2024. 02. 19.
Session 2
Financial statements of manufacturing
companies
1
1
1.
2.
Define the various costs of manufacturing
products and providing services as well as
the costs of selling and administration.
Prepare SPL for manufacturing and service
organizations.
2
1
2024. 02. 19.
3

Costs are used for:
◦
◦
◦
◦
◦
Profit measurement
Inventory valuation
Decision-making
Performance measurement
Control
The term ’cost’ always needs further clarification.
3


There are two types of output: products and
services.
Products are goods produced by converting
raw materials through the use of labor and
indirect manufacturing resources, such as the
manufacturing plant, land, and machinery.
◦ Televisions, hamburgers, automobiles, computers,
clothes, and furniture are examples of products.
4
2
2024. 02. 19.

Services are tasks or activities performed for
a customer or an activity performed using an
organization’s products or facilities.
◦ E.g. Car rental, video rental, and skiing
5

Services differ from products in many ways.
1
Services are intangible
2
Services are perishable
3
Services require direct
contact between providers
and buyers
6
3
2024. 02. 19.

Product (manufacturing) costs are costs:
◦ both direct and indirect, of producing a product
◦ in a manufacturing firm or of acquiring a product in
a merchandising firm and preparing it for sale.
7


Direct costs are costs that can be easily and
accurately traced to a product (wood-desk)
When a cost is easy to trace, we mean that
the relationship between the cost and the
object can be physically observed, is easy to
track
8
4
2024. 02. 19.

Indirect costs are costs that cannot be easily
and accurately traced to a product
◦ E.g. electricity cost in a factory building

Allocation means that an indirect cost is
assigned to a product by using a reasonable
and convenient method
◦ See „management accounting” in a year
9



Product costs are inventoried.
Product costs are first added to an inventory
account and remain in inventory until sold, at
which time they are transferred to cost of goods.
Product costs are classified as direct materials,
direct labor, and manufacturing overhead.
10
5
2024. 02. 19.
Activities and processes that convert raw materials into
finished goods.
LO 2
11
11
• Raw materials are basic materials
and parts used in manufacturing
process
• Raw materials that can be
physically and directly associated
(traced) with finished are direct
materials
LO 2
12
12
6
2024. 02. 19.
Have one of two characteristics
1. Not physically part of finished product
2. Are impractical to trace to finished product because
their association with finished product is too small in
terms of cost
Considered part of manufacturing overhead
LO 2
13
13
Direct Labor
Work of factory employees that
can be physically and directly
associated with converting raw
materials into finished goods.
Indirect Labor
◦ Work of factory employees that has no association with
finished product or
◦ which is impractical to trace costs to goods produced.
LO 2
14
14
7
2024. 02. 19.
◦ Costs indirectly associated with
manufacturing the finished product
◦ All manufacturing costs except
direct materials and direct labor
◦ Also called factory overhead,
indirect manufacturing costs, or
burden
LO 2
15
15


Costs are included as manufacturing
overhead if they cannot be traced to the cost
object of interest
Manufacturing overhead cost category
includes a variety of items.
◦ Examples: depreciation on plant buildings and
equipment, janitorial and maintenance labor, plant
supervision, materials handling, power for plant
utilities, and plant property taxes.
16
8
2024. 02. 19.
17
17
•
•
•
•
Components:
o
Direct materials
o
Direct labor
o
Manufacturing overhead
Costs that are an integral part of producing product
Recorded in “inventory” account
Not an expense (COGS) until goods are sold
LO 2
18
18
9
2024. 02. 19.
◦ Charged to expense as incurred
◦ Non-manufacturing costs
◦ Includes all selling and administrative expenses
LO 2
19
LO 2
20
19
20
10
2024. 02. 19.
The total product cost equals the sum of direct
materials, direct labor, and manufacturing
overhead:
Total product post = DM + DL + MOH
The unit product cost equals total product cost
divided by the number of units produced:
Per-unit Cost = Total Product Cost ÷ Number of
Units Produced
21
Illustration: Suppose you started your own snowboard factory,
Terrain Park Boards. Here are some of the costs that your
snowboard factory would incur. Assign the following costs:
LO 2
22
22
11
2024. 02. 19.
LO 2
23
23
If Terrain Park Boards produces 10,000 snowboards the
first year, what would be the total manufacturing costs?
Cost Number and Item
1. Material cost ($30 × 10,000)
2. Labor cost ($40 × 10,000)
Manufacturing Cost
$300,000
400,000
3. Depreciation on factory equipment
25,000
4. Property taxes on factory building
6,000
7. Maintenance salaries (factory facilities)
45,000
8. Salary of plant manager
70,000
Total manufacturing costs
LO 2
$846,000
24
24
12
2024. 02. 19.
25
26

Merchandising companies:
buy merchandise to resell it
◦ Retailer / and wholesaler

Manufacturing
companies:
◦ make goods to sell

Service providers
26
13
2024. 02. 19.
Operating Cycles
The operating
cycle of a
merchandising
company
ordinarily is longer
than that of a
service
company.
27
28
Merchandising
Company
One Classification:

Inventory
• HELPFUL HINT
Regardless of the classification,
companies report all inventories
under Current Assets on the
statement of financial position
Manufacturing
Company
Three Classifications:

Raw Materials

Work in Process

Finished Goods
28
14
2024. 02. 19.
Inventory accounts of a manufacturer
•
•
•
Raw Materials Inventory: Shows the cost of raw
Work in Process Inventory: Shows the cost applicable to
units that have been started into production but are only
partially completed
Finished Goods Inventory: Shows the cost of completed
goods on hand
LO 3
29
29
30
https://group.mercedesbenz.com/documents/investors/reports/annualreport/mercedes-benz/mercedes-benz-ir-annual-report-2021incl-combined-management-report-mbg-ag.pdf
30
15
2024. 02. 19.
LO 3
31
31
32
Manufacturing companies
32
16
2024. 02. 19.


The cost of goods manufactured represents
the total product cost of goods completed
during the current period and transferred to
finished goods inventory.
The cost of direct materials used in
production can be derived using the following
formula:
33

The direct materials is then used to calculate
the cost of goods manufactured as follows:
+ Direct materials
+ Direct labor
+ Manufacturing overhead costs
+ Beginning WIP inventory
- Ending WIP inventory
= Cost of goods manufactured
34
17
2024. 02. 19.


Once the direct materials are calculated, the
direct labor and manufacturing overhead for
the period are added to get the total
manufacturing cost for the period.
The second type of inventory—work in
process (WIP) is the cost of the partially
completed goods that are still on the factory
floor at the end of a time period.
35
◦ WIP units have been started, but not finished; they have
some value, but not as much as they will when they are
completed; and there are beginning and ending
inventories of WIP.
◦ We must adjust the total manufacturing cost for the time
period for the inventories of WIP.
◦ When that is done, we will have the total cost of the goods
that were completed and transferred from work-inprocess inventory to finished goods inventory during the
time period.
36
18
2024. 02. 19.
37
LO 3
38
38
19
2024. 02. 19.
LO-3
39
40
20
2024. 02. 19.
The following information is available for Keystone Company.
Raw materials inventory
Work in process inventory
Materials purchased in March
Direct labor in March
Manufacturing overhead in March
March 1
March 31
$12,000
$10,000
2,500
4,000
$90,000
75,000
220,000
Prepare the cost of goods manufactured schedule for the month
of March 2020.
LO 3
41
LO 3
42
41
42
21
2024. 02. 19.
Cost of goods sold represents the cost of
goods that were sold during the period and
then transferred from finished goods
inventory on the SFP to cost of goods sold on
SPL (i.e., as an inventory expense). Cost of
goods sold is calculated as:
+ Beginning finished goods inventory
+ Cost of goods manufactured
- Ending finished goods inventory
= Cost of goods sold

43
LO 3
44
44
22
2024. 02. 19.
45
46
23
2024. 02. 19.
Relationship Between Flow of Costs,
Inventories, and Cost of Goods Sold
47
47
48
24