Professional Documents
Culture Documents
Topic Manufacturing
Operations
8 100 Shares
Manufacturing?
$1 par value
Wnwa 2008 1
Learning
Learning Objectives
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
Wnwa 2008 2
Nature
Nature of
of business:
business:
Merchandisers
Merchandisers vs.
vs. Manufacturers
Manufacturers
Merchandisers . . . Manufacturers . . .
Buy finished goods. Buy raw materials.
Sell finished goods. Produce and sell
finished goods.
SaleMart
Wnwa 2008 3
Cost
Cost Accounting
Accounting Concepts
Concepts
Behavior
Traceability
Controllability
Relevance
Function
Wnwa 2008 4
Classification
Classification by
by Behavior
Behavior
Wnwa 2008 5
Classification
Classification by
by Behavior
Behavior
change in proportion
to activity changes.
Activity
Wnwa 2008 6
Classification
Classification by
by Traceability
Traceability
Direct costs Indirect costs
Costs incurred for the Costs incurred for the
benefit of one specific benefit of more than
cost object. one cost object.
Examples: material and Example: maintenance
labor cost for a product. expenditures benefiting
two or more
departments.
Wnwa 2008 7
Classification
Classification by
by Controllability
Controllability
The degree of control depends on the
level of management in the organization.
M
or
ol
e
ntr
Co
Co
nt
ro
re
l
Mo
Wnwa 2008 9
Classification
Classification by
by Relevance:
Relevance:
Sunk
Sunk Costs
Costs
All costs incurred in the past that cannot be changed by any
decision made now or in the future.
Wnwa 2008 10
Classification
Classification by
by Function:
Function:
Product
Product Costs
Costs
The
Product
Wnwa 2008 11
Classification
Classification by
by Function:
Function:
Period
Period Costs
Costs
Administrative Costs
Selling Costs
Non-manufacturing costs
Costs incurred to obtain
of staff support and
customer orders and to
administrative functions –
deliver finished goods
accounting, data processing,
to customers –
personnel, research
advertising and shipping.
and development.
Wnwa 2008 12
Period
Period and
and Product
Product Costs
Costs
in
in Financial
Financial Statements
Statements
2007 Income
Statement
Period Costs Operating
(Expenses) Expenses
Wnwa 2008 14
Manufacturing
Manufacturing costs
costs
Direct
Direct Materials
Materials
Materials
Materials that
that are
are clearly
clearly and
and easily
easily
identified
identified with
with aa particular
particular product.
product.
Example:
Example:
Steel
Steel used
used to
to
manufacture
manufacture
the
theautomobile.
automobile.
Wnwa 2008 15
Manufacturing
Manufacturing costs
costs
Direct
Direct Labor
Labor
Labor
Labor costs
costs that
that are
are clearly
clearly traceable
traceable
to,
to, or
or readily
readily identifiable
identifiable with,
with, the
the
finished
finished product.
product.
Example:
Example:
Wages
Wagespaid
paidto
toan
an
automobile
automobileassembly
assembly
worker.
worker.
Wnwa 2008 16
Manufacturing
Manufacturing costs
costs
Factory
Factory Overhead
Overhead
All
All factory
factory costs
costs except
except
direct
direct material
material and
and direct
direct labor.
labor.
Factory
Factory costs
costs that
that cannot
cannot bebe
traced
traced directly
directly toto specific
specific units
units produced.
produced.
Examples:
Indirect labor – maintenance
Indirect material – cleaning supplies
Factory utility costs
Supervisory costs
Wnwa 2008 17
Manufacturing
Manufacturing costs
costs
Prime Conversion
Cost Cost
Wnwa 2008 18
Question
Question
The
The primary
primary distinction
distinction between
between product product
and
and period
period costs
costs is
is .. .. ..
a.
a. Product
Product costs
costs are
are expensed
expensed in in the
the period
period
incurred.
incurred.
b.
b. Product
Product costs
costs are
are directly
directly traceable
traceable to to
product
product units.
units.
c.
c. Product
Product costs
costs are
are inventoriable.
inventoriable.
d.
d. Period
Period costs
costs are
are inventoriable.
inventoriable.
Wnwa 2008 19
Question
Question
Question
The
The primary
primary distinction
distinction between
between product product
and
and period
period costs
costs is
is .. .. ..
a.
a. Product
Product costs
costs are
are expensed
expensed in in the
the period
period
incurred.
incurred.
b.
b. Product
Product costs
costs are
are directly
directly traceable
traceable to to
product
product units.
units.
c.
c. Product
Product costs
costs are
are inventoriable.
inventoriable.
d.
d. Period
Period costs
costs are
are inventoriable.
inventoriable.
Wnwa 2008 20
Flow
Flow of
of Manufacturing
Manufacturing Activities
Activities
Materials Production activity Sales activity
activity
Work in Process Finished Goods
Raw Beginning Inventory Beginning Inventory
Materials
Beginning Cost of Goods
Inventory Direct Labor
Manufactured
Raw Factory
Materials Overhead Finished
Purchases Cost
Raw Materials Goods of
Ending
Used Sales
Inventory
Manufacturing W
Raw Materials Costs In P
Conversion
Conversion
Beginning raw Direct materialscosts
costsarearecosts
costs
materials inventory + Direct labor incurred
incurredto to
+ Raw materials + Mfg. overhead convert
convert the
the
purchased direct
directmaterial
= Total manufacturing material
= Raw materials costs into
into aafinished
finished
available for use product.
product.
in production
– Ending raw materials
inventory
= Raw materials used
in production
Wnwa 2008 24
Product
Product Cost
Cost Flows
Flows
Manufacturing Work
Raw Materials Costs In Process
Wnwa 2008 25
Product
Product Cost
Cost Flows
Flows
Manufacturing Work
Raw Materials Costs In Process
Wnwa 2008 27
Statement
Statement of
of Cost
Cost of
of Goods
Goods
Manufactured
Manufactured
Wnwa 2008 28
Statement
Statement of
of Cost
Cost of
of Goods
Goods
Manufactured
Manufactured
Wnwa 2008 29
Statement
Statement of
ofCostCost
Computation of of Directof
Cost of Goods
Goods
Material Used
Manufactured
Manufactured
Beginning raw materials inventory $ 8,000Exh.
18-16
Add: Purchases of raw materials 86,500
Cost of raw materials available for use $ 94,500
Less: Ending raw materials inventory 9,000
ROCKY
Cost of direct MOUNTAIN
materials used inBIKES
production $ 85,500
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
Wnwa 2008 30
Statement
Statement of
of Cost
Cost of
of Goods
Goods
Manufactured
Manufactured
Include all direct labor
costsMOUNTAIN
ROCKY incurred during the
BIKES
current
STATEMENT OF COST OF GOODS period.
MANUFACTURED
FOR THE YEAR ENDED 31 DECEMBER 2006
Wnwa 2008 31
Computation of Total Manufacturing Overhead
Indirect labor $ 9,000
Manufacturing
Manufacturing Statement
Factory supervision Statement
6,000
Factory utilities 2,600
Property taxes, factory building 1,900
ROCKY MOUNTAIN BIKES
Factory supplies used 600
STATEMENT
Factory insuranceOF COST OF GOODS MANUFACTURED
expired 1,100
FOR building
Depreciation, THE YEAR ENDED
and 31 DECEMBER 2006 5,300
equipment
Other
Direct factory overhead
materials used in production 3,500
$ 85,500
Totallabor
Direct factory overhead costs $ 30,000 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
Wnwa 2008 32
Statement
Statement of
of Cost
Cost of
of Goods
Goods
Manufactured
Manufactured
Beginning work in
ROCKY MOUNTAIN BIKES process inventory is
carried over from the
STATEMENT OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED 31 DECEMBER 2006prior period.
Wnwa 2008 33
Statement
Statement of
of Cost
Cost of
of Goods
Goods
Manufactured
Manufactured
Ending work in process inventory
ROCKYcontains the cost of unfinished
MOUNTAIN BIKES
STATEMENT OFgoods, and isMANUFACTURED
COST OF GOODS reported in the current
FOR THE YEAR ENDED 31 DECEMBER 2006
assets section of the balance sheet.
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
Wnwa 2008 34
Balance
Balance Sheet
Sheet of
of aa Manufacturer
Manufacturer
Work in
Raw Process Finished
Materials Goods
Manufacturing
Inventory
Classifications
Wnwa 2008 35
Balance
Balance Sheet
Sheet of
of aa Manufacturer
Manufacturer
Work in
Raw Process Finished
Materials Goods
Partially complete
Materials products. Completed
waiting to be products
processed. Material to which for sale.
some labor and/or
overhead have
been added.
Wnwa 2008 36
Balance
Balance Sheet
Sheet of
of aa Manufacturer
Manufacturer
MERCHANDISER MANUFACTURER
Beginning Beginning
Merchandise Finished Goods
Inventory Inventory
+ +
Cost of Goods The major Cost of Goods
Purchased difference Manufactured
_ _
Ending Ending
Merchandise Finished Goods
Inventory Inventory
= Cost of Sales =
Wnwa 2008 38
Income
Income Statement
Statement of
of aa Manufacturer
Manufacturer
Cost of goods sold for manufacturers differs only
slightly from cost of goods sold for merchandisers.
Merchandising Company Manufacturing Company
Cost of Sales
Cost of Sales
Beg. finished
Beg. merchandise
goods inv. $ 14,200
inventory $ 14,200
+ Cost of goods
+ Purchases 234,150
manufactured 234,150
= Goods available
= Goods available
for sale $ 248,350
for sale $ 248,350
- Ending
- Ending
merchandise
finished goods
inventory (12,100)
inventory (12,100)
= Cost of Sales $ 236,250
= Cost of Sales $ 236,250
Wnwa 2008 39
Income
Income Statement
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
Wnwa 2008 40
End of Chapter 8
Wnwa 2008 41