ACCOUNTING FOR
MANUFACTURING OPERATIONS
EMPV
MANUFACTURING BUSINESS
• A business engage in buying raw materials and converting it to finished goods in order to sell it to
customers.
• It employs manpower and machines to convert raw materials to finished products.
• Example is a furniture manufacturer who buys wood and upholstery materials and produces finished
products like tables, chairs , cabinet, etc.
PRODUCTION AREA
Production Area
- In charge of manufacturing the finished products of a company. This is also called the Production Department.
- the following manufacturing costs are incurred in this department:
a.) Direct Materials – raw materials that become an essential part of the finished product. These costs are easily
traceable to product.
Example: Direct materials used for a pair of shoe manufactured are the costs of rubber sole or leather.
b.) Direct Labor– labor costs that are directly incurred in manufacturing the product. These cost are easily traceable to
the product.
Example: Direct labor incurred for a pair of shoe are the number of hours a laborer spends times the per hour rate for
each pair of shoe manufactured.
c.) Manufacturing Overhead – it refers to all manufacturing costs or expenses incurred in the manufacturing or
production department except direct materials used and direct labor incurred. These costs are not easily traceable to
particular units of products. It is also called as Factory overhead. It includes:
1.) Indirect Materials – raw materials that are part of the finished product, but cannot be easily traced to it.
2.) Indirect Labor costs – labor cost that cannot be directly traced to the production of products.
3.) Other Expenses incurred in manufacturing department or production department (depreciation of
factory machineries, utilities, taxes, maintenance repairs and insurance on manufacturing facilities).
Example: Manufacturing overhead of a shoe manufacturer can be glue/ thread used ( indirect materials) , factory
supervisor salaries (indirect labor), utilities expenses of the factory (other expenses incurred in manufacturing
department)
NON-PRODUCTION AREA
Non-production Area
- Composed of Administrative and Sales Department.
a.) Administrative department
- is in charge with the executive, organizational, clerical and general management of the organization.
- Costs incurred in this department is called Administrative costs. Administrative costs includes the organizational and
executive costs related with the administration of an organization.
- Example: Salaries of managers and supervisors who are in charge of the general management of the business, Depreciation of the
office equipment, bad debts expense, office supplies expenses etc.
b.) Sales department
- is in charge with the sales, warehousing, transporting or delivering of the goods.
- Costs incurred in this department is called Selling costs. These includes all costs to sell the finished products.
- Example: freight out/ delivery costs, depreciation expense of the store equipment / building, utilities expenses of the store,
commissions to sales agents, etc.
STAGE OF PRODUCTION
• The production process passes through the following stages:
STAGE 1 : Work not started or Raw materials
STAGE 2: Work started but not completed or Work in Process
STAGE 3: Finished work or Finished goods
INVENTORY ACCOUNTS OF A
MANUFACTURING BUSINESS
1.) Raw Materials Inventory – includes the materials on hand waiting to be used in the manufacture of goods. A
manufacturing company may use one account for all its raw materials (direct or indirect material) or use separate
accounts for direct materials and indirect material.
2.) Work in Process Inventory – includes the cost of the goods started but not yet completed. The costs of the
goods included in this inventory is a mixture of the direct material used, direct labor and manufacturing overhead
incurred called Manufacturing costs.
3.) Finished Goods Inventory – includes the cost of the goods already completed.
PRODUCT COSTS VS. PERIOD COSTS
Product cost
- Includes all the costs that are incurred in manufacturing a product. It comprises of the direct materials, direct
labor, and manufacturing overhead. This is also called Inventoriable Cost.
- Product costs are recognized as expenses (Cost of goods sold) when the products are sold.
Period cost
- Includes administrative and selling costs.
- Period costs are recognized expense ( Selling Expenses / General & Administrative Expenses) in the period
incurred.
PRIME COST VS. CONVERSION COST
Prime cost
Prime Cost
- Sum of Direct materials and direct labor incurred. Direct D l
Material i a
r b
e o
Conversion Cost c r
t Conversion
- Sum of Direct labor and Manufacturing overhead incurred. cost
Conversion cost
FLOW OF COSTS OF A
MANUFACTURING BUSINESS
The following entries are under perpetual system:
1. Purchase of Raw Materials
Raw Materials Inventory XX
Cash/ Accounts payable XX
Raw Materials Inventory
Purchase of Raw Materials XX
FLOW OF COSTS OF A
MANUFACTURING BUSINESS
2. Direct Raw Materials used in the production
Work in Process Inventory XX
Raw Materials Inventory XX
Raw Materials Inventory Work in Process Inventory
Purchase of Raw Materials XX Direct Materials used XX
Direct Materials used XX
FLOW OF COSTS OF A
MANUFACTURING BUSINESS
3. Indirect Materials used in the production
Manufacturing Overhead XX
Raw Materials Inventory XX
Raw Materials Inventory Manufacturing Overhead
Purchase of Raw Materials XX Direct Materials used XX
Indirect Materials used XX Indirect Materials used XX
FLOW OF COSTS OF A
MANUFACTURING BUSINESS
4. Direct labor incurred in the production
Work in Process Inventory XX
Cash/ Salaries and Wages payable XX
Work in Process Inventory
Direct Materials used XX
Direct Labor incurred XX
FLOW OF COSTS OF A
MANUFACTURING BUSINESS
5. Indirect Labor incurred in the production
Manufacturing Overhead XX
Cash/ Salaries and Wages payable XX
Manufacturing Overhead
Indirect Materials used XX
Indirect Labor incurred XX
FLOW OF COSTS OF A
MANUFACTURING BUSINESS
6. Other expenses incurred in the manufacturing or production department other than direct
material, direct labor, indirect material and indirect labor:
Manufacturing Overhead XX
Various accounts XX
Manufacturing Overhead
Indirect Materials used XX
Indirect Labor incurred XX
Other factory overhead XX
FLOW OF COSTS OF A
MANUFACTURING BUSINESS
7. Closing of the Manufacturing overhead account to Work-in process Inventory
Work in Process Inventory XX
Manufacturing Overhead XX
Manufacturing Overhead Work in Process Inventory
Indirect Materials used XX Direct Materials used XX
Total manufacturing overhead XX Direct Labor incurred XX
Indirect Labor incurred XX
Other factory overhead XX Manufacturing Overhead XX
*manufacturing overhead will be zero
FLOW OF COSTS OF A
MANUFACTURING BUSINESS
7. Goods completed during the period
Finished Goods Inventory XX
Work in Process Inventory XX
Work in Process Inventory Finished Goods Inventory
Direct Materials used XX Cost of goods manufactured XX
Cost of goods manufactured
Direct Labor incurred XX
Manufacturing Overhead XX
FLOW OF COSTS OF A
MANUFACTURING BUSINESS
7. Goods sold during the period
Accounts receivable / Cash XX
Sales XX
Cost of goods sold XX
Finished goods inventory XX
Finished Goods Inventory
Cost of goods manufactured Cost of goods sold
SUMMARY OF THE FLOW OF COSTS
Raw Materials Inventory Work in Process Inventory Finished Goods Inventory
Total Beginning XX Beginning
Raw Beginning XX XX
Materials
Cost of goods manufactured
available Purchase of Raw Materials XX Cost of goods sold XX
Direct Materials used XX XX
for use Direct Materials used XX
Indirect Materials used XX Prime costs Cost of goods manufactured XX
Direct Labor incurred XX
Conversion costs
Manufacturing Overhead XX
Total goods available for sale
Total manufacturing cost
Ending XX
Ending XX Ending XX
Total goods place into process
Manufacturing Overhead
Indirect Materials used XX
Total manufacturing Indirect Labor incurred XX Total manufacturing overhead XX
overhead
Other factory overhead XX
COST OF GOODS MANUFACTURED
STATEMENT
Raw Materials Inventory, Beginning P XX
Net purchases XX
Raw Materials available for use P XX
Less: Raw Materials Inventory, Ending XX
Raw Materials Used XX
Direct Labor XX
Manufacturing Overhead XX
Total Manufacturing Costs p XX
Add: Work in Process in Inventory, Beginning XX
Total goods placed in process p XX
Less: Work in Process in Inventory, Ending XX
Cost of goods manufactured P XX
COST OF GOODS SOLD STATEMENT
Finished Goods Inventory, Beginning P XX
Cost of good manufactured XX
Total goods available for sale P XX
Less: Finished Goods Inventory, Ending XX
Cost of goods sold P XX
ILLUSTRATIVE PROBLEM: ACCOUNTING FOR A
MANUFACTURING BUSINESS
ACT Company had the following inventory balance at December 1,2020:
Raw Materials Inventory P 100,000
Work in Process Inventory 150,000
Finished Goods Inventory 100,000
ACT Company have the following transactions during the month of December 2020:
a.) Purchased raw materials on account for P 500,000.
b.) Raw materials placed in production: Direct Material, P 300,000 ; Indirect materials, P 15,000.
c.) Salaries and wages for the year is P 200,000 which is comprised of direct labor of P 125,000 , salaries of salesman of P 50,000
and P 25,000 for administrative salaries.
d.) Other Factory overhead expenses incurred on account were P 45,000.
e.) Total factory overhead is closed and transferred to Work in Process Inventory.
f.) Unfinished goods costs as of December 31,2020 was P 200,000. Finished goods in December 1 totaled P 100,000 and finished
goods in the warehouse as of December 31,2020 is P 50,000. Goods shipped to customers were billed and on account for P
500,000.
The following entries are under perpetual system:
a.) Purchased raw materials on account for P 500,000.
Raw Materials Inventory 500,000
Accounts payable 500,000
Raw Materials Inventory
Beginning 100,000
Purchase of Raw Materials 500,000
b.) Raw materials placed in production: Direct Material, P 300,000 ; Indirect materials, P 15,000.
Work in Process Inventory 300,000
Raw Materials Inventory 300,000
Manufacturing Overhead 15,000
Raw Materials Inventory 15,000
Raw Materials Inventory Work in Process Inventory Manufacturing Overhead
Beginning 100,000 Beginning 150,000
Purchase of Raw Materials
Direct Materials used Indirect Materials used
500,000
300,000 Direct Materials used 15,000
300,000
Indirect materials used
15,000
c.) Salaries and wages paid for the year is P 200,000 which is comprised of direct labor of P
125,000 , wages of factory equipment operator, P 10,000, salaries of salesman of P 40,000 and P
25,000 for administrative salaries.
Salaries and Wages Expense- General & Administrative 25,000
Salaries and Wages Expense- Selling 40,000
Manufacturing Overhead 10,000
Work in Process Inventory 125,000
Cash 200,000
Work in Process Inventory Manufacturing Overhead
Beginning 150,000
Direct Materials used 300,000 Indirect Materials used
Direct Labor 125,000 15,000
Indirect labor 10,000
d.) Other Factory overhead expenses incurred on account were P 45,000.
Manufacturing Overhead 45,000
Accounts payable/various accounts 45,000
Manufacturing Overhead
Indirect Materials used 15,000
Indirect labor 10,000
Other factory overhead 45,000
e.) Total factory overhead is closed and transferred to Work in Process Inventory.
Work in Process Inventory 70,000
Manufacturing Overhead 70,000
Manufacturing Overhead Work in Process Inventory
Beginning 150,000
Indirect Materials used 15,000 Direct Materials used 300,000
Indirect labor 10,000 Total manufacturing overhead 70,000 Direct Labor 125,000
Other factory overhead 45,000 Manufacturing Overhead 70,000
f.) Unfinished goods costs as of December 31,2020 was P 200,000. Finished goods in December 1
totaled P 100,000 and finished goods in the warehouse as of December 31,2020 is P 50,000. Goods
shipped to customers were billed and on account for P 500,000.
Finished Goods Inventory 445,000
Work in Process Inventory 445,000
Accounts receivable 500,000
Sales 500,000
Cost of good sold 495,000
Finished Goods Inventory 495,000
Work in Process Inventory Finished Goods Inventory
Beginning 150,000 Beginning 100,000
Direct Materials used 300,000
Direct Labor 125,000 Cost of goods manufactured Cost of goods sold 495,000
Cost of goods manufactured
Manufacturing Overhead 70,000 445,000
445,000
Ending 200,000 Ending 50,000
SUMMARY OF THE FLOW OF COSTS
Raw Materials Inventory Work in Process Inventory Finished Goods Inventory
Total Beginning 150,000 Beginning
Raw Beginning 100,000
Cost of goods manufactured
100,000
Materials
available
445,000
Purchase of Raw Materials Direct Materials used 300,000 Cost of goods sold
for use =
500,000 Direct Materials used 300,000
Indirect Materials used 15,000 Direct Labor incurred 125,000 Prime costs = 425,000 Cost of goods manufactured 495,000
600,000
Manufacturing Overhead 70,000 Conversion costs = 195,000 445,000
Total manufacturing cost= 495,000 Total goods available for sale =545,000
Ending 285,000 Ending 200,000 Ending 50,000
Total goods place into process =645,000
Manufacturing Overhead
Indirect Materials used 15,000
Indirect Labor incurred 10,000 Total manufacturing overhead 70,000
Total manufacturing
overhead
Other factory overhead 45,000
= 70,000
