Chapter 26
Manufacturing
Accounting
Comparison of Merchandising
Firm to Manufacturing Firm
Merchandising Firm
• Buys goods in a
finished condition
• Later sells them at a
higher price in the
same condition
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Manufacturing Firm
• Buys raw materials
• Transforms them into
finished goods
• Later sells the
finished goods
26 | 5
Comparison of Merchandising
Firm to Manufacturing Firm (cont’d)
Now, let’s look at a comparison of the income
statements for a merchandising firm and a
manufacturing firm.
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26 | 6
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Statement of Cost
of Goods Manufactured
• Includes the beginning work-in-process
inventory, plus the cost of raw materials used,
plus direct labor, plus factory overhead, less the
ending work-in-process inventory
• Prepared before the income statement
Cost of Goods Manufactured
Beginning Work-in-Process Inventory
+
+
+
=
Cost of Raw Materials Used
Direct Labor
Factory Overhead
Ending Work-in-Process Inventory
Cost of Goods Manufactured
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26 | 9
Statement of Cost of Goods
Manufactured: An Example
Park Manufacturing Company, Inc.
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Elements of Manufacturing Costs
• Raw materials
• Direct labor
• Factory overhead
– Indirect labor
– Indirect materials
© Royalty-Free/Digital Vision
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Raw Materials
• The materials that enter directly into and
become a part of the finished product
• Also called direct materials
• Examples:
– The plastic used to make a television frame
– The wood or paint used to make cabinets or
boomerangs
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26 | 12
Direct Labor
• Wages paid to factory
employees who
work—with machines
or hand tools—directly
on raw materials to
convert them into
finished products
© Royalty-Free/Digital Vision
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26 | 13
Factory Overhead
• All manufacturing costs that cannot be traced
directly to products being manufactured
• Examples:
–
–
–
–
–
–
–
–
Heat, light, and power
Repairs and maintenance
Depreciation expense, factory equipment
Factory insurance expired
Workers’ compensation insurance
Payroll taxes on factory employees
Indirect labor
Indirect materials
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26 | 14
Indirect Labor
• The cost of work performed by workers who
keep the plant in operation rather than by
workers who are directly occupied with
production
• Examples of such workers:
– Operations personnel
– Factory maintenance workers
– Timekeepers
• Considered part of factory overhead
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26 | 15
Indirect Materials
• Factory supplies, such as oil, grease, and
cleaning fluids, used to keep the plant in
operation
• Considered part of factory overhead
• Balance of Factory Supplies Used reveals the
cost of these materials
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26 | 16
Manufacturing Summary Account
• Used to make adjustments to Raw Materials
Inventory and Work-in-Process Inventory
accounts
• For beginning inventory amounts:
– Debit Manufacturing Summary.
– Credit the Inventory account.
• For counted and valued inventory amounts:
– Debit the Inventory account.
– Credit Manufacturing Summary.
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26 | 18
A Work Sheet for a
Manufacturing Enterprise
• Contains an extra pair of columns entitled
Statement of Cost of Goods Manufactured
• Manufacturing costs are recorded in the Trial
Balance Debit column
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26 | 19
Adjustments for Raw Materials
Inventory and Work-in-Process Inventory
• Use the Manufacturing Summary account.
– Debits in the Manufacturing Summary account:
• Represent beginning balances of Raw Materials
Inventory and Work-in-Process Inventory
• Are listed in the Statement of Cost of Goods
Manufactured Debit column
– Credits in the Manufacturing Summary account:
• Represent ending balances of Raw Materials
Inventory and Work-in-Process Inventory
• Are listed in the Statement of Cost of Goods
Manufactured Credit column
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26 | 20
Cost of Goods Manufactured
• The difference between the Statement of Cost
of Goods Manufactured Debit and Credit columns
is the amount of the cost of goods manufactured.
– Recorded as a credit to balance off the columns
– Also recorded in the Income Statement Debit column
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26 | 21
Adjusting Raw Materials and Work-inProcess Inventories: An Example
Data
• a.- b. Raw Materials Inventory at Dec. 31,
$100,000
• c.- d. Work-in-Process Inventory at Dec. 31,
$130,000
• e.- f. Finished Goods Inventory at Dec. 31,
$250,000
Each account balance is transferred to
Manufacturing Summary.
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26 | 22
Adjusting Raw Materials and Work-inProcess Inventories: An Example (cont’d)
• T Accounts
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26 | 23
Steps in the Closing Process
1. Close the costs that appear in the statement
of cost of goods manufactured into the
Manufacturing Summary account.
2. Close the Manufacturing Summary account into
the Income Summary account (by the amount of
cost of goods manufactured).
3. Close the revenue account into the Income
Summary account.
Let’s look at a T account example for step 2. 
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T Account for Step 2
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Steps in the Closing Process (cont’d)
4. Close expense accounts into the Income
Summary account.
5. Close Income Tax Expense into the Income
Summary account.
6. Close the Income Summary account into the
Retained Earnings account (by the amount of
net income).
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26 | 26
Determining the Value of
Ending Raw Materials Inventory
• Raw materials are in their original form; nothing
has been done to them.
– Determine the quantities on hand and the unit costs.
– Calculate the value of ending inventory by:
• FIFO
• LIFO
• Weighted-average method
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26 | 27
Inventory Systems for
Raw Materials Inventory
• Perpetual inventory system
– Debit Raw Materials Inventory when materials are
purchased.
– Credit Raw Materials Inventory when materials are
put into production.
– The perpetual inventory system provides a
continuous running balance of the inventory.
• Periodic inventory system
– Verify the balance of the account by counting the
goods on hand.
– Adjust by debiting or crediting Inventory and Cost of
Goods Sold.
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26 | 28
Determining the Ending Inventory
Value of Work-in-Process Inventory
• Record the cost and amount of raw materials
placed in production.
• Record the cost of direct labor expended on the
ending work-in-process inventory.
• Estimate the cost of factory overhead.
– Use a percentage of the direct labor cost.
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26 | 29
Job-Order Cost Accounting
• Product costing system used by companies
making products in batches
• Raw materials, direct labor, and factory
overhead costs assigned to specific job orders
• Each batch of units given a job-order number
• Examples:
– Custom furniture builder
– Custom print shop
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Journal Entries for Job-Order Cost
Accounting System: An Example
a) Purchased raw materials, $100,000, paying
cash.
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Journal Entries for Job-Order Cost
Accounting System: An Example (cont’d)
b) Placed $80,000 of raw materials into
production.
c) Issued checks for direct labor, $40,000.
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Journal Entries for Job-Order Cost
Accounting System: An Example (cont’d)
d) Applied factory overhead at the rate of 70
percent of direct labor.
e) Transferred completed production to Finished
Goods Inventory.
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26 | 35
Control Accounts
and Subsidiary Ledgers
• The costs of production (raw materials, direct
labor, and factory overhead) are debited to the
account for that job-order number in the work-inprocess subsidiary ledger.
• When the job is completed, the Finished Goods
Inventory account is debited and the Work-inProcess Inventory account is credited.
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T Accounts for Journal Entries
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26 | 37
Process Cost Accounting System
• A product costing system used by companies
that maintain a continuous production flow
– The output consists of homogeneous units.
– The production flows from one department to another
department.
• Manufacturing costs assigned to departments
that complete successive stages of production
• Examples:
– Cement manufacturer
– Snack food manufacturer
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Journal Entries for
a Process Cost Accounting System
• To record the costs used by the department:
– Debit that department’s Work-in-Process Inventory
account.
• To record the passing on of production from one
department to another:
– Debit the second department’s Work-in-Process Inventory
account.
– Credit the first department’s Work-in-Process Inventory
account.
• Upon completion of the last stage of production:
– Debit Finished Goods Inventory.
– Credit the last department’s Work-in-Process Inventory
account.
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Demonstration Problem
• Create the statement of cost of goods manufactured
for Simpson Manufacturing Company, Inc.
• Journalize the adjusting entries for the raw materials
inventory and the work-in-process inventory.
• Journalize the closing entries for manufacturing
costs.
• Close Manufacturing Summary to Income Summary.
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26 | 47
Simpson Manufacturing Company, Inc.
Statement of Cost of Goods Manufactured
For Year Ended December 31, 20—
Work-in-Process Inventory, January 1, 20—
$ 140,000.00
Raw Materials:
Raw Materials Inventory, January 1, 20—
$ 90,000.00
Raw Materials Purchases (net)
230,000.00
Cost of Raw Materials Available for Use
$ 320,000.00
Less Raw Materials Inventory, December 31, 20—
100,000.00
Cost of Raw Materials Used
$ 220,000.00
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26 | 48
Simpson Manufacturing Company, Inc.
Statement of Cost of Goods Manufactured
For Year Ended December 31, 20—
Work-in-Process Inventory, January 1, 20—
$ 140,000.00
Raw Materials:
Raw Materials Inventory, January 1, 20—
$ 90,000.00
Raw Materials Purchases (net)
230,000.00
Cost of Raw Materials Available for Use
$ 320,000.00
Less Raw Materials Inventory, December 31, 20—
100,000.00
Cost of Raw Materials Used
$ 220,000.00
Direct Labor
565,000.00
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26 | 49
Simpson Manufacturing Company, Inc.
Statement of Cost of Goods Manufactured
For Year Ended December 31, 20—
Work-in-Process Inventory, January 1, 20—
$ 140,000.00
Raw Materials:
Raw Materials Inventory, January 1, 20—
$ 90,000.00
Raw Materials Purchases (net)
230,000.00
Cost of Raw Materials Available for Use
$ 320,000.00
Less Raw Materials Inventory, December 31, 20—
100,000.00
Cost of Raw Materials Used
$ 220,000.00
Direct Labor
565,000.00
Factory Overhead:
Indirect Labor
$ 120,000.00
Supervisory Sales
110,000.00
Heat, Light, and Power
42,000.00
Depreciation Expense, Factory Equipment
32,000.00
Depreciation Expense, Factory Building
25,000.00
Repairs and Maintenance
24,000.00
Factory Insurance Expired
22,000.00
Factory Supplies Used
14,000.00
Miscellaneous Factory Costs
16,000.00
Total Factory Overhead
405,000.00
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26 | 50
Simpson Manufacturing Company, Inc.
Statement of Cost of Goods Manufactured
For Year Ended December 31, 20—
Work-in-Process Inventory, January 1, 20—
$ 140,000.00
Raw Materials:
Raw Materials Inventory, January 1, 20—
$ 90,000.00
Raw Materials Purchases (net)
230,000.00
Cost of Raw Materials Available for Use
$ 320,000.00
Less Raw Materials Inventory, December 31, 20—
100,000.00
Cost of Raw Materials Used
$ 220,000.00
Direct Labor
565,000.00
Factory Overhead:
Indirect Labor
$ 120,000.00
Supervisory Sales
110,000.00
Heat, Light, and Power
42,000.00
Depreciation Expense, Factory Equipment
32,000.00
Depreciation Expense, Factory Building
25,000.00
Repairs and Maintenance
24,000.00
Factory Insurance Expired
22,000.00
Factory Supplies Used
14,000.00
Miscellaneous Factory Costs
16,000.00
Total Factory Overhead
405,000.00
Total Manufacturing Costs
1,190,000.00
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26 | 51
Simpson Manufacturing Company, Inc.
Statement of Cost of Goods Manufactured
For Year Ended December 31, 20—
Work-in-Process Inventory, January 1, 20—
$ 140,000.00
Raw Materials:
Raw Materials Inventory, January 1, 20—
$ 90,000.00
Raw Materials Purchases (net)
230,000.00
Cost of Raw Materials Available for Use
$ 320,000.00
Less Raw Materials Inventory, December 31, 20—
100,000.00
Cost of Raw Materials Used
$ 220,000.00
Direct Labor
565,000.00
Factory Overhead:
Indirect Labor
$ 120,000.00
Supervisory Sales
110,000.00
Heat, Light, and Power
42,000.00
Depreciation Expense, Factory Equipment
32,000.00
Depreciation Expense, Factory Building
25,000.00
Repairs and Maintenance
24,000.00
Factory Insurance Expired
22,000.00
Factory Supplies Used
14,000.00
Miscellaneous Factory Costs
16,000.00
Total Factory Overhead
405,000.00
Total Manufacturing Costs
1,190,000.00
Total Cost of Work-in-Process During Period
$ 1,330,000.00
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26 | 52
Simpson Manufacturing Company, Inc.
Statement of Cost of Goods Manufactured
For Year Ended December 31, 20—
Work-in-Process Inventory, January 1, 20—
$ 140,000.00
Raw Materials:
Raw Materials Inventory, January 1, 20—
$ 90,000.00
Raw Materials Purchases (net)
230,000.00
Cost of Raw Materials Available for Use
$ 320,000.00
Less Raw Materials Inventory, December 31, 20—
100,000.00
Cost of Raw Materials Used
$ 220,000.00
Direct Labor
565,000.00
Factory Overhead:
Indirect Labor
$ 120,000.00
Supervisory Sales
110,000.00
Heat, Light, and Power
42,000.00
Depreciation Expense, Factory Equipment
32,000.00
Depreciation Expense, Factory Building
25,000.00
Repairs and Maintenance
24,000.00
Factory Insurance Expired
22,000.00
Factory Supplies Used
14,000.00
Miscellaneous Factory Costs
16,000.00
Total Factory Overhead
405,000.00
Total Manufacturing Costs
1,190,000.00
Total Cost of Work-in-Process During Period
$ 1,330,000.00
Less Work-in-Process Inventory, December 31, 20—
130,000.00
$
1,200,000.00
Cost of Goods Manufactured
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Simpson Manufacturing Company, Inc.
Statement of Cost of Goods Manufactured
For Year Ended December 31, 20—
Work-in-Process Inventory, January 1, 20—
$ 140,000.00
Raw Materials:
Raw Materials Inventory, January 1, 20—
$ 90,000.00
Raw Materials Purchases (net)
230,000.00
Cost of Raw Materials Available for Use
$ 320,000.00
Less Raw Materials Inventory, December 31, 20—
100,000.00
Cost of Raw Materials Used
$ 220,000.00
Direct Labor
565,000.00
Factory Overhead:
Indirect Labor
$ 120,000.00
Supervisory Sales
110,000.00
Heat, Light, and Power
42,000.00
Depreciation Expense, Factory Equipment
32,000.00
Depreciation Expense, Factory Building
25,000.00
Repairs and Maintenance
24,000.00
Factory Insurance Expired
22,000.00
Factory Supplies Used
14,000.00
Miscellaneous Factory Costs
16,000.00
Total Factory Overhead
405,000.00
Total Manufacturing Costs
1,190,000.00
Total Cost of Work-in-Process During Period
$ 1,330,000.00
Less Work-in-Process Inventory, December 31, 20—
130,000.00
Cost of Goods Manufactured
$ 1,200,000.00
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Adjusting Entries for Raw Materials Inventory
Simpson Manufacturing Company, Inc.
Statement of Cost of Goods Manufactured
For Year Ended December 31, 20—
Work-in-Process Inventory, January 1, 20—
$ 140,000.00
Raw Materials:
Raw Materials Inventory, January 1, 20—
$ 90,000.00
Raw Materials Purchases (net)
230,000.00
Cost of Raw Materials Available for Use
$ 320,000.00
Less Raw Materials Inventory, December 31, 20—
100,000.00
Cost of Raw Materials Used
$ 220,000.00
Direct Labor
565,000.00
Factory Overhead:
Indirect Labor
$ 120,000.00
Supervisory Sales
110,000.00
Heat, Light, and Power
42,000.00
Depreciation Expense, Factory Equipment
32,000.00
Depreciation Expense, Factory Building
25,000.00
Repairs and Maintenance
24,000.00
Factory Insurance Expired
22,000.00
Factory Supplies Used
14,000.00
Miscellaneous Factory Costs
16,000.00
Total Factory Overhead
405,000.00
Total Manufacturing Costs
1,190,000.00
Total Cost of Work-in-Process During Period
$ 1,330,000.00
Less Work-in-Process Inventory, December 31, 20—
130,000.00
Cost of Goods Manufactured
$ 1,200,000.00
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26 | 55
Adjusting Entries for
Raw Materials Inventory (cont’d)
General Journal
Date
Description
20—
Adjusting Entries
Dec.
31 Manufacturing Summary
Raw Materials Inventory
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Page 11
Post.
Ref.
Debit
Credit
90,000.00
90,000.00
26 | 56
Adjusting Entries for Raw Materials Inventory (cont’d)
Simpson Manufacturing Company, Inc.
Statement of Cost of Goods Manufactured
For Year Ended December 31, 20—
Work-in-Process Inventory, January 1, 20—
$ 140,000.00
Raw Materials:
Raw Materials Inventory, January 1, 20—
$ 90,000.00
Raw Materials Purchases (net)
230,000.00
Cost of Raw Materials Available for Use
$ 320,000.00
Less Raw Materials Inventory, December 31, 20—
100,000.00
Cost of Raw Materials Used
$ 220,000.00
Direct Labor
565,000.00
Factory Overhead:
Indirect Labor
$ 120,000.00
Supervisory Sales
110,000.00
Heat, Light, and Power
42,000.00
Depreciation Expense, Factory Equipment
32,000.00
Depreciation Expense, Factory Building
25,000.00
Repairs and Maintenance
24,000.00
Factory Insurance Expired
22,000.00
Factory Supplies Used
14,000.00
Miscellaneous Factory Costs
16,000.00
Total Factory Overhead
405,000.00
Total Manufacturing Costs
1,190,000.00
Total Cost of Work-in-Process During Period
$ 1,330,000.00
Less Work-in-Process Inventory, December 31, 20—
130,000.00
Cost of Goods Manufactured
$ 1,200,000.00
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Adjusting Entries for
Raw Materials Inventory (cont’d)
General Journal
Date
Description
20—
Adjusting Entries
Dec.
31 Manufacturing Summary
Raw Materials Inventory
31 Raw Materials Inventory
Manufacturing Summary
Copyright © Houghton Mifflin Company. All rights reserved.
Page 11
Post.
Ref.
Debit
Credit
90,000.00
90,000.00
100,000.00
100,000.00
26 | 58
Adjusting Entries for Work-in-Process Inventory
Simpson Manufacturing Company, Inc.
Statement of Cost of Goods Manufactured
For Year Ended December 31, 20—
Work-in-Process Inventory, January 1, 20—
$ 140,000.00
Raw Materials:
Raw Materials Inventory, January 1, 20—
$ 90,000.00
Raw Materials Purchases (net)
230,000.00
Cost of Raw Materials Available for Use
$ 320,000.00
Less Raw Materials Inventory, December 31, 20—
100,000.00
Cost of Raw Materials Used
$ 220,000.00
Direct Labor
565,000.00
Factory Overhead:
Indirect Labor
$ 120,000.00
Supervisory Sales
110,000.00
Heat, Light, and Power
42,000.00
Depreciation Expense, Factory Equipment
32,000.00
Depreciation Expense, Factory Building
25,000.00
Repairs and Maintenance
24,000.00
Factory Insurance Expired
22,000.00
Factory Supplies Used
14,000.00
Miscellaneous Factory Costs
16,000.00
Total Factory Overhead
405,000.00
Total Manufacturing Costs
1,190,000.00
Total Cost of Work-in-Process During Period
$ 1,330,000.00
Less Work-in-Process Inventory, December 31, 20—
130,000.00
Cost of Goods Manufactured
$ 1,200,000.00
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Adjusting Entries for
Work-in-Process Inventory (cont’d)
General Journal
Date
20—
Dec.
Description
Adjusting Entries
31 Manufacturing Summary
Raw Materials Inventory
Page 11
Post.
Ref.
Debit
90,000.00
90,000.00
31 Raw Materials Inventory
Manufacturing Summary
100,000.00
31 Manufacturing Summary
Work-in-Process Inventory
140,000.00
Copyright © Houghton Mifflin Company. All rights reserved.
Credit
100,000.00
140,000.00
26 | 60
Adjusting Entries for Work-in-Process Inventory (cont’d)
Simpson Manufacturing Company, Inc.
Statement of Cost of Goods Manufactured
For Year Ended December 31, 20—
Work-in-Process Inventory, January 1, 20—
$ 140,000.00
Raw Materials:
Raw Materials Inventory, January 1, 20—
$ 90,000.00
Raw Materials Purchases (net)
230,000.00
Cost of Raw Materials Available for Use
$ 320,000.00
Less Raw Materials Inventory, December 31, 20—
100,000.00
Cost of Raw Materials Used
$ 220,000.00
Direct Labor
565,000.00
Factory Overhead:
Indirect Labor
$ 120,000.00
Supervisory Sales
110,000.00
Heat, Light, and Power
42,000.00
Depreciation Expense, Factory Equipment
32,000.00
Depreciation Expense, Factory Building
25,000.00
Repairs and Maintenance
24,000.00
Factory Insurance Expired
22,000.00
Factory Supplies Used
14,000.00
Miscellaneous Factory Costs
16,000.00
Total Factory Overhead
405,000.00
Total Manufacturing Costs
1,190,000.00
Total Cost of Work-in-Process During Period
$ 1,330,000.00
Less Work-in-Process Inventory, December 31, 20—
130,000.00
Cost of Goods Manufactured
$ 1,200,000.00
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Adjusting Entries for
Work-in-Process Inventory (cont’d)
General Journal
Date
20—
Dec.
Description
Adjusting Entries
31 Manufacturing Summary
Raw Materials Inventory
Page 11
Post.
Ref.
Debit
90,000.00
90,000.00
31 Raw Materials Inventory
Manufacturing Summary
100,000.00
31 Manufacturing Summary
Work-in-Process Inventory
140,000.00
31 Work-in-Process Inventory
Manufacturing Summary
130,000.00
Copyright © Houghton Mifflin Company. All rights reserved.
Credit
100,000.00
140,000.00
130,000.00
26 | 62
Entry for Closing Manufacturing Costs
Simpson Manufacturing Company, Inc.
Statement of Cost of Goods Manufactured
For Year Ended December 31, 20—
Work-in-Process Inventory, January 1, 20—
$ 140,000.00
Raw Materials:
Raw Materials Inventory, January 1, 20—
$ 90,000.00
Raw Materials Purchases (net)
230,000.00
Cost of Raw Materials Available for Use
$ 320,000.00
Less Raw Materials Inventory, December 31, 20—
100,000.00
Cost of Raw Materials Used
$ 220,000.00
Direct Labor
565,000.00
Factory Overhead:
Indirect Labor
$ 120,000.00
Supervisory Sales
110,000.00
Heat, Light, and Power
42,000.00
Depreciation Expense, Factory Equipment
32,000.00
Depreciation Expense, Factory Building
25,000.00
Repairs and Maintenance
24,000.00
Factory Insurance Expired
22,000.00
Factory Supplies Used
14,000.00
Miscellaneous Factory Costs
16,000.00
Total Factory Overhead
405,000.00
Total Manufacturing Costs
1,190,000.00
Total Cost of Work-in-Process During Period
$ 1,330,000.00
Less Work-in-Process Inventory, December 31, 20—
130,000.00
Cost of Goods Manufactured
$ 1,200,000.00
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26 | 63
Entry for Closing Manufacturing Costs (cont’d)
General Journal
Date
Description
20—
Dec. 31 Manufacturing Summary
Raw Materials Purchases
Direct Labor
Indirect Labor
Supervisory Sales
Heat, Light, and Power
Depreciation Expense, Factory Equipment
Depreciation Expense, Factory Building
Repairs and Maintenance
Factory Insurance Expired
Factory Supplies Used
Miscellaneous Factory Costs
Copyright © Houghton Mifflin Company. All rights reserved.
Page 12
Post.
Ref.
Debit
Credit
1,200,000.00
230,000.00
565,000.00
120,000.00
110,000.00
42,000.00
32,000.00
25,000.00
24,000.00
22,000.00
14,000.00
16,000.00
26 | 64
Closing Entry for Manufacturing Summary
General Journal
Date
Description
20—
Dec. 31 Manufacturing Summary
Raw Materials Purchases
Direct Labor
Indirect Labor
Supervisory Sales
Heat, Light, and Power
Depreciation Expense, Factory Equipment
Depreciation Expense, Factory Building
Repairs and Maintenance
Factory Insurance Expired
Factory Supplies Used
Miscellaneous Factory Costs
31
Income Summary
Manufacturing Summary
Copyright © Houghton Mifflin Company. All rights reserved.
Page 12
Post.
Ref.
Debit
Credit
1,200,000.00
230,000.00
565,000.00
120,000.00
110,000.00
42,000.00
32,000.00
25,000.00
24,000.00
22,000.00
14,000.00
16,000.00
1,200,000.00
1,200,000.00
26 | 65