Accounting for Manufacturing Business

Lecture 24

Lecture Overview

• Difference Between Merchandizing and Service Business

• Accounting for Inventories• Terms of purchases• Terms of Sales• Calculation of Net Profit• Closing Entries

• Cost– Sacrifice made to achieve a particular purpose measured by the

resources given up.

• Product cost– A cost assigned to goods that were either purchased or manufactured

for resale purpose

• Cost of goods sold– In the period of sale, the product costs are recognized as an

expense called cost of goods sold

• Period cost– Costs are identified with the period of time in which they are incurred.

Manufacturing Costs– Direct Material• Raw Material, can be traced out in finished products

– Direct Labor• Salaries, wages, fringe benefits for people directly

working on production

–Manufacturing Overheads• Indirect material

– Insignificant to trace i.e. Cost of drill bits, glue, nails,

• indirect labor – Deptt supervisors, security guards etc

• and other manufacturing overheads. – Depreciation of plant and machinery, property taxes,

insurance, electricity, gas etc.

Cost of Goods Manufactured• Direct Material

– Raw material inventory, 1st January 500– Add – Material Purchased

1000– Raw Material available for use 1500– Deduct- Raw-material inventory, dec 31 200– Raw Material used 1300

• Direct Labor 1000

• Prime Cost2300

Cost of Goods Manufactured

• Prime Cost 2300• Manufacturing overheads

– Indirect Material 200– Indirect Labor 200– Depreciation on factory 50– Depreciation on equipment 10– Utilities 20– Insurance 20– Total manufacturing overheads 500

Total manufacturing costs 2800

Cost of Goods Manufactured• Direct Material

– Raw material inventory, 1st January 500– Add – Material Purchased 1000– Raw Material available for use 1500– Deduct- Raw-material inventory, dec 31 200– Raw Material used 1300

• Direct Labor 1000• Manufacturing overheads

– Indirect Material 200– Indirect Labor 200– Depreciation on factory 50– Depreciation on equipment 10– Utilities 20– Insurance 20– Total manufacturing overheads 500– Total manufacturing costs 2800

• Prime Cost

• Conversion Cost

Cost of Goods Manufactured (con`t)

• Total manufacturing costs 2800• Add work in process inventory, Jan 01 500• Sub total 3300• Deduct, work in process inventory, dec, 31 300• Cost of goods manufactured 3000

Cost of Goods Sold

• Finished Goods inventory Jan 01, 1000• Add cost of goods manufactured 3000• Cost of goods available for sale 4000

• Deduct finished goods inventory Dec 31 500• Cost of Goods Sold 3500

Manufacturing Cost Flows

Direct Material

Direct Labor

Manufacturing Overheads

Work in Process Finished Goods inventory

Cost of Goods Sold

Journal Entries

Journal Entries

Income Statement• Sales Revenue 10000• Less Cost of Goods Sold 3500• Gross profit 6500• Operating Cost:

– Selling General Administration Expenses 100– Research and Development Expenses 50– Interest Expenses of financial assets 50– Other operating expenses 20

• Total Operating cost 220• Operating profit 6280• Less other interest expenses 40• Add other interest income 30• Profit before taxes 6270• Provision for income tax 70• Net Income 6200

Income Statement• Sales Revenue 1000• Less Cost of Goods Sold 500• Gross profit 500• Operating Cost:• Selling General Administration Expenses 100• Operating profit 400• Less other interest expenses 40• Profit before taxes 360• Provision for income tax 70• Less Minority interest 10• Net Income 280

Income Statement• Interest Income 1000• Interest Expenses 500• Net Interest Income 500

– Fees and Commission Income 500– Fees and Commission Expenses 200– Net Trading Income 50– Other operating income 50

• Total Non Interest Income 400• Operating Income 900

– Staff Cost 400– Premises Cost 100– General Administrative Expenses 50– Depreciation and amortization 50

• Operating Expenses 600• Operating profit before impairment losses and taxation 300

– impairment losses and taxation 50

• Profit before taxation 250– Taxation 50

• Profit for the year 200

Lecture Overview

• Cost, Product Cost, Period Cost• Components of Manufacturing Products• Cost of Good Manufactured• Cost of Goods Sold• Manufacturing Cost Flows• Income Statements

End of Lecture 24