COURSE
ESSENTIAL
STANDARD
OBJECTIVE
ESSENTIAL
QUESTIONS
6312 Accounting II
7.00 C3
Unit C Inventory Control and Cost
Accounting
12% Apply concepts for cost accounting procedures.
7.01 B2 4% Understand cost accounting concepts and practices for a manufacturing business.
 How does a manufacturing business differ from other businesses?
 What are the elements of manufacturing costs?

What is the purpose of manufacturing inventories and cost ledgers?
UNPACKED CONTENT
I. Types of Business Entities
A. Service businesses – fulfill people’s wants and needs primarily through the efforts of people providing services, not inventory or merchandise
1. Financial statements do not contain Inventory or Purchases accounts.
2. Examples: accounting firms, law firms, medical practices, and beauty/barber shops
B. Merchandising businesses – fulfill people’s wants and needs by providing tangible items called inventory or merchandise
1. These businesses purchase inventory and, without changing the form of the good, resell the products to customers.
2. Financial statements contain Inventory and Purchases accounts.
3. Examples: department stores and grocery stores
C. Manufacturing businesses
– buy materials and use labor and machinery to change the materials into a finished product for sale
1. Sell their finished product to merchandising businesses, who then sell to customers
2. Financial statements contain several Inventory and Purchases accounts:
Raw-Materials Inventory, Work-in-Process Inventory, and Finished-Goods
Inventory.
3. Examples: auto makers, furniture makers, clothing makers
II. Elements of Manufacturing Costs
– all finished products include three cost elements
A. Direct materials
1. Materials that are of significant value in the cost of a finished product and that become an identifiable part of the finished product
2. Includes all items used in the manufacturing process that have sufficient value
B. Direct labor
1. Salaries/wages of factory workers who directly make a product
2. Does not include salaries of supervisors, maintenance workers, and others who do not directly work on the manufacture of a product
C. Factory overhead
1. All expenses other than direct materials and direct labor that apply to making products
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2. Indirect materials a. Materials used in the completion of a product that are of insignificant value to justify accounting for separately b. May include items such as glue, solder, bolts, and rivets c. Materials and supplies used such as cleaning supplies and lubricants
3. Indirect labor a. Salaries/wages of people are not directly involved in making the product b. Examples: supervisory, clerical, and maintenance workers
4. Other indirect costs a. Depreciation of buildings and equipment b. Repairs to factory buildings and equipment c. Insurance on building, equipment, and inventory stock d. Taxes on property owned e. Heat, lighting, and power
III. Manufacturing Inventories and Cost Ledgers
A. Types of manufacturing inventories
1. Materials inventory a. Materials on hand that have not yet been used in making the product b. Includes all products meant for production that have not been used
2. Work-in-process inventory a. Products in the process of being manufactured b. Includes all costs spent on the product to date
3. Finished-goods inventory a. Manufactured products that are fully completed b. Finished products still on hand that have not been sold
4. Perpetual versus periodic inventory a. Perpetual inventory - a system which updates inventory on a continuous basis; an ongoing maintenance of stock b. Periodic inventory – a system which updates inventory on a periodic basis such as monthly, quarterly or annually
B. Subsidiary cost ledgers:
1. Materials ledger – a record of all materials to be used in the manufacturing process
2. Materials requisition
– prepared to request materials, both direct and indirect, for a specific job
3. Job time record – prepared to record employee time for each job
4. Cost sheet
– contains all specific job costs, including materials, direct labor, and overhead, for products manufactured
5. Finished-goods ledger – prepared to account for all finished goods/ products manufactured
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Key Terms

Service business

Merchandising business

Manufacturing business

Direct materials

Direct labor

Factory overhead

Indirect materials/Factory supplies

Indirect labor

Materials inventory

Work-in-process inventory

Finished-goods inventory

Perpetual inventory

Periodic inventory

Materials ledger

Materials requisition

Job cost

Cost sheet
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Types of Business Entities
Service business
Merchandising business
Manufacturing business
Fulfills people’s wants and needs primarily through the effort of people providing services, not inventory or merchandise
Fulfill people’s wants and needs by providing tangible items called inventory or merchandise
Buys materials and uses labor and machinery to change the materials into a finished product for sale
Manufacturing Costs Elements
Direct materials
Direct labor
Factory overhead
Indirect materials
Indirect labor
Materials that are of significant value in the cost of a finished product and that become an identifiable part of the product
Salaries of factory workers who make a product; as well as salaries of persons working directly on a product
All expenses other than direct materials and direct labor that apply to making products
Materials used in the completion of a product that are of insignificant value to justify accounting for separately
Salaries paid to factory worker who are not actually making products
Manufacturing Inventory and Cost Ledgers
All materials to be used in the production process Materials inventory
Work in process inventory
Finished goods inventory
Periodic inventory
Products that are being manufactured but are not yet complete
Perpetual inventory
Materials requisition
Materials ledger
Job time record
Cost sheet
Finished goods ledger
Manufactured products that are fully completed
A system which updates inventory on a periodic basis such as monthly, quarterly or annually
A system which updates inventory on a continuous basis; an ongoing maintenance of stock
Prepared to request materials, both direct and indirect, for a specific job
A record of all materials to be used in the manufacturing process
Prepared to record employee time for each job
Contains all specific job costs, including Materials, Direct
Labor, and Overhead, for products manufactured
Prepared to account for all Finished Goods/ Products manufactured
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Service Business
Capital
Drawing
Inventory
Cost of Goods Sold
Purchases
Merchandising
Business
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Accounts Payable
Payables
Income Summary
Sales
Expenses
Raw Materials Inventory
Work-In-Progress Inventory
Finished-Goods Inventory
Factory Supplies Factory
Equipment Factory Building
All 500 accounts
Manufacturing
Business
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Cake mix
Eggs
Water
Cooking oil
Two 8
″
round baking pans
1 small bowl
1 large bowl
Cake mixer
Toothpick
Oven
Spoons
Electricity
Icing/Frosting
Soap and water for clean-up
Cake baker
Kitchen
Direct materials
Direct materials
Direct materials
Direct materials
Factory overhead
Factory overhead
Factory overhead
Factory overhead
Factory overhead
Factory overhead
Factory overhead
Factory overhead
Direct materials
Factory overhead
Direct labor
Factory overhead
Types of Costs

Direct materials

Direct labor

Factory overhead
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7.01 Ledgers and Requisitions – Page 2 Text page 568 and 570
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Materials
Ledger
Card
Materials
Requisitions
Total DM $
Job-Time
Records
Total DL $
Direct Materials $
Direct Labor $
Est. Overhead $
Total Costs $
Finished-
Goods
Ledger
Card
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These prototype assessment items illustrate the types of items used in the item bank for this objective. All items have been written to match the cognitive process of the understand verb in the objective. These exact questions will not be used on the secure postassessment, but questions in similar formats will be used.
Types of Business Entities
1. Jones Clothing Store sells goods to its customers. The balance sheet contains these accounts: Inventory
– Women’s Swimsuits and Inventory – Children’s
Clothes. How would Jones Clothing Store be classified?
A. Construction Business
B. Manufacturing Business
C. Merchandising Business
D. Service Business
Answer:
Elements of Manufacturing Costs
2. The Tomeka Company makes beach balls. The purchasing agent orders 500 pounds of plastic for use in the production process. How should the plastic be classified?
A. Direct labor
B. Direct materials
C. Indirect labor
D. Indirect materials
Answer:
Manufacturing Inventories and Cost Ledgers
3. The Jones Jeans Company makes jeans out of cotton fiber. They have several containers of cotton fiber that has not been made into jeans. How are the two containers of cotton fiber classified?
A. Finished goods inventory
B. Materials inventory
C. Perpetual inventory
D. Work in process inventory
Answer:
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