Chapter 24
Manufacturing
Accounting
1
College Accounting
10th Edition
McQuaig
McQuaig
Bille
Bille
Nobles
PowerPoint presented by Douglas Cloud
Professor Emeritus of Accounting, Pepperdine University
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© 2011 Cengage Learning
Income Statement
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Statement of Cost of
Goods Manufactured
 Because Cost of Goods Manufactured is
included on the income statement, the
accountant naturally prepares the statement
of cost of goods manufactured first.
 Three elements make up the cost of goods
manufactured: raw materials used, direct
labor, and manufacturing overhead.
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Elements of
Manufacturing Costs
 Raw materials are the materials that enter
directly into—and become part of—the finished
product.
 Direct labor consists of the wages paid to
factory employees who work directly on the
materials to convert them into finished products.
 Manufacturing overhead consists of
manufacturing costs that cannot be directly
traced to products being manufactured.
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Elements of
Manufacturing Costs
 A manufacturer uses Manufacturing Overhead
as a control account.
 Indirect labor is the wages paid to those
people who keep the plant in operation rather
than directly working on production
(maintenance workers, timekeepers).
 Indirect materials are cost of materials used to
keep the plant in operation (lubricants, cleaning
supplies).
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Balance Sheet
 The balance sheet of a manufacturing firm is
similar to that of a merchandise firm.
 A merchandising firm has one inventory
account—Merchandise Inventory—while a
manufacturing firm has three inventory
accounts—Finished Goods Inventory,
Work-in-Process Inventory, and Raw
Materials Inventory.
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Balance Sheet
 Raw Materials Inventory consists of the direct
materials not yet used.
 Work-in-Process Inventory consists of all
unfinished goods.
 Finished Goods Inventory consists of all
items that are complete but not sold.
 All of these are reported on the balance sheet
until the inventories are completed and sold.
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Adjusting Entries
 Since Raw Materials Inventory and Work-inProcess Inventory appear in the statement of
cost of goods manufactured, the accountant
adjusts them using Manufacturing Summary.
 Since Finished Goods Inventory appears on
the income statement, the accountant adjusts it
using Income Summary.
 Finished Goods Inventory for a manufacturing firm is equivalent to Merchandise
Inventory for a merchandising firm.
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Adjusting Entries
(a–b) Raw Materials Inventory at December 31 is
$100,000.
 The first step is to remove the beginning
inventory by adjusting entry (a).
 The next step is to insert the ending inventory by
adjusting entry (b).
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Adjusting Entries
(c–d) Work-in-Process Inventory at December 31
is $130,000.
 The first step is to remove the beginning
inventory by adjusting entry (c).
 The next step is to insert the ending inventory by
adjusting entry (d).
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Adjusting Entries
(e–f) Finished Goods Inventory at December 31 is
$250,000.
 The first step is to remove the beginning
inventory by adjusting entry (e).
 The next step is to insert the ending inventory by
adjusting entry (f).
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Adjusting Entries
(g) Depreciation of factory building, $25,000.
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Adjusting Entries
(h) Depreciation of factory equipment, $46,000.
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Adjusting Entries
(i) Expired factory insurance, $22,000.
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Adjusting Entries
(j) Depreciation of office equipment, $5,000.
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Adjusting Entries
(k) Estimated uncollectible accounts, $6,000
(determined by aging). A $3,500 adjusting entry
is needed to raise the balance of the allowance
account from $2,500 to $6,000.
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Adjusting Entries
(l) Income tax, $241,400. An adjusting entry of
$103,950 is required to increase the balance of
Income Tax Expense from $135,450 to
$241,400.
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Adjusting Entries
Notice how the figures in the Adjustment columns
are transferred to the remaining columns of the
work sheet.
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Adjusting Entries
On the work sheet, the accountant transfers
Cost of Goods Manufactured to the Income
Statement Debit column of the work sheet.
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Adjusting Entries in the Journal
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Adjusting Entries in the Journal
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Adjusting Entries
Steps to take in making the closing entries for a
manufacturer.
STEP 1. Close the costs that appears on the
statement of cost of goods
manufactured into Manufacturing
Summary.
STEP 2. Close Manufacturing Summary into
Income Summary.
STEP 3. Close the revenue accounts into
Income Summary.
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Adjusting Entries
STEP 4. Close the expense accounts into
Income Summary.
STEP 5. Close Income Tax Expense into
Income Summary.
STEP 6. Close Income Summary into Retained
Earnings.
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Adjusting Entries
T accounts for Manufacturing Summary and Income Summary.
Closing Entries
Closing Entries
* Note: The December 31 closing entry credit to Manufacturing Summary is equal to Cost of Goods
Manufactured (as shown on the work sheet). It is solely a coincidence that the December 31 debit
entry to close the costs that appear on the statement of cost of goods manufactured is equal to the
December 31 credit entry.
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Determining the Value of the Ending
Raw Materials Inventory
 The items that make up the raw materials
inventory are in the same form they were in
when the manufacturer bought them; nothing
has been done to them yet.
 The value of the ending inventory may be
calculated by either FIFO, LIFO, or weightedaverage-cost method.
 A manufacturer may use a perpetual or a
periodic inventory system.
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Determining the Value of the Ending
Work-in-Process Inventory
 The manufacturer keeps a record of the
amount and cost of raw materials placed into
production.
 The manufacturer also records the cost of
direct labor expended on the ending work-inprocess inventory.
 The manufacturer has to estimate the cost of
overhead used to produce the ending work-inprocess inventory.
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Determining the Value of the Ending
Work-in-Process Inventory
If Bergman Manufacturing Company, Inc.
estimates factory overhead based on a
percentage of direct labor, the formula to do this is
as follows:
Manufacturing =
Overhead Rate
Manufacturing Overhead
Direct Labor
Now, the percentage:
Manufacturing
$405,000
= 0.72 = 72% (rounded)
=
Overhead Rate
$565,000
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Job-Order Cost
Accounting System
 In a job-order cost accounting system,
materials, labor, and overhead costs are
accumulated by the job or batch on a joborder cost sheet as the batch is transferred
through the various production departments.
 Robles Manufacturing produces bicycle pumps.
The company receives an order for 5,000
pumps. The job is assigned Job Order #72.
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Job-Order Cost
Accounting System
(a) Purchased raw materials, $100,000, paying cash (Robles
Manufacturing uses a perpetual inventory system).
(b) Placed $80,000 of raw materials into production.
Job-Order Cost
Accounting System
(c) Issued checks for direct labor, $40,000.
(d) Applied manufacturing overhead at the rate of 70
percent of direct labor.
Job-Order Cost
Accounting System
(e) Transferred completed production to Finished Goods
Inventory.
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Job-Order Cost
Accounting System
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Process Cost
Accounting System
 A process cost accounting system is used by
manufacturers of homogeneous units in a continuous
process.
 Production of such goods is continuous and is
completed in stages, with one department completing
one stage and another department completing the next
stage.
 Each department accumulates the costs of materials,
labor, and overhead.
 There is a Work-in-Process Inventory account for
each department that is debited for the costs of
materials, labor, and overhead used by that department.
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Process Cost
Accounting System