Download Chapter1

Chapter1
ACCOUNTING FOR
MANUFACTURING
OPERATION
• 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
Comparing Merchandising
and Manufacturing
Activities
Merchandisers . . .
– Buy finished
goods.
– Sell finished
goods.
MegaLoMart
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
Financial Accounting
Management Accounting
Provide information about the
Provide information for
Purpose
financial position and
planning, evaluating, and
performance of the company.
rewarding performance.
Balance sheet, income
Types of
statement, and statement of Various, non-standard reports.
Reports
cash flows.
Standards
GAAP
None
Reporting Usually, the company taken
A component of the
Entity
as a whole.
company's value chain.
Time
Usually a year, quarter, or a
Any period.
Periods
month.
Investors, creditors, and other Management, customers, and
Users
external parties.
others in the value chain.
MANAGERIAL
COST CONCEPTS
• Manufacturing consists of activities and
processes that convert raw materials into
finished goods.
Direct Costs and Indirect
Costs
Direct costs
Indirect costs
• Costs that can be
easily and conveniently
traced to a unit of
product or other cost
objective.
• Costs cannot be easily
and conveniently
traced to a unit of
product or other cost
object.
• Examples:
– Direct material
– Direct labor
• Example:
Manufacturing
overhead
Manufacturing costs
• Manufacturing costs are usually
classified as follows:
1. Direct materials,
2. Direct labor, and
3. Manufacturing overhead.
Manufacturing Costs
Direct
Materials
Direct
Labor
The Product
Manufacturing
Overhead
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 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 workers
Manufacturing/Factory Overheads
 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.
Examples: 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 includes
1 indirect materials;
2 indirect labor;
3 depreciation on factory buildings and machines
4 insurance, taxes, and maintenance on
factory facilities.
COST OF GOODS SOLD
COMPONENTS
• Under a periodic inventory system, the
income statements of a merchandiser and a
manufacturer differ in the cost of goods
sold section.
ILLUSTRATION
COST OF GOODS SOLD
COMPONENTS
Merchandiser
Beginning
Merchandise
Inventory
+
Cost of Goods
Purchased
-
Ending
Merchandise
Inventory
=
Cost of
Goods Sold
Manufacturer
Beginning
Finished Goods
Inventory
+
Cost of Goods
Manufactured
-
Ending
Finished Goods
Inventory
=
COST OF GOODs SOLD STATEMENT
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Direct materials:
Beginning Materials inventory
Purchases
xxx
less purchases returns and allowances xxx
Materials available for use
less ending materials inventory
direct materials consumed
Direct labor
Factory overhead
Indirect labor
Salaries
Payroll taxes
Power
Heat
Light
Factory supplies
Depreciation-factory building
Depreciation – machinery
Repairs and maintenance
Patent
Tools and dies used
Insurance
Total factory overhead cost
Total manufacturing cost
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
•
•
•
•
•
•
•
•
•
Total manufacturing cost
Add beginning work in process inventory
less ending work in process inventory
Cost of goods manufactured
Add beginning finished goods inventory
Cost of goods available for sale
less ending finished goods inventory
Cost of goods sold
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
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 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
Manufacturing costs are often
combined as follows:
Direct
Materials
Direct
Labor
Prime
Cost
Manufacturing
Overhead
Conversion
Cost
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
Product Costs
Manufacturing
Costs
Direct Labor
Manufacturing
Overhead
Period Costs
Selling Expenses
Nonmanufacturing
Costs
Administrative
Expenses
{
{
Direct Materials
Prime
Costs
Conversion
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.