McGraw-Hill/Irwin
1-1
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
26-1
Chapter
26
Accounting for
Manufacturing Activities
Section 1: Accounting for
Manufacturing Activities
Section Objectives
1.
2.
3.
4.
Prepare a statement of cost of goods manufactured.
Explain the basic components of manufacturing
cost.
Prepare an income statement for a manufacturing
business.
Prepare a balance sheet for a manufacturing
business.
26-2
Comparison
Manufacturing Businesses
Merchandising Businesses

Merchandising businesses purchase goods to be resold in
the same condition and form but at a profit.

Manufacturing businesses purchase and convert raw
materials into finished goods to be sold at a profit.
26-3
Statement of Cost of Goods Manufactured
The Cost of Goods Manufactured
line item replaces the Purchases line
item on the income statement
26-4
Manufacturing Costs Consist of Three Components
Raw
Materials
Direct
Labor
Manufacturing
Overhead
26-5
Raw Materials

Raw materials consist of direct and indirect
materials.

Examples of direct materials are wood, glue,
varnish, or hardware for a furniture maker.

Indirect materials are used to work on the products,
but do not become a part of the product.
26-6
Raw Materials and the Statement of Cost of
Goods Manufactured
2. Compute raw
materials used
1. Compute total
materials available
26-7
Examples of Direct Labor Costs

Salaries of workers who shape the lumber.

Salaries of workers who assemble the pieces into
trailers.

Labor costs for workers who paint or finish the final
products.
26-8
Indirect Labor

Costs of personnel who support production
but are not directly involved in manufacturing
(supervisors, janitors, maintenance staff).
26-9
Manufacturing Overhead

Manufacturing overhead includes all of the costs that
are not classified as direct materials and direct labor.

Manufacturing overhead may include the following:
 Indirect
labor - Costs attributable to personnel who
support the production process.
 Indirect supplies
 Utilities
 Depreciation
 Repair and maintenance
 Property taxes
 Insurance
26-10
Accounting for Work in Process on the Income Statement
An estimate is made of the costs of raw materials,
direct labor, and manufacturing overhead that
apply to work in process at the end of the period
26-11
Income Statement for a Manufacturing Concern
Figure taken from the cost of goods
manufactured statement
26-12
Inventories and the Balance Sheet
for a Manufacturing Business
Trailer Manufacturing Company
Partial Balance Sheet
December 31, 2013
Inventories
Raw Materials
24,000.00
Work in Process
12,000.00
Finished Goods
29,000.00
65,000.00
The balance sheet for a manufacturing business
contains three inventory categories
26-13
Chapter
26
Accounting for
Manufacturing Activities
Section 2: Completing the
Accounting Cycle
Section Objectives
5.
6.
7.
8.
Prepare a worksheet for a manufacturing business.
Record the end-of-period adjusting entries for a
manufacturing business.
Record closing entries for a manufacturing
business.
Record reversing entries for a manufacturing
business.
26-14
The Accounting Cycle for a
Manufacturing Business

The steps in the accounting cycle do not change for a
manufacturing business.

The worksheet must be constructed to facilitate preparation
of the cost of goods manufactured statement.

The worksheet has two new columns:

Cost of Goods Manufactured Debit column

Cost of Goods Manufactured Credit column
26-15
The worksheet of a manufacturing business contains
several new accounts:

Raw Materials Inventory

Work in Process Inventory

Finished Goods Inventory

Direct Labor

Various Manufacturing Overhead Accounts

Manufacturing Summary
26-16
Adjusting Inventory Accounts
Raw Materials
Work in Process
Finished Goods
1. DR Manufacturing Summary
CR Raw Materials Inventory
for beginning inventory
amount
3. DR Manufacturing Summary
CR Work in Process Inventory
for beginning inventory
amount
5. DR Income Summary
CR Finished Goods Inventory
for beginning inventory
amount
2. DR Raw Materials Inventory
CR Manufacturing Summary
for ending inventory
amount
4. DR Work in Process Inventory
CR Manufacturing Summary
for ending inventory
amount
6. DR Finished Goods Inventory
CR Income Summary
for ending inventory
amount
26-17
Adjusting Entries on the Worksheet

Inventory

Uncollectible accounts

Expired insurance

Supplies on hand

Depreciation

Accrued salaries

Payroll taxes on accrued payroll

Income tax payable
26-18
Preparing Financial Statements
From the Worksheet
Three sets of columns exist for the financial statements:
Cost of Goods
Manufactured
Income
Statement
Balance
Sheet
26-19