Topic 8 - Accounting For Manufacturing Operations

Topic

8 Wnwa 2008

Accounting for Manufacturing Operations 100 Shares

Manufacturing? $1 par value

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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

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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

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Cost Cost Accounting Accounting Concepts Concepts

Behavior Traceability Controllability Relevance Function Wnwa 2008

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Classification Classification by by Behavior 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 proportion to activity changes.

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Classification Classification by by Behavior Behavior Cost

Cost behavior means how a cost will react to changes in the level of business activity. Activity

fixed costs do not change when activity changes. variable costs change in proportion to activity changes.

Cost

 Total

Activity Wnwa 2008

 Total

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Classification Classification by by Traceability Traceability Direct costs

Indirect costs



Costs incurred for the benefit of one specific cost object.



Costs incurred for the benefit of more than one cost object.



Examples: material and labor cost for a product.



Example: maintenance expenditures benefiting two or more departments.

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Classification Classification by by Controllability Controllability

Mo re Wnwa 2008

l ro nt Co

Very little control

e or M

Co ntr ol

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

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Classification Classification by by Relevance: Relevance: Opportunity Opportunity Costs Costs 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 cost of attending college for one year is $20,000. Wnwa 2008

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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. 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.

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Classification Classification by by Function: Function: Product Product Costs Costs Direct Labor

Direct Material

Manufacturing Overhead

The Product Wnwa 2008

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Classification Classification by by Function: Function: Period Period Costs Costs Period costs are expenses not charged to the product.

Selling Costs Costs incurred to obtain customer orders and to deliver finished goods to customers – advertising and shipping. Wnwa 2008

Administrative Costs Non-manufacturing costs of staff support and administrative functions – accounting, data processing, personnel, research and development.

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Period Period and and Product Product Costs Costs in in Financial Financial Statements Statements Period Costs (Expenses)

2007 Income Statement Operating Expenses

2007 Costs Incurred

Cost of Sales

Inventory Sold in 2007

Product Costs (Inventory) Inventory Not Sold in 2007 Wnwa 2008

2007 Balance Sheet Inventory Raw Materials Work in Process Finished Goods

2008 Income Statement Cost of Sales

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Potential Potential Multiple Multiple Cost Cost Classifications Classifications 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

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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.

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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

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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 be be traced traced directly directly to to specific specific units units produced. produced. Examples: Indirect labor – maintenance Indirect material – cleaning supplies Factory utility costs Supervisory costs Wnwa 2008

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Manufacturing Manufacturing costs costs Manufacturing costs are often combined as follows: Direct Material

Direct Labor

Prime Cost Wnwa 2008

Manufacturing Overhead

Conversion Cost 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

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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

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Flow Flow of of Manufacturing Manufacturing Activities Activities Materials activity

Production activity

Sales activity

Raw Materials Beginning Inventory

Work in Process

Finished Goods

Raw Materials Purchases

Factory Overhead

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Beginning Inventory

Beginning Inventory

Direct Labor

Cost of Goods Manufactured

Raw Materials Used

Finished Goods Ending Inventory

Raw Materials

Work in Process

Ending Inventory

Ending Inventory

Cost of Sales

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Statement Statement of of Cost Cost of of Goods Goods Manufactured Manufactured Cost of all goods completed and transferred from work in process to finished goods during a reporting period. + + = + – = Wnwa 2008

Direct Materials Used Direct Labor Factory Overhead Total Manufacturing Costs Beginning Work in Process Ending Work in Process Cost of Goods Manufactured 22

Product Product Cost Cost Flows Flows Raw Materials

+ =

– =

Beginning raw materials inventory Raw materials purchased Raw materials available for use in production Ending raw materials inventory Raw materials used in production

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Manufacturing Costs

Work In Process

Direct materials

As As items itemsare are removed removedfrom fromraw raw materials materialsinventory inventoryand andplaced placedinto into the theproduction production process, process, they they are are called called direct direct materials. materials. 23

Product Product Cost Cost Flows Flows Raw Materials

+ =

– =

Beginning raw materials inventory Raw materials purchased Raw materials available for use in production Ending raw materials inventory Raw materials used in production

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Manufacturing W Costs In P Conversion Conversion costsare arecosts costs Direct materialscosts incurred incurredto to + Direct labor + Mfg. overhead convert convert the the direct = Total manufacturing directmaterial material into costs into aafinished finished product. product.

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Product Product Cost Cost Flows Flows Raw Materials

+ =

– =

Beginning raw materials inventory Raw materials purchased Raw materials available for use in production Ending raw materials inventory Raw materials used in production

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Manufacturing Costs Direct materials + Direct labor + Mfg. overhead = Total manufacturing costs

Work In Process Beginning work in process inventory + Total manufacturing costs = Total work in process for the period

All All manufacturing manufacturing costs costs incurred incurred during during the theperiod period are are added addedto tothe the beginning beginning balance balanceof of work work in in process. process. 25

Product Product Cost Cost Flows Flows Raw Materials Beginning raw materials inventory + Raw materials purchased = Raw materials available for use in production

Manufacturing Costs

Work In Process

Direct materials + Direct labor + Mfg. overhead = Total manufacturing costs

Beginning work in process inventory Total manufacturing costs Total work in process for the period Ending work in process inventory Cost of goods manufactured

+ =

– =

Costs Costsassociated associatedwith withthe the goods goods that that are arecompleted completed during duringthe the period period are are transferred transferredto tofinished finished goods goods inventory. inventory. Wnwa 2008

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Product Product Cost Cost Flows Flows

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Statement Statement of of Cost Cost of of Goods Goods Manufactured Manufactured

Let’s take a look at Rocky Mountain Bikes’ Statement of Cost of Goods Manufactured. Wnwa 2008

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Statement Statement of of Cost Cost of of Goods Goods Manufactured Manufactured ROCKY MOUNTAIN BIKES STATEMENT OF COST OF GOODS MANUFACTURED FOR THE YEAR ENDED 31 DECEMBER 2006 Direct materials used in production Direct labor Total factory overhead costs

$

85,500 60,000 30,000

Total manufacturing costs for the period Beginning work in process inventory

$ 175,500 2,500

Total cost of work in process Ending work in process inventory

$ 178,000 (7,500)

Cost of goods manufactured

$ 170,500

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Computation of of Directof Material Used Statement of Goods Statement ofCostCost Cost of Goods Beginning raw materials inventory $ Manufactured Manufactured Add: Purchases of raw materials

8,000Exh. 18-16 86,500

Cost of raw materials available for use Less: Ending raw materials inventory

$ 94,500 9,000

ROCKY MOUNTAIN Cost of direct materials used inBIKES production

$ 85,500

STATEMENT OF COST OF GOODS MANUFACTURED FOR THE YEAR ENDED 31 DECEMBER 2006 Direct materials used in production Direct labor Total factory overhead costs

$

85,500 60,000 30,000

Total manufacturing costs for the period Beginning work in process inventory

$ 175,500 2,500

Total cost of work in process Ending work in process inventory

$ 178,000 (7,500)

Cost of goods manufactured

$ 170,500

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Statement Statement of of Cost Cost of of Goods Goods Manufactured Manufactured Include all direct labor ROCKY BIKES costsMOUNTAIN incurred during the STATEMENT OF COST OF GOODS period. MANUFACTURED current FOR THE YEAR ENDED 31 DECEMBER 2006

Direct materials used in production

$

Direct labor Total factory overhead costs

85,500 60,000 30,000

Total manufacturing costs for the period Beginning work in process inventory

$

175,500 2,500

Total cost of work in process Ending work in process inventory

$

178,000 (7,500)

Cost of goods manufactured

$

170,500

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Computation of Total Manufacturing Overhead Indirect labor

$

9,000

Manufacturing Manufacturing Statement Statement 6,000

Factory supervision Factory utilities

2,600

Property taxes, factory building ROCKY MOUNTAIN BIKES Factory supplies used

1,900

600 STATEMENT COST OF GOODS MANUFACTURED Factory insuranceOF expired 1,100 FOR building THE YEAR ENDED 31 DECEMBER 2006 5,300 Depreciation, and equipment Other factory overhead 3,500 Direct materials used in production $ 85,500 Totallabor factory overhead costs $ 30,000 60,000 Direct Total factory overhead costs

30,000

Total manufacturing costs for the period Beginning work in process inventory

$

175,500 2,500

Total cost of work in process Ending work in process inventory

$

178,000 (7,500)

Cost of goods manufactured

$

170,500

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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. Direct materials used in production

$

Direct labor Total factory overhead costs

85,500 60,000 30,000

Total manufacturing costs for the period Beginning work in process inventory

$

175,500 2,500

Total cost of work in process Ending work in process inventory

$

178,000 (7,500)

Cost of goods manufactured

$

170,500

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Statement Statement of of Cost Cost of of Goods Goods Manufactured Manufactured Ending work in process inventory ROCKY MOUNTAIN BIKES contains the cost of unfinished STATEMENT OFgoods, COST OF GOODS and isMANUFACTURED reported in the current FOR THE YEAR ENDED 31 DECEMBER 2006 assets section of the balance sheet. Direct materials used in production

$

Direct labor Total factory overhead costs

85,500 60,000 30,000

Total manufacturing costs for the period Beginning work in process inventory

$

175,500 2,500

Total cost of work in process Ending work in process inventory

$

178,000 (7,500)

Cost of goods manufactured

$

170,500

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Balance Balance Sheet Sheet of of aa Manufacturer Manufacturer Raw Materials

Work in Process

Finished Goods

Manufacturing Inventory Classifications Wnwa 2008

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Balance Balance Sheet Sheet of of aa Manufacturer Manufacturer Raw Materials

Materials waiting to be processed.

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Work in Process

Partially complete products. Material to which some labor and/or overhead have been added.

Finished Goods

Completed products for sale.

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Balance Balance Sheet Sheet of of aa Manufacturer Manufacturer MERCHANDISER Current Assets   

Cash Receivables Merchandise Inventory

MANUFACTURER Current Assets   

Cash Receivables Inventories Raw Materials Work in Process Finished Goods

The only difference is inventory. Wnwa 2008

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Income Income Statement Statement of of aa Manufacturer Manufacturer Merchandiser

Manufacturer

Beginning Merchandise Inventory

Beginning Finished Goods Inventory

+

+

Cost of Goods Purchased

_

The major difference

Ending Merchandise Inventory

= Wnwa 2008

Cost of Goods Manufactured

_

Ending Finished Goods Inventory Cost of Sales

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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 Cost of Sales Beg. merchandise inventory + Purchases = Goods available for sale - Ending merchandise inventory = Cost of Sales

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$ 14,200 234,150 $ 248,350

(12,100) $ 236,250

Manufacturing Company Cost of Sales Beg. finished goods inv. + Cost of goods manufactured = Goods available for sale - Ending finished goods inventory = Cost of Sales

$ 14,200 234,150 $ 248,350

(12,100) $ 236,250

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Income Income Statement Statement  Sales (-) COGS Beginning Finished goods x COGM x CGAFS x (-) Ending finished goods (x) COGS Gross Profit Operating expenses Net Profit Wnwa 2008

x

(x) x (x) x

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End of Chapter 8

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