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Accounting for Manufacturing
Operations
Topic
88 100 Shares
$1 par value
Manufacturing?
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Learning ObjectivesLearning Objectives
Describe the environment for manufacturing operation
Describe cost accounting concepts useful in classifying costs.
Explain how the financial statements for manufacturing and merchandising companies differ.
Compute cost of goods sold for a manufacturer. Prepare a statement of cost of goods manufactured
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Merchandisers . . .Buy finished goods.
Sell finished goods.
SaleMart
Manufacturers . . .Buy raw materials.
Produce and sell finished goods.
Nature of business: Merchandisers vs. Manufacturers
Nature of business: Merchandisers vs. Manufacturers
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Behavior
Traceability
Controllability
Relevance
Function
Cost Accounting ConceptsCost Accounting Concepts
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Cost behavior means how a cost will react to changes in the level of business activity. Total fixed costs do
not change when activity changes.
Total variable costs change in proportionto activity changes.
Classification by BehaviorClassification by Behavior
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Activity
Cos
t
Activity
Cos
tClassification by BehaviorClassification by Behavior
Cost behavior means how a cost will react to changes in the level of business activity. Total fixed costs do
not change when activity changes.
Total variable costs change in proportionto activity changes.
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Direct costs Costs incurred for the
benefit of one specific cost object.
Examples: material and labor cost for a product.
Indirect costs Costs incurred for the
benefit of more than one cost object.
Example: maintenance expenditures benefiting two or more departments.
Classification by TraceabilityClassification by Traceability
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The degree of control depends on thelevel of management in the organization.
More C
ontrolM
ore
Con
trol
Very little control
Classification by ControllabilityClassification by Controllability
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The potential benefit that is given up when one alternative is selected over another. Example: If you were
not attending college,you could be earning$20,000 per year. Your opportunity costof attending college for one year is $20,000.
Classification by Relevance: Opportunity Costs
Classification by Relevance: Opportunity Costs
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All costs incurred in the past that cannot be changed by any decision made now or in the future.
Sunk costs should not be considered in decisions.
Example: You bought an automobile that cost $15,000 two years ago. The $15,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $15,000 cost.
Classification by Relevance:Sunk Costs
Classification by Relevance:Sunk Costs
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TheProduct
Classification by Function:Product Costs
Classification by Function:Product Costs
DirectLabor
DirectMaterial
Manufacturing Overhead
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Period costs are expensesnot charged to the product.
Classification by Function:Period Costs
Classification by Function:Period Costs
Administrative Costs
Non-manufacturing costsof staff support and
administrative functions –accounting, data processing,
personnel, researchand development.
Selling Costs
Costs incurred to obtain customer orders and todeliver finished goods
to customers –advertising and shipping.
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Period Costs(Expenses)
Product Costs(Inventory)
Inventory Not Sold in 2007
OperatingExpenses
Cost ofSales
Raw MaterialsWork in ProcessFinished Goods
Cost ofSales
2007 CostsIncurred
2007 IncomeStatement
2008 IncomeStatement
2007 BalanceSheet Inventory
InventorySold in 2007
Period and Product Costsin Financial Statements
Period and Product Costsin Financial Statements
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Cost Item Behavior Traceability Function
Material Variable Direct Product
Assembly Wages Variable Direct Product
Advertising Fixed Indirect Period
Production Manager's Salary Fixed Indirect Product
Office Depreciation Fixed Indirect Period
Cost Item Behavior Traceability Function
Material Variable Direct Product
Assembly Wages Variable Direct Product
Advertising Fixed Indirect Period
Production Manager's Salary Fixed Indirect Product
Office Depreciation Fixed Indirect Period
Potential Multiple Cost ClassificationsPotential Multiple Cost Classifications
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Direct Materials
Materials that are clearly and easilyidentified with a particular product.
Direct Materials
Materials that are clearly and easilyidentified with a particular product.
Example:Steel used tomanufacture
the automobile.
Example:Steel used tomanufacture
the automobile.
Manufacturing costsManufacturing costs
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Direct Labor
Labor costs that are clearly traceable to, or readily identifiable with, the
finished product.
Direct Labor
Labor costs that are clearly traceable to, or readily identifiable with, the
finished product.
Example:Wages paid to an
automobile assemblyworker.
Example:Wages paid to an
automobile assemblyworker.
Manufacturing costsManufacturing costs
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Factory Overhead
All factory costs exceptdirect material and direct labor.
Factory costs that cannot betraced directly to specific units produced.
Factory Overhead
All factory costs exceptdirect material and direct labor.
Factory costs that cannot betraced directly to specific units produced.
Examples:Indirect labor – maintenance
Indirect material – cleaning suppliesFactory utility costsSupervisory costs
Manufacturing costsManufacturing costs
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DirectMaterial
DirectLabor
ManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftencombined as follows:
Manufacturing costsManufacturing costs
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QuestionQuestion
The primary distinction between product and period costs is . . .
a. Product costs are expensed in the period incurred.
b. Product costs are directly traceable to product units.
c. Product costs are inventoriable.
d. Period costs are inventoriable.
The primary distinction between product and period costs is . . .
a. Product costs are expensed in the period incurred.
b. Product costs are directly traceable to product units.
c. Product costs are inventoriable.
d. Period costs are inventoriable.
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The primary distinction between product and period costs is . . .
a. Product costs are expensed in the period incurred.
b. Product costs are directly traceable to product units.
c. Product costs are inventoriable.
d. Period costs are inventoriable.
The primary distinction between product and period costs is . . .
a. Product costs are expensed in the period incurred.
b. Product costs are directly traceable to product units.
c. Product costs are inventoriable.
d. Period costs are inventoriable.
Question
QuestionQuestion
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Finished GoodsBeginning Inventory
Cost of GoodsManufactured
FinishedGoodsEnding
Inventory
RawMaterialsBeginningInventory
RawMaterials
Purchases
Raw MaterialsEnding Inventory
Costof
Sales
Work in ProcessBeginning Inventory
Direct Labor
FactoryOverhead
Raw MaterialsUsed
Sales activityProduction activityMaterialsactivity
Flow of Manufacturing ActivitiesFlow of Manufacturing Activities
Work in ProcessEnding Inventory
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Cost of all goods completed and transferred from work in process to finished goods during a
reporting period.
Direct Materials Used + Direct Labor + Factory Overhead = Total Manufacturing Costs + Beginning Work in Process – Ending Work in Process = Cost of Goods Manufactured
Statement of Cost of Goods Manufactured
Statement of Cost of Goods Manufactured
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Manufacturing WorkRaw Materials Costs In Process
Beginning raw Direct materials materials inventory
+ Raw materials purchased
= Raw materials
available for use in production
– Ending raw materials inventory
= Raw materials used
in production
As items are removed from raw materials inventory and placed into
the production process, they arecalled direct materials.
As items are removed from raw materials inventory and placed into
the production process, they arecalled direct materials.
Product Cost FlowsProduct Cost Flows
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Manufacturing WorkRaw Materials Costs In Process
Beginning raw Direct materials materials inventory + Direct labor
+ Raw materials + Mfg. overhead purchased = Total manufacturing
= Raw materials costs
available for use in production
– Ending raw materials inventory
= Raw materials used
in production
Conversion costs are costs
incurred to convert the
direct material into a finished
product.
Conversion costs are costs
incurred to convert the
direct material into a finished
product.
Product Cost FlowsProduct Cost Flows
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Manufacturing WorkRaw Materials Costs In Process
Beginning raw Direct materials Beginning work in materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturing purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the in production period
– Ending raw materials inventory
= Raw materials used
in production
Product Cost FlowsProduct Cost Flows
All manufacturing costs incurred during the period are added to the
beginning balance of work in process.
All manufacturing costs incurred during the period are added to the
beginning balance of work in process.
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Manufacturing WorkRaw Materials Costs In Process
Beginning raw Direct materials Beginning work in materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturing purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the in production period
– Ending work in process inventory
= Cost of goods
manufactured
Product Cost FlowsProduct Cost Flows
Costs associated with the goods that are completed during the period are
transferred to finished goods inventory.
Costs associated with the goods that are completed during the period are
transferred to finished goods inventory.
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Product Cost FlowsProduct Cost Flows
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Let’s take a look at Rocky
Mountain Bikes’ Statement of Cost
of Goods Manufactured.
Statement of Cost of Goods Manufactured
Statement of Cost of Goods Manufactured
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ROCKY MOUNTAIN BIKES
STATEMENT OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED 31 DECEMBER 2006
Direct materials used in production 85,500$
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period 175,500$
Beginning work in process inventory 2,500
Total cost of work in process 178,000$
Ending work in process inventory (7,500)
Cost of goods manufactured 170,500$
Statement of Cost of Goods Manufactured
Statement of Cost of Goods Manufactured
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ROCKY MOUNTAIN BIKES
STATEMENT OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED 31 DECEMBER 2006
Direct materials used in production 85,500$
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period 175,500$
Beginning work in process inventory 2,500
Total cost of work in process 178,000$
Ending work in process inventory (7,500)
Cost of goods manufactured 170,500$
Statement of Cost of Goods Manufactured
Statement of Cost of Goods Manufactured Exh.
18-16
Computation of Cost of Direct Material Used
Beginning raw materials inventory 8,000$
Add: Purchases of raw materials 86,500
Cost of raw materials available for use 94,500$
Less: Ending raw materials inventory 9,000
Cost of direct materials used in production 85,500$
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ROCKY MOUNTAIN BIKES
STATEMENT OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED 31 DECEMBER 2006
Direct materials used in production 85,500$
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period 175,500$
Beginning work in process inventory 2,500
Total cost of work in process 178,000$
Ending work in process inventory (7,500)
Cost of goods manufactured 170,500$
Include all direct labor costs incurred during the
current period.
Statement of Cost of Goods Manufactured
Statement of Cost of Goods Manufactured
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ROCKY MOUNTAIN BIKES
STATEMENT OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED 31 DECEMBER 2006
Direct materials used in production 85,500$
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period 175,500$
Beginning work in process inventory 2,500
Total cost of work in process 178,000$
Ending work in process inventory (7,500)
Cost of goods manufactured 170,500$
Manufacturing StatementManufacturing Statement
Computation of Total Manufacturing Overhead
Indirect labor 9,000$
Factory supervision 6,000
Factory utilities 2,600
Property taxes, factory building 1,900
Factory supplies used 600
Factory insurance expired 1,100
Depreciation, building and equipment 5,300
Other factory overhead 3,500
Total factory overhead costs 30,000$
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ROCKY MOUNTAIN BIKES
STATEMENT OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED 31 DECEMBER 2006
Direct materials used in production 85,500$
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period 175,500$
Beginning work in process inventory 2,500
Total cost of work in process 178,000$
Ending work in process inventory (7,500)
Cost of goods manufactured 170,500$
Beginning work in process inventory is carried over from the
prior period.
Statement of Cost of Goods Manufactured
Statement of Cost of Goods Manufactured
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ROCKY MOUNTAIN BIKES
STATEMENT OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED 31 DECEMBER 2006
Direct materials used in production 85,500$
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period 175,500$
Beginning work in process inventory 2,500
Total cost of work in process 178,000$
Ending work in process inventory (7,500)
Cost of goods manufactured 170,500$
Ending work in process inventory contains the cost of unfinished
goods, and is reported in the current assets section of the balance sheet.
Statement of Cost of Goods Manufactured
Statement of Cost of Goods Manufactured
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ManufacturingInventory
Classifications
Balance Sheet of a ManufacturerBalance Sheet of a Manufacturer
RawMaterials
FinishedGoods
Work inProcess
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Completedproductsfor sale.
Materialswaiting to beprocessed.
Partially completeproducts.
Material to whichsome labor and/or
overhead havebeen added.
Balance Sheet of a ManufacturerBalance Sheet of a Manufacturer
RawMaterials
FinishedGoods
Work inProcess
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MERCHANDISER
Current Assets Cash Receivables Merchandise
Inventory
MANUFACTURER
Current Assets Cash Receivables Inventories
Raw MaterialsWork in ProcessFinished Goods
The only difference is inventory.
Balance Sheet of a ManufacturerBalance Sheet of a Manufacturer
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Beginning Merchandise
Inventory
Beginning Finished Goods
Inventory
Cost of Goods Purchased
Cost of GoodsManufactured
Ending Merchandise
Inventory
EndingFinished Goods
Inventory
Cost of Sales
Merchandiser Manufacturer
+
_
+
==
_
The major difference
Income Statement of a ManufacturerIncome Statement of a Manufacturer
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Manufacturing Company
Cost of Sales Beg. finished goods inv. 14,200$ + Cost of goods manufactured 234,150 = Goods available for sale 248,350$ - Ending finished goods inventory (12,100) = Cost of Sales 236,250$
Merchandising Company
Cost of Sales Beg. merchandise inventory 14,200$ + Purchases 234,150 = Goods available for sale 248,350$ - Ending merchandise inventory (12,100) = Cost of Sales 236,250$
Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.
Income Statement of a ManufacturerIncome Statement of a Manufacturer
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Income StatementIncome Statement
Sales x
(-) COGS
Beginning Finished goods x
COGM x
CGAFS x
(-) Ending finished goods (x)
COGS (x)
Gross Profit x
Operating expenses (x)
Net Profit x
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End of Chapter 8End of Chapter 8