topic 8 - accounting for manufacturing operations

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Accounting for Manufacturing

Operations

Topic

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Manufacturing?

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Learning ObjectivesLearning Objectives

Describe the environment for manufacturing operation

Describe cost accounting concepts useful in classifying costs.

Explain how the financial statements for manufacturing and merchandising companies differ.

Compute cost of goods sold for a manufacturer. Prepare a statement of cost of goods manufactured

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Merchandisers . . .Buy finished goods.

Sell finished goods.

SaleMart

Manufacturers . . .Buy raw materials.

Produce and sell finished goods.

Nature of business: Merchandisers vs. Manufacturers

Nature of business: Merchandisers vs. Manufacturers

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Behavior

Traceability

Controllability

Relevance

Function

Cost Accounting ConceptsCost Accounting Concepts

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Cost behavior means how a cost will react to changes in the level of business activity. Total fixed costs do

not change when activity changes.

Total variable costs change in proportionto activity changes.

Classification by BehaviorClassification by Behavior

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Activity

Cos

t

Activity

Cos

tClassification by BehaviorClassification by Behavior

Cost behavior means how a cost will react to changes in the level of business activity. Total fixed costs do

not change when activity changes.

Total variable costs change in proportionto activity changes.

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Direct costs Costs incurred for the

benefit of one specific cost object.

Examples: material and labor cost for a product.

Indirect costs Costs incurred for the

benefit of more than one cost object.

Example: maintenance expenditures benefiting two or more departments.

Classification by TraceabilityClassification by Traceability

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The degree of control depends on thelevel of management in the organization.

More C

ontrolM

ore

Con

trol

Very little control

Classification by ControllabilityClassification by Controllability

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The potential benefit that is given up when one alternative is selected over another. Example: If you were

not attending college,you could be earning$20,000 per year. Your opportunity costof attending college for one year is $20,000.

Classification by Relevance: Opportunity Costs

Classification by Relevance: Opportunity Costs

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All costs incurred in the past that cannot be changed by any decision made now or in the future.

Sunk costs should not be considered in decisions.

Example: You bought an automobile that cost $15,000 two years ago. The $15,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $15,000 cost.

Classification by Relevance:Sunk Costs

Classification by Relevance:Sunk Costs

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TheProduct

Classification by Function:Product Costs

Classification by Function:Product Costs

DirectLabor

DirectMaterial

Manufacturing Overhead

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Period costs are expensesnot charged to the product.

Classification by Function:Period Costs

Classification by Function:Period Costs

Administrative Costs

Non-manufacturing costsof staff support and

administrative functions –accounting, data processing,

personnel, researchand development.

Selling Costs

Costs incurred to obtain customer orders and todeliver finished goods

to customers –advertising and shipping.

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Period Costs(Expenses)

Product Costs(Inventory)

Inventory Not Sold in 2007

OperatingExpenses

Cost ofSales

Raw MaterialsWork in ProcessFinished Goods

Cost ofSales

2007 CostsIncurred

2007 IncomeStatement

2008 IncomeStatement

2007 BalanceSheet Inventory

InventorySold in 2007

Period and Product Costsin Financial Statements

Period and Product Costsin Financial Statements

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Cost Item Behavior Traceability Function

Material Variable Direct Product

Assembly Wages Variable Direct Product

Advertising Fixed Indirect Period

Production Manager's Salary Fixed Indirect Product

Office Depreciation Fixed Indirect Period

Cost Item Behavior Traceability Function

Material Variable Direct Product

Assembly Wages Variable Direct Product

Advertising Fixed Indirect Period

Production Manager's Salary Fixed Indirect Product

Office Depreciation Fixed Indirect Period

Potential Multiple Cost ClassificationsPotential Multiple Cost Classifications

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Direct Materials

Materials that are clearly and easilyidentified with a particular product.

Direct Materials

Materials that are clearly and easilyidentified with a particular product.

Example:Steel used tomanufacture

the automobile.

Example:Steel used tomanufacture

the automobile.

Manufacturing costsManufacturing costs

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Direct Labor

Labor costs that are clearly traceable to, or readily identifiable with, the

finished product.

Direct Labor

Labor costs that are clearly traceable to, or readily identifiable with, the

finished product.

Example:Wages paid to an

automobile assemblyworker.

Example:Wages paid to an

automobile assemblyworker.


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Factory Overhead

All factory costs exceptdirect material and direct labor.

Factory costs that cannot betraced directly to specific units produced.

Factory Overhead

All factory costs exceptdirect material and direct labor.

Factory costs that cannot betraced directly to specific units produced.

Examples:Indirect labor – maintenance

Indirect material – cleaning suppliesFactory utility costsSupervisory costs


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DirectMaterial

DirectLabor

ManufacturingOverhead

PrimeCost

ConversionCost

Manufacturing costs are oftencombined as follows:


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QuestionQuestion

The primary distinction between product and period costs is . . .

a. Product costs are expensed in the period incurred.

b. Product costs are directly traceable to product units.

c. Product costs are inventoriable.

d. Period costs are inventoriable.






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Question

QuestionQuestion

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Finished GoodsBeginning Inventory

Cost of GoodsManufactured

FinishedGoodsEnding

Inventory

RawMaterialsBeginningInventory

RawMaterials

Purchases

Raw MaterialsEnding Inventory

Costof

Sales

Work in ProcessBeginning Inventory

Direct Labor

FactoryOverhead

Raw MaterialsUsed

Sales activityProduction activityMaterialsactivity

Flow of Manufacturing ActivitiesFlow of Manufacturing Activities

Work in ProcessEnding Inventory

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Cost of all goods completed and transferred from work in process to finished goods during a

reporting period.

Direct Materials Used + Direct Labor + Factory Overhead = Total Manufacturing Costs + Beginning Work in Process – Ending Work in Process = Cost of Goods Manufactured

Statement of Cost of Goods Manufactured


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Manufacturing WorkRaw Materials Costs In Process

Beginning raw Direct materials materials inventory

+ Raw materials purchased

= Raw materials

available for use in production

– Ending raw materials inventory

= Raw materials used

in production

As items are removed from raw materials inventory and placed into

the production process, they arecalled direct materials.

As items are removed from raw materials inventory and placed into

the production process, they arecalled direct materials.

Product Cost FlowsProduct Cost Flows

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Beginning raw Direct materials materials inventory + Direct labor

+ Raw materials + Mfg. overhead purchased = Total manufacturing

= Raw materials costs

available for use in production



in production

Conversion costs are costs

incurred to convert the

direct material into a finished

product.

Conversion costs are costs

incurred to convert the

direct material into a finished

product.


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Beginning raw Direct materials Beginning work in materials inventory + Direct labor process inventory

+ Raw materials + Mfg. overhead + Total manufacturing purchased = Total manufacturing costs

= Raw materials costs = Total work in

available for use process for the in production period



in production


All manufacturing costs incurred during the period are added to the

beginning balance of work in process.

All manufacturing costs incurred during the period are added to the

beginning balance of work in process.

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Beginning raw Direct materials Beginning work in materials inventory + Direct labor process inventory

+ Raw materials + Mfg. overhead + Total manufacturing purchased = Total manufacturing costs

= Raw materials costs = Total work in

available for use process for the in production period

– Ending work in process inventory

= Cost of goods

manufactured


Costs associated with the goods that are completed during the period are

transferred to finished goods inventory.

Costs associated with the goods that are completed during the period are

transferred to finished goods inventory.

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Let’s take a look at Rocky

Mountain Bikes’ Statement of Cost

of Goods Manufactured.



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ROCKY MOUNTAIN BIKES

STATEMENT OF COST OF GOODS MANUFACTURED

FOR THE YEAR ENDED 31 DECEMBER 2006

Direct materials used in production 85,500$

Direct labor 60,000

Total factory overhead costs 30,000

Total manufacturing costs for the period 175,500$

Beginning work in process inventory 2,500

Total cost of work in process 178,000$

Ending work in process inventory (7,500)

Cost of goods manufactured 170,500$



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Direct labor 60,000








Statement of Cost of Goods Manufactured Exh.

18-16

Computation of Cost of Direct Material Used

Beginning raw materials inventory 8,000$

Add: Purchases of raw materials 86,500

Cost of raw materials available for use 94,500$

Less: Ending raw materials inventory 9,000

Cost of direct materials used in production 85,500$

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Direct labor 60,000







Include all direct labor costs incurred during the

current period.



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Direct labor 60,000







Manufacturing StatementManufacturing Statement

Computation of Total Manufacturing Overhead

Indirect labor 9,000$

Factory supervision 6,000

Factory utilities 2,600

Property taxes, factory building 1,900

Factory supplies used 600

Factory insurance expired 1,100

Depreciation, building and equipment 5,300

Other factory overhead 3,500

Total factory overhead costs 30,000$

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Direct labor 60,000







Beginning work in process inventory is carried over from the

prior period.



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Direct labor 60,000







Ending work in process inventory contains the cost of unfinished

goods, and is reported in the current assets section of the balance sheet.



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ManufacturingInventory

Classifications

Balance Sheet of a ManufacturerBalance Sheet of a Manufacturer

RawMaterials

FinishedGoods

Work inProcess

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Completedproductsfor sale.

Materialswaiting to beprocessed.

Partially completeproducts.

Material to whichsome labor and/or

overhead havebeen added.


RawMaterials

FinishedGoods

Work inProcess

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MERCHANDISER

Current Assets Cash Receivables Merchandise

Inventory

MANUFACTURER

Current Assets Cash Receivables Inventories

Raw MaterialsWork in ProcessFinished Goods

The only difference is inventory.


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Beginning Merchandise

Inventory

Beginning Finished Goods

Inventory

Cost of Goods Purchased

Cost of GoodsManufactured

Ending Merchandise

Inventory

EndingFinished Goods

Inventory

Cost of Sales

Merchandiser Manufacturer

+

_

+

==

_

The major difference

Income Statement of a ManufacturerIncome Statement of a Manufacturer

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Manufacturing Company

Cost of Sales Beg. finished goods inv. 14,200$ + Cost of goods manufactured 234,150 = Goods available for sale 248,350$ - Ending finished goods inventory (12,100) = Cost of Sales 236,250$

Merchandising Company

Cost of Sales Beg. merchandise inventory 14,200$ + Purchases 234,150 = Goods available for sale 248,350$ - Ending merchandise inventory (12,100) = Cost of Sales 236,250$

Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.

Income Statement of a ManufacturerIncome Statement of a Manufacturer

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Income StatementIncome Statement

Sales x

(-) COGS

Beginning Finished goods x

COGM x

CGAFS x

(-) Ending finished goods (x)

COGS (x)

Gross Profit x

Operating expenses (x)

Net Profit x

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End of Chapter 8End of Chapter 8

topic 8 - accounting for manufacturing operations

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