chapter1chapter1 accounting for manufacturing operation
TRANSCRIPT
Chapter1Chapter1Chapter1Chapter1
ACCOUNTING FOR ACCOUNTING FOR MANUFACTURING MANUFACTURING
OPERATIONOPERATION
• OBJECTIVES
• Environment for Manufacturing Operation
• Manufacturing Cost Concept• Product Cost v. Period Cost
• Deal With Firms Which Are Manufacturers
• A Manufacturing A/C Is Prepared In Addition To The Trading And Income Statement Accounts
MegaLoMart
Comparing Merchandising and Manufacturing
ActivitiesMerchandisers . . .
– Buy finished goods.
– Sell finished goods.
Manufacturers . . .– Buy raw materials.– Produce and sell
finished goods.
Manufacturing Cost Concepts
Financial Accounting
Cost is a measure of resources used or
given up to achieve a stated purpose.
Managerial Accounting
Product costs are the costs a company assigns to units
produced.
Comparing Financial Accounting and Management
Accounting
MANAGERIAL COST CONCEPTS
MANAGERIAL COST CONCEPTS
• Manufacturing consists of activities and processes that convert raw materials into finished goods.
Direct Costs and Indirect Costs
Direct costs
• Costs that can beeasily and conveniently traced to a unit of product or other cost objective.
• Examples: – Direct material
– Direct labor
Indirect costs• Costs cannot be
easily and conveniently traced to a unit of product or other cost object.
• Example: Manufacturing overhead
Manufacturing costs• Manufacturing costs are
usually classified as follows: 1. Direct materials, 2. Direct labor, and 3. Manufacturing overhead.
The ProductThe Product
DirectMaterials
DirectMaterials
DirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
Manufacturing Costs
Direct Materials
Raw materials are the basic materials and parts that are to be used in the manufacturing process.
Raw materials that can be physically and directly associated with the finished product during the manufacturing process are called direct materials.
Example: A radio installed in an automobileExample: A radio installed in an automobile
Direct Labor
Direct labor is the work of factory employees that can be physically and directly associated with converting raw materials into finished goods.
Those labor costs that can be easily traced to individual units of product.
Example: Wages paid to automobile assembly workersExample: Wages paid to automobile assembly workers
Manufacturing costs that cannot be traced directly to specific units produced.
Manufacturing/factory overhead consists of costs that are indirectly associated with the manufacture of the finished product.
Manufacturing/Factory Overheads
Examples: Indirect labor and indirect materialsExamples: Indirect labor and indirect materials
Wages paid to employees who are not directly
involved in production work.
Examples: maintenance workers, janitors and
security guards.
Materials used to support the production process.
Examples: lubricants and cleaning supplies used in the automobile assembly plant.
Overhead
Manufacturing overhead consists of costs that are indirectly associated with the manufacture of the
finished product.
These costs may also be manufacturing costs that cannot be classified as direct materials or direct labor.
Manufacturing overhead includes1 indirect materials;2 indirect labor;3 depreciation on factory buildings and machines4 insurance, taxes, and maintenance on
factory facilities.
• Under a periodic inventory system, the income statements of a merchandiser and a manufacturer differ in the cost of goods sold section.
COST OF GOODS SOLD COMPONENTS
COST OF GOODS SOLD COMPONENTS
Cost of Goods Sold
Manufacturer
Merchandiser
Beginning Merchandise
Inventory
Beginning Finished Goods
Inventory
Ending Merchandise
Inventory
Ending Finished Goods
Inventory
Cost of Goods Purchased
Cost of Goods Manufactured
+
+ -
-
=
=
ILLUSTRATION COST OF GOODS SOLD
COMPONENTS
ILLUSTRATION COST OF GOODS SOLD
COMPONENTS
COST OF GOODs SOLD STATEMENT
• Direct materials:• Beginning Materials inventory xxx• Purchases xxx• less purchases returns and allowances xxx xxx• Materials available for use xxx• less ending materials inventory xxx• direct materials consumed xxx
• Direct labor xxx
• Factory overhead• Indirect labor xxx• Salaries xxx• Payroll taxes xxx• Power xxx• Heat xxx• Light xxx
• Factory supplies xxx• Depreciation-factory building xxx • Depreciation – machinery xxx• Repairs and maintenance xxx• Patent xxx• Tools and dies used xxx• Insurance xxx• Total factory overhead cost xxx• Total manufacturing cost xxx
• Total manufacturing cost xxx• Add beginning work in process inventory xxx• xxx• less ending work in process inventory xxx • Cost of goods manufactured
xxx• Add beginning finished goods inventory xxx• Cost of goods available for sale xxx• less ending finished goods inventory xxx• Cost of goods sold xxx
Evaluating annual results to orient the outsiders
• Current ratio• Acid – test ratio• Income before income tax as a %
os sales• Net income as a % of sales• Gross profit as a % of sales• Rate of return on capital
employed
Evaluating annual results to orient the insider
• Cost of goods manufactured/units manufactured
• Cost of beginning finished goods inventory/units in beginning finished goods inventory
• Cost of ending finished goods inventory/units in ending finished goods inventory
• Cost of goods sold/units sold
Nonmanufacturing Costs
a) Administration / Operating costs
a) Marketing and selling costs
ADMINISTRATION EXPENSES
All executive, organizational,
and clerical costs. Examples:
- managers’ salaries
- legal and accountancy
charges
- depreciation of accounting
machinery & secretarial
salaries
SELLING AND DISTRIBUTION EXPENSES
Costs necessary to get the order and deliver the
product. Examples: - Sales staff’s - Salaries & commission - Carriage outwards - Depreciation of delivery vans - Advertising expenses
PRODUCT COSTSPRODUCT COSTS
Costs that are a necessary and integral part of
producing the finished product.include each of the manufacturing cost elements
(direct materials, direct labor, and
manufacturing overhead)These costs are not expensed to cost of goods
sold under the matching principle until the
finished goods inventory is sold.
PRODUCT COSTS (Cont…)
Direct materials and direct labor are often referred to as prime costs due to their direct association with the manufacturing of the finished product.
Direct labor and manufacturing overhead are often referred to as conversion costs since they are incurred in converting raw materials into
finished goods.
Classifications of Costs
DirectMaterials
DirectMaterials
DirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftencombined as follows:
PERIOD COSTS
a) are identifiable with a specific time period,
b) relates to nonmanufacturing
non-inventoriable costs, and
c) include selling and administrative expenses.
ILLUSTRATION: PRODUCT VERSUS PERIOD COSTS
ILLUSTRATION: PRODUCT VERSUS PERIOD COSTS
Prime Costs
Conversion Costs
Product Costs
Direct Materials
Direct Labor
Manufacturing Overhead
Period Costs
Selling Expenses
Administrative Expenses
{{{Manufacturing
Costs
{Nonmanufacturing Costs
VARIABLE FACTORY OVERHEADS• Supplies• Fuel• Power• Small tools• Spoilage, salvage and reclamation
expenses• Receiving costs• Hauling within plant• Royalties• Communication costs• Overtime premium
FIXED FACTORY OVERHEADS
• Salaries of production executives• Depreciation• Property tax• Patent amortization• Wages of security guards and fire
fighters• Maintenance and repairs of
building and grounds• Insurance- property and liability
SEMI VARIABLE FACTORY OVERHEADS
• Supervision• Inspection• Payroll department services• Personnel department services• Factory office services• Materials and inventory services• Cost department services• Maintenance and repairs of machinery and
equipment• Compensation insurance• Health and accident insurance• Payroll taxes• Industrial relations and employees’ welfare expenses• Heat, light and power
Controllable and Uncontrollable costs
• Controllable costs:• Costs that can be controlled or heavily
influenced by the manager.
• Uncontrollable costs:• Costs that a manager cannot influence
significantly.
Manufacturing operations and Manufacturing Costs
• Job Shop:• Low production volume; little standardization; one
of a kind product.
• Batch: • Multiple products; low volume
• Assembly line: • A few major products; higher volume.• Mass customization:• Higher production volume; many standardized
components ; customized components of components.
• Continuous flow:• Higher production volume; highly standardized
commodity products.
More cost classifications
• Opportunity costs:• Is defined as a benefit that is sacrificed when the choice
of one action preludes taking an alternative course of action.
• Out of pocket costs:• Costs that require payment of cash or other assets as a
result of their incurrence.
• Sunk costs:• Costs that have been incurred in the past. • They do not affect future costs and cannot be changed
by any current or future action.• Irrelevant to all future decisions.
More cost classifications
• Differential costs:• It is the amount by which the cost differs under two
alternative actions.
• Incremental costs:• The increase in cost from one alternative to another.
• Marginal costs:• Additional costs incurred when an additional unit is
produced.
• Average costs:• It is the total cost for whatever quantity is
manufactured, divided by the number of units manufactured.
• Standard costs:• Pre determined costs for direct materials, direct
labor and factory overhead. • They are established by using information
accumulated from past experience and data secured from research studies.