26-11-1McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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Accounting forManufacturing Activities

Section 1: Accounting forManufacturing Activities

Chapter

26

Section Objectives1. Prepare a statement of cost of goods manufactured. 2. Explain the basic components of manufacturing

cost.3. Prepare an income statement for a manufacturing

business.4. Prepare a balance sheet for a manufacturing

business.

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Manufacturing Businesses

Merchandising businesses purchase goods to be resold in the same condition and form but at a profit.

Manufacturing businesses purchase and convert raw materials into finished goods to be sold at a profit.

Merchandising Businesses

Comparison

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The Cost of Goods Manufactured line item replaces the Purchases line item on the income statement

Statement of Cost of Goods Manufactured

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Manufacturing Costs Consist of Three Components

RawMaterials

Direct Labor

ManufacturingOverhead

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Raw Materials

Raw materials consist of direct and indirect materials.

Examples of direct materials are wood, glue, varnish, or hardware for a furniture maker.

Indirect materials are used to work on the products, but do not become a part of the product.

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Raw Materials and the Statement of Cost of Goods Manufactured

1. Compute total materials available

2. Compute raw materials used

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Examples of Direct Labor Costs

Salaries of workers who shape the lumber.Salaries of workers who assemble the pieces into

trailers.Labor costs for workers who paint or finish the final

products.

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Indirect Labor

Costs of personnel who support productionbut are not directly involved in manufacturing (supervisors, janitors, maintenance staff).

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Manufacturing Overhead Manufacturing overhead includes all of the costs that

are not classified as direct materials and direct labor. Manufacturing overhead may include the following:

Indirect labor - Costs attributable to personnel who support the production process.

Indirect supplies Utilities Depreciation Repair and maintenance Property taxes Insurance

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Accounting for Work in Process on the Income Statement

An estimate is made of the costs of raw materials, direct labor, and manufacturing overhead that apply to work in process at the end of the period

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Income Statement for a Manufacturing Concern

Figure taken from the cost of goods manufactured statement

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The balance sheet for a manufacturing business contains three inventory categories

InventoriesRaw Materials 24,000.00Work in Process 12,000.00Finished Goods 29,000.00 65,000.00

Trailer Manufacturing CompanyPartial Balance Sheet

December 31, 2013

Inventories and the Balance Sheet for a Manufacturing Business

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Accounting forManufacturing Activities

Section 2: Completing theAccounting Cycle

Chapter

26

Section Objectives5. Prepare a worksheet for a manufacturing business.6. Record the end-of-period adjusting entries for a

manufacturing business.7. Record closing entries for a manufacturing

business.8. Record reversing entries for a manufacturing

business.

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The steps in the accounting cycle do not change for a manufacturing business.

The worksheet must be constructed to facilitate preparation of the cost of goods manufactured statement.

The worksheet has two new columns: Cost of Goods Manufactured Debit column Cost of Goods Manufactured Credit column

The Accounting Cycle for a Manufacturing Business

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Raw Materials Inventory Work in Process Inventory Finished Goods Inventory Direct Labor Various Manufacturing Overhead Accounts Manufacturing Summary

The worksheet of a manufacturing business contains several new accounts:

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Adjusting Inventory Accounts

6. DR Finished Goods Inventory CR Income Summary

for ending inventory amount

4. DR Work in Process Inventory CR Manufacturing Summary

for ending inventory amount

2. DR Raw Materials Inventory CR Manufacturing Summary

for ending inventory amount

5. DR Income Summary CR Finished Goods Inventory

for beginning inventory amount

3. DR Manufacturing Summary CR Work in Process Inventory

for beginning inventory amount

1. DR Manufacturing Summary CR Raw Materials Inventory

for beginning inventory amount

Finished GoodsWork in ProcessRaw Materials

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Inventory Uncollectible accounts Expired insurance Supplies on hand Depreciation Accrued salaries Payroll taxes on accrued payroll Income tax payable

Adjusting Entries on the Worksheet

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Preparing Financial Statements From the Worksheet

Three sets of columns exist for the financial statements:

Cost of Goods Manufactured

Income Statement

Balance Sheet