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