhead:
Indirect Labor $ 120,000.00
Supervisory Sales 110,000.00
Heat, Light, and Power 42,000.00
Depreciation Expense, Factory Equipment 32,000.00
Depreciation Expense, Factory Building 25,000.00
Repairs and Maintenance 24,000.00
Factory Insurance Expired 22,000.00
Factory Supplies Used 14,000.00
Miscellaneous Factory Costs 16,000.00
Total Factory Overhead 405,000.00

Raw Materials:
Factory Overhead:
Total Manufacturing Costs 1,190,000.00

Raw Materials:
Factory Overhead:
Total Cost of Work-in-Process During Period $ 1,330,000.00

Raw Materials:
Factory Overhead:
Less Work-in-Process Inventory, December 31, 20 130,000.00
Cost of Goods Manufactured $ 1,200,000.00

Raw Materials:
Factory Overhead:

Adjusting Entries for Raw Materials Inventory
Raw Materials:
Factory Overhead:

Adjusting Entries for
Raw Materials Inventory (contd)
General Journal Page 11

Post.
Date Description Ref. Debit Credit
20 Adjusting Entries
Dec. 31 Manufacturing Summary 90,000.00
Raw Materials Inventory 90,000.00

Adjusting Entries for Raw Materials Inventory (contd)
Raw Materials:
Factory Overhead:

Raw Materials Inventory (contd)

Post.
31 Raw Materials Inventory 100,000.00

Manufacturing Summary 100,000.00

Adjusting Entries for Work-in-Process Inventory
Raw Materials:
Factory Overhead:

Work-in-Process Inventory (contd)
Post.

31 Manufacturing Summary 140,000.00

Work-in-Process Inventory 140,000.00

Adjusting Entries for Work-in-Process Inventory (contd)
Raw Materials:
Factory Overhead:

Work-in-Process Inventory (contd)
Post.

31 Manufacturing Summary 140,000.00

Work-in-Process Inventory 140,000.00
31 Work-in-Process Inventory 130,000.00


Entry for Closing Manufacturing Costs
Raw Materials:
Factory Overhead:

Entry for Closing Manufacturing Costs (contd)
Post.
20
Dec. 31 Manufacturing Summary 1,200,000.00
Raw Materials Purchases 230,000.00
Indirect Labor 120,000.00

Closing Entry for Manufacturing Summary
Post.
20
Dec. 31 Manufacturing Summary 1,200,000.00
Raw Materials Purchases 230,000.00
Indirect Labor 120,000.00
31 Income Summary 1,200,000.00

Manufacturing Summary 1,200,000.00

Manufacturing Accounting

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Chapter 26

Merchandising Firm Manufacturing Firm

Copyright Houghton Mifflin Company. All rights reserved. 26 | 5

Now, lets look at a comparison of the income

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The materials that enter directly into and become

Also called direct materials

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Wages paid to factory

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All manufacturing costs that cannot be traced

The cost of work performed by workers who

Examples of such workers:

Considered part of factory overhead

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Factory supplies, such as oil, grease, and

Considered part of factory overhead

Balance of Factory Supplies Used reveals the

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Used to make adjustments to Raw Materials

For beginning inventory amounts:

For counted and valued inventory amounts:

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Manufacturing costs are recorded in the Trial

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Credits in the Manufacturing Summary account:

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The difference between the Statement of Cost

Recorded as a credit to balance off the columns

Also recorded in the Income Statement Debit column

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Each account balance is transferred to

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1. Close the costs that appear in the statement

2. Close the Manufacturing Summary account into the

3. Close the revenue account into the Income Summary

Lets look at a T account example for step 2.

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4. Close expense accounts into the Income

5. Close Income Tax Expense into the Income

6. Close the Income Summary account into the

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Calculate the value of ending inventory by:

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Periodic inventory system

Record the cost of direct labor expended on the

Estimate the cost of factory overhead.

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Product costing system used by companies

Raw materials, direct labor, and factory overhead

Each batch of units given a job-order number

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c) Issued checks for direct labor, $40,000.

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e) Transferred completed production to Finished

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When the job is completed, the Finished Goods