ing For Manufacturing Business 3b39g
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Nature of Manufacturing Business
Merchandising includes cost of merchandise purchased including the transportation cost of bringing merchandise to the business place.
Manufacturing involves the conversion of raw materials into finished goods through the application of labor and various factory cost incidental to the production of products.
Manufacturing business makes major investments in physical facilities such as factory site, factory building and acquisition of various machinery and equipment to be use in the factory.
Chart of s of Manufacturing Business Acct No.
Acct No. Assets:
110 111 112 120 130 140 150 160 161 162 165 170 180 190 200 210 220 221 240 241 250 251
Cash in Bank Cash on Hand Petty Cash s Receivable Allowance for Uncollectible s Notes Receivable – Short-term Interest Receivable Finished Goods Work in Process Raw Materials Supplies Prepaid Rent Prepaid Insurance Trading Securities Notes Receivable – Long-term Land Building Accum. Depreciation – Building Furniture & Fixtures Accum. Depreciation – Fur. & Fix. Office Equipment Accum. Depreciation – Office Equipment
Liabilities: 310 320 321 330 340 350 360 370 380 390 400 410 420 430 440
s Payable Notes Payable – Short-term Interest Payable Accrued Salary Payable Accrued Rent Payable Bank Loans Payable – Short-term Income Tax Payable Withholding Tax Payable SSS Contribution Payable PhilHealth Contribution Payable Pag-ibig Contribution Payable Insurance Payable Unearned Service Income Notes Payable – Long-term Bank Loans Payable – Long-term
Acct No. Owner’s Equity: 510 520
Owner’s, Capital Owner’s, Drawing
Acct No.
810 811 812 813 814 815 820 830 840 850 860 870 880 890 900 905 910 920 930 940 950 960
Cost and Expenses:
Purchases Purchases returns Purchases allowances Purchases discounts Freight-in Cost of goods sold Salary Expense Rent Expense Utilities Expense Uncollectible s Expense Advertising Expense Insurance Expense Taxes and Licenses Supplies Expense Interest Expense Freight-out Depreciation Expense Employees Benefits Expense Loss on Sale of Land (Building, Furniture & Fixture or Office Equipment) Unrealized Holding Loss – Trading Sec Loss on Sale of Trading Securities Miscellaneous Expense
Acct No.
610 611 612 613 620 630 640 650
660
Revenues:
Sales Sales returns Sales allowances Sales discounts Interest Income Rent Income Dividend Income Gain on sale of Land (Building, Furniture & Fixture or Office Equipment) Unrealized Holding Loss – Trading Sec
Operating Cycle of Manufacturing Business
Phase 1: Buy Raw Materials
Phase 2: Processed raw materials to finished goods (Raw materials + direct labor + factory overhead)
Phase 4: Collect from customers
Phase 3: Sell finished goods to customers
Cost Elements of Manufacturing Business 3 Types of Production Costs: 1. Raw Materials 2. Direct Labor 3. Factory Overhead
Raw Materials
Direct Labor
Factory Overhead The cost of factory overhead is called as manufacturing overhead cost. It refers to all indirect materials, indirect labor and other miscellaneous items used in the making of a product. Examples are: used factory supplies salary of factory supervisors factory depreciation factory maintenance. As a rule, if a cost could not be classified as direct raw materials or direct labor, it is classified as factory overhead.
When the three elements of production cost are mixed, the following costs can be determined until a product is produced. 1.Manufacturing costs. This is the sum of the three (3) cost elements: direct materials, direct labor and factory overhead. This is sometimes referred to as production cost or factory cost. 2.Work-in-process. The portion of the total manufacturing costs that pertains to the goods under process which are not yet 100% completed at the end of the ing period. 3.Cost of goods manufactured. The portion of the total manufacturing costs pertaining to the work which is 100% processed and completed, transferred to finished goods.
The unsold finished goods, unfinished goods-inprocess and unused raw materials at the end of the period are inventories, which should be reported as part of the current assets of the business. The ending inventories of each type of business are compared as follows: MERCHANDISING
MANUFACTURING
1. Merchandise inventory (Unsold merchandise at the end of the period)
1. Finished goods inventory (unsold) 2. Work-in-process inventory (incomplete) 3. Raw materials inventory (unused) 4. Factory supplies inventory (unused)
Comparative Cost Flow The comparative cost flow of merchandising and manufacturing business could be outlined as follows: MANUFACTURING MERCHANDISING Merchandise beginning Add (Deduct) Net purchases
Direct materials, beginning Pxxx
Purchases Freight-in Purchase discount
Pxxx xxx (xxx)
Purchase allowances
(xxx)
Purchase returns
(xxx)
xxx
Total goods available for sale
Pxxx
Less: Unsold merchandise at the end of the period Cost of goods sold
xxx Pxxx
The Cost of Sales can be described as Cost of Goods Sold for a merchandising business since the items purchased are already the final product sold. On the other hand, it is described as the Cost of Goods Manufactured and Sold for manufacturing firms because the items purchased are converted into finished products before they are sold.
Pxxx
Add (Deduct) Net purchases Purchases Freight-in Purchase discount Purchase allowances Purchase returns Total direct materials for use
Pxxx xxx (xxx) (xxx) (xxx)
Less: Unused raw materials at the end of the period Direct materials used Add: Direct labor Factory overhead Total manufacturing costs Add: work-in-process, beg. Total work-put-in-process Less: work-in-process, end Total costs of goods manufactured Add: finished goods, beg. Total finished goods for sale Less: finished goods, end Cost of goods manufactured and sold
xxx Pxxx
xxx Pxxx Pxxx xxx
xxx Pxxx xxx Pxxx xxx
Pxxx xxx Pxxx xxx Pxxx
ASSETS IN THE BALANCE SHEET
EXPENSE IN THE INCOME STATEMENT
Factory Overhead: • Indirect Materials • Indirect labor • Factory depreciation and other factory expenses
FINISHED GOODS INVENTORY
Direct Labor
WORK-IN-PROCESS INVENTORY
Raw Materials
Cost of goods sold
Prime Cost and Conversion Cost The cost elements of a manufacturing firm could be combined and formed as (1) prime costs and (2) conversion costs. 1. Prime Costs consist of direct materials and direct labor used to make the product . This cost is called prime cost or direct cost because the primary materials and main labor are combined in making the product.
2. Conversion Costs includes the costs of direct labor and all indirect costs. This is called conversion cost because the direct labor and overhead costs transform the raw materials to finished goods. Indirect manufacturing cost is also called manufacturing overhead or factory overhead cost.
The Cost of Goods Manufactured and Sold The cost of goods manufactured and sold is generally used to describe the merchandise sold by a manufacturing business. The schedule of cost of goods manufactured and sold is presented as follows (all amounts assumed):
VALROX Manufacturing Schedule of Cost of Goods Manufactured and Sold For the Year Ended December 31, 200x Raw materials used: Beginning raw materials inventory Add: Net raw materials purchases Raw materials purchases Freight-in Gross raw materials purchases Less: Purchase discounts Purchase returns Purchase allowances Total raw materials available for use Less: Ending raw materials inventory Direct labor Factory overhead Total manufacturing cost Add: Work in process, beginning Total cost of goods in process Less: Work in process, ending Total cost of goods manufactured Add: Finished goods, beginning Total finished goods available for sale Less: Finished goods, ending Cost of goods manufactured and sold
P 70,000 P 200,000 5,000 205,000 P2,500 1,500 1,000
5,000
200,000 P 270000 20,000 P250000 400,000 150,000 P800000 100,000 P900000 150,000 P750000 50,000 P800000 150,000 P650000
Cost versus Non-Cost System The ing for manufacturing activities may be done using either Cost System or Non-Cost System.
1. Cost System maintains detailed perpetual records of the cost of raw materials, work-in-process and finished goods inventory. This system provides an updated information about manufacturing costs which serves as helpful guide for price decision-making. 2. Non-cost system determines the cost of goods manufactured based on the periodic actual physical count of ending inventory for materials, work-in-process, and finished goods, converting these into value using the adapted cost method (FIFO or weighted average). This chapter discusses the manufacturing ing using the non-cost system.
Under the non-cost system, the manufacturing cost should be summarized in manufacturing which basically includes the following postings: Direct Raw Materials Debit Credit 1. Beginning 4. Purchase return Inventory 5. Purchase discounts 2. Purchases 6. Manufacturing 3. Freight-In Summary
Manufacturing Summary Debit Credit 1. Work-in-process, 5. Work-in-process, beginning end (per ) 2. Direct raw materials used 3. Direct Labor
6. Transferred to Finished goods (per )
4. Factory overhead
Direct Labor Debit 1. Actual payroll paid
Credit 3. Manufacturing summary
2. Accrued payroll
Factory Overhead Debit Credit 1. Actual payroll, indirect 2. Accrued payroll, indirect 3. Factory utilities 7. Manufacturing 4. Taxes/Insurances Summary 5. Depreciation Factory 6. Factory supplies
Work-In-Process Debit Credit 1. Manufacturing Summary
Finished Goods Debit Credit 1. Beginning Inventory 2. Manufacturing Summary
Finished goods sold
Notes: 1. The cost of goods manufactured and sold, computed as follows: Finished goods, beginning Pxxx Add: Transferred to finished goods xxx Total Pxxx Less: Finished goods inventory,end xxx Cost of goods manufactured and sold Pxxx
Cost of Goods Manufactured and Sold Debit Credit 1. Finished goods sold
2. The appropriate journal entry for the finished goods inventory end would be
Finished goods, end Income summary
xxx xxx
The debit to finished goods end represents the item to be reported in the SFP, while the credit to income summary is the finished goods end to the income statement representing a reduction of the cost of finished goods sold during the period.
Transactions Related to Manufacturing Process Business transactions of manufacturing firms are generally similar to the merchandising firm except that a merchandising firm doest not produce goods. The ing for the production of goods includes the following pro-forma entries ( comparing periodic non-cost ing system from perpetual cost ing system):
Transactions Related to Manufacturin Process Business transactions of manufacturing firms are generally similar to the merchandising firm except that a merchandising firm does not produce goods. The ing for the production of goods includes the following pro-forma entries (comparing periodic non-cost ing system from perpetual cost ing system):
Transactions Related to Manufacturing Process ing for Materials: 1. Purchased raw materials, P105,000 & factory supplies, P20,000. Non-Cost System
VS
Cost System
Purchases
105 000
Raw Materials, Inty.
105 000
Factory Supplies
20 000
Factory Supplies
20 000
s Payable
125 000
s Payable
125 000
2. Returned defective raw materials to vendor, P5,000. Non-Cost System s Payable
5 000
Purchase Returns
Cost System
VS
s Payable 5 000
5 000
Raw materials, inty.
5 000
3. Paid the s payable less P2,000 cash discount. Non-Cost System s Payable Cash Purchase Returns
Cost System
VS
120 000
s Payable 118 000 2 000
Cash Raw materials, inty.
120 000 118 000 2 000
4. Issued raw materials, P97,000 & factory supplies, P20,000 for factory use. Non-Cost System No entry
VS
Cost System
WIP - Raw Materials
97 000
WIP - Overhead
20 000
Raw materials, Inty.
97 000
Factory Supplies
20 000
5. Returned excess raw materials to storeroom, P2,000. Non-Cost System No entry
VS
Cost System
Raw materials, Inty. WIP – Raw materials
Note : WIP means work-in-process
2 000 2 000
6. Closed raw materials cost s (assume raw materials beginning is P2,000). Non-Cost System
VS
Raw materials, Inty. - end
5 000
WIP – Raw materials
95 000
Purchase returns
5 000
Purchase discounts
2 000
Raw materials, Inty. - beg. Purchases
Cost System
No entry
2 000 105 000
ing for Labor: 7. Paid payroll of factory: Direct workers, P100,000; Supervisor, P20,000; Janitor, P3,000. Non-Cost System
VS
Cost System
Direct Labor
100 000
WIP, Direct Labor
100 000
Indirect Labor
23 000
WIP, Factor Overhead
23 000
Cash
123 000
Cash
123 000
8. Closed direct labor cost . Non-Cost System WIP – Direct Labor Direct Labor
VS
100 000
Cost System No Entry
100 000
ing for Factory Overhead
9.Recorded other factory overhead expenses: Depreciation of factory machine, P12,000; Paid factory insurance expense, P4000 and miscellaneous factory expense, P1,000. Non- Cost System Depreciation expensefactory
Work-in-process, FOH 12,000
factory machine 4,000
Cash
Miscellaneous expense-
factory
17,000
Accum. Depreciation-
Insurance expensefactory
Cost System
VS
1,000
Accum. Depreciationfactory machine
12,000
Cash
5,000
12,000 5,000
10. Summarized factory overhead s. Non- Cost System
VS
Cost System
Manufacturing overhead summary
60,000
factory supplies
20,000
Indirect labor
23,000
Dep’n expense factory
12,000
Insurance expense - factory
4,000
Miscellaneous expense - factory
1,000
No entry
11. Closed factory overhead Non- Cost System Work-in-process, FOH
VS 60,000
Manufacturing overhead summary
Cost System
No entry 60,000
ing for Cost of Goods Manufactured and Sold
12. Recorded 80% goods completed. Non- Cost System
VS
*Cost of goods
Manufactured
WIP – Raw materials WIP – Direct labor WIP - FOH
Cost System
Cost of goods
196,000
Manufactured
196,00 0
76,000
WIP – Raw materials
76,000
80,000
WIP – Direct labor
80,000
40,000
WIP – FOH
40,000
13. Closed cost elements of cost of sales (assuming that finished goods - beginning, P20,000 and finished goods – ending, P10,000) Non- Cost System
VS
Cost of goods
Cost System
Cost of goods
Manufactured and sold
206,000
Manufactured and sold
206,000
*Finished goods, end
10,000
Finished goods, end
10,000
Finished goods, beg
20,000
Cost of goods manufactured
Finished goods, beg
20,000
Cost of goods 196,000
manufactured
196,000
14. Closed revenue and cost of sales to income summary (assuming that the total sales is P400,000). Non- Cost System Sales
Cost System
VS
400,000
Sales
400,000
Cost of goods
206,000
Cost of goods
206,000
manufactured and sold
194,000
manufactured and sold
194,000
Income summary
Income summary
Cost Accumulation Procedures Process Costing Job Order Costing
Process Costing Is a system applicable to continuous process of production of the same or similar (i.e. homogenous) goods. There is no need to determine the costs of the different groups of products because the product is uniform. Thus, each processing department becomes a cost center.
Job Order Costing Is a system of allocating costs to group of unique products. It is applicable to the production of customer’s specified products. Each job becomes a cost center from which costs are accumulated. A subsidiary record called a JOB ORDER SHEET is needed to keep track of all unfinished jobs (work-in-process) and finished jobs (finished goods).
Distinction between Process Costing and Job Order Costing Process Costing
Job Order Costing
1. Homogenous units through a series of similar process.
1. Unique jobs are worked on a time period.
2. Costs are accumulated by processing department.
2. Costs are accumulated by individual job order.
3. Unit costs are computed by dividing 3. Unit costs are determine by dividing the individual processing department’s the total costs on the job cost sheet by costs by the equivalent units of the number of units on the job. production.
4. The cost of production report provides the detail for the work-inprocess for each processing departments.
4. The job cost sheet provides the detail for work-in-process .
Job Order Costing
Job Order Costing Assumptions: Raw materials are recorded under perpetual inventory system. Total materials issuance for the period based on store requisition slip, patrol costs per payroll summary, and cash voucher and payable voucher for supplies is as follow: Total Direct raw materials Direct labor Indirect labor Factory supplies Status at the end of ing period
P1,500,000 950,000 475,000 75,000 P3,000,000
JOB ORDERS 001 002 003 P1,300,00 800,000 350,000 50,000 P2,500,000 Completed
P100,000 100,000 85,000 15,000 P300,000 In process
P100,000 50,000 40,000 10,000 P200,000 In process
Journal entries 1. To record the costs incurred GENERAL LEDGER Date (a)
Description Work-in-process - materials Work-in-process - direct labor Work-in-process - indirect labor Work-in-process - factory supplies Raw materials Cash s payable
Page number Debit 1,500,000 950,000 475,000 75,000
200
Credit
1,500,000 1,425,000 75,000
Note: individual subsidiary ledger for each job order is maintained; hence the above entries affecting the work-in-process s are posted in the general ledger and subsidiary ledger.
2. To record the completed job order 001 GENERAL LEDGER Date
(b)
Description
Cost of goods manufactured Work-in-process – Job 001
Page number Debit 2,500,000
200 Credit 2,500,000
3. Supposing that Job Order 001 was billed at P3,125,000 (using perpetual inventory system), the journal entries would be: GENERAL LEDGER
Date (c)
(d)
(e)
Description s receivable Sales To record billing for job order 001.
Page number Debit 3,125,000
200 Debit 3,125,000
Cost of goods manufactured and sold Cost of goods manufactured To record cost of goods sold
2,500,000
Sales Cost of goods manufactured and sold Income summary To close revenue and cost of goods sold
3,125,000
2,500,000
3,125,000
Just-in-time is a manufacturing model based on the philosophy that storing inventory is a non-value added activity that a company should try to reduce or eliminate. Hence, the best decision is to maintain zero or minimal inventories. This manufacturing model implies that products should be produced when needed in the quantities needed by customers , so there is little need for workin-process or finish goods inventories. In addition, raw materials should arrive when needed, in the quantities needed for production.
JIT is
a pull system, that is production is determined by customer demand , and the need for raw materials is determined by production. Accordingly, manufacturing firms that adopt this model use the backflush costing system, which is described as follows:
1. The amount of raw materials purchased , direct labor used, and manufacturing overhead applied on the cost of goods sold for the period will expensed during the same period.
2. At the end of the period, if any inventory remains on hand, it is necessary to make an entry for the adjustment of the cost of goods sold to reflect the cost of the remaining inventory. 3. The cost of the ending inventory , whether it is a raw material, work-in-process, or finished goods, is recorded in a current asset called raw and in-process inventory. This ing method eliminates the need for separate raw materials, work-in-process and finished goods inventory s, so is saves record-keeping time and cost.
Illustration: Japan company incurs the ff. cost in connection with the production of a product named Kamukhamo:
Raw materials purchased Direct labor used Manufacturing overhead applied
P 100,000 150,000 50,000
At the end of the period the cost of Kamukhamo still-in-process is P10,000 and there are 5,000 raw material still unused. The journal entries of the above JIT production activities using backflush ing would be:
GENERAL JOURNAL Page Number
Date a)
Description
Debit
Cost of goods sold s payable To record the purchase of Inventory on acount
100,000
b)
Cost of goods sold Accrued wages payable To record the labor used in production.
150,000
c)
Cost of goods sold Factory overhead
50,000
100
Credit
100,000 Accordingly, the cost of goods
sold is immediately debited upon requisition of the basic manufacturing costs. This is accordance with the principle 150,000 that the cost of finished goods should be expensed at the period of production.
50,000
To record the overhead applied to production d)
Raw and in-process inventory Cost of goods sold To record raw materials and work-in-process inventory
The recording of raw materials, labor and overhead is eliminated because the products are presumed to be in accordance with the customer’s demand.
15,000 15,000
At the end of the production period, the raw material unused and the work-in-process are adjusted in the raw and inprocess inventory . The cost of goods sold, net of raw and in-process inventory at the end of the period is actually the amount of the total cost of goods manufactured and sold.
Cost of Goods Sold Debit
Credit
Direct Materials
100,000
Direct Labor
150,000
Factory Overhead
No.16
Raw and in-process
15,000
50,000 300,000 285,000
Raw and In-Process Inventory Debit Cost of goods sold 15,000
No. 18
Credit
Activity-Based Costing System (ABC SYSTEM)
Activity-Based Costing (ABC) System Activity-based costing uses more than one predetermined overhead rate to assign overhead costs for each activity utilized in production. Accordingly, this method ensures that the amount of overhead assigned represents the resources consumed. When companies use an activity-based costing(ABC) system, they first assign estimated manufacturing overhead costs to activity level called cost pools. A cost pool is a group of costs that change in response to the same cost driver. Cost Drivers measure activity in the conversion cycle and are assumed to cause the change of conversion cycle cost. A good example of cost driver is the number of hours used for a particular type of activity.
The following activity-based costing overview facilitates an understanding of the concept: ACTIVITY-BASED COSTING OVERVIEW
Activity Level
Types of Activities
Types of Costs
Example of Cost Drivers
Facility sustaining
Owning buildings Occupying buildings Using buildings Maintaining buildings
Depreciation Property taxes Utilities Insurance
Number of square feet Number of square feet BTUs of heat produced Number of square feet
Product sustaining
Testing products Deg products Maintaining products inventory Using specialized machinery
Testing costs* Design costs* Carrying costs* Depreciation
Number of tests required Number of hours of design time Number of parts required No. of specialized processes required
Batch related
Ordering parts Setting up machines Handling materials Requisitioning parts
Ordering costs* Setup costs* Moving costs* Requisition cost
Number of orders placed Number of setups required Number of moves required Number of requisition made
Unit related
Cutting/drilling units Assembling units Painting units Inspecting units
Power costs Indirect labor Indirect material Rework costs*
Number of machine hours Number of labor hours Direct materials cost Number of units reworked
*Includes the salaries and wages of those individuals involved in the acitivity.
Illustration Assume the following costs and cost drivers of the cost pools of New Products Manufacturing Company:
Predetermined overhead rates: Cost drivers
Costs assigned Total cost driver
Cost driver per unit
Building costs
P400,000
100,000 sq. ft.
P4 per square foot
Development costs
P200,000
20,000 hours
P10 per development hour
Product testing costs
P 30,000
30 quality test
P1,000 per test
Setup and inspection
P150,000
150 production runs
P1,000 per production run
Machine usage costs
P 50,000
10,000 machine hours
P5 per machine hour
Assuming that during the period, the production of New Products Manufacturing Company actually required the following resources to produce Kamukhamo products: •3,000 square feet of building space •2,000 hours of development time •10 quality tests •150 production runs •1,000 machine runs Using the predetermined overhead rates, the manufacturing overhead is applied to the production, as follows: Building costs: (P 4x 3,000 sq.feet) Development costs: (P10x 2,000 devt.hours) Product testing costs: (P1,0000x10 quality tests) Setup and inspection costs: (P1,000x150 production runs) Machine usage costs: (P5x1000) Total Manufacturing overhead applied in the period
= P 12,000 = 20,000 = 10,000 = 150,000 = 5,000 = P 197,000
The appropriate journal entry to reflect the applied manufacturing overhead costs for the period would be: GENERAL JOURNAL
Date Descriptions a) Work-in-process inventory – Kamukhamo Factory overhead – Building Factory overhead – Development Factory overhead – Testing Factory overhead – Setup and inspection Factory overhead – Machining To record applied manufacturing overhead for The period
Page 100 Number Debit 197,000
Credit 12,000 20,000 10,000 150,00 0 5,000
Merchandising includes cost of merchandise purchased including the transportation cost of bringing merchandise to the business place.
Manufacturing involves the conversion of raw materials into finished goods through the application of labor and various factory cost incidental to the production of products.
Manufacturing business makes major investments in physical facilities such as factory site, factory building and acquisition of various machinery and equipment to be use in the factory.
Chart of s of Manufacturing Business Acct No.
Acct No. Assets:
110 111 112 120 130 140 150 160 161 162 165 170 180 190 200 210 220 221 240 241 250 251
Cash in Bank Cash on Hand Petty Cash s Receivable Allowance for Uncollectible s Notes Receivable – Short-term Interest Receivable Finished Goods Work in Process Raw Materials Supplies Prepaid Rent Prepaid Insurance Trading Securities Notes Receivable – Long-term Land Building Accum. Depreciation – Building Furniture & Fixtures Accum. Depreciation – Fur. & Fix. Office Equipment Accum. Depreciation – Office Equipment
Liabilities: 310 320 321 330 340 350 360 370 380 390 400 410 420 430 440
s Payable Notes Payable – Short-term Interest Payable Accrued Salary Payable Accrued Rent Payable Bank Loans Payable – Short-term Income Tax Payable Withholding Tax Payable SSS Contribution Payable PhilHealth Contribution Payable Pag-ibig Contribution Payable Insurance Payable Unearned Service Income Notes Payable – Long-term Bank Loans Payable – Long-term
Acct No. Owner’s Equity: 510 520
Owner’s, Capital Owner’s, Drawing
Acct No.
810 811 812 813 814 815 820 830 840 850 860 870 880 890 900 905 910 920 930 940 950 960
Cost and Expenses:
Purchases Purchases returns Purchases allowances Purchases discounts Freight-in Cost of goods sold Salary Expense Rent Expense Utilities Expense Uncollectible s Expense Advertising Expense Insurance Expense Taxes and Licenses Supplies Expense Interest Expense Freight-out Depreciation Expense Employees Benefits Expense Loss on Sale of Land (Building, Furniture & Fixture or Office Equipment) Unrealized Holding Loss – Trading Sec Loss on Sale of Trading Securities Miscellaneous Expense
Acct No.
610 611 612 613 620 630 640 650
660
Revenues:
Sales Sales returns Sales allowances Sales discounts Interest Income Rent Income Dividend Income Gain on sale of Land (Building, Furniture & Fixture or Office Equipment) Unrealized Holding Loss – Trading Sec
Operating Cycle of Manufacturing Business
Phase 1: Buy Raw Materials
Phase 2: Processed raw materials to finished goods (Raw materials + direct labor + factory overhead)
Phase 4: Collect from customers
Phase 3: Sell finished goods to customers
Cost Elements of Manufacturing Business 3 Types of Production Costs: 1. Raw Materials 2. Direct Labor 3. Factory Overhead
Raw Materials
Direct Labor
Factory Overhead The cost of factory overhead is called as manufacturing overhead cost. It refers to all indirect materials, indirect labor and other miscellaneous items used in the making of a product. Examples are: used factory supplies salary of factory supervisors factory depreciation factory maintenance. As a rule, if a cost could not be classified as direct raw materials or direct labor, it is classified as factory overhead.
When the three elements of production cost are mixed, the following costs can be determined until a product is produced. 1.Manufacturing costs. This is the sum of the three (3) cost elements: direct materials, direct labor and factory overhead. This is sometimes referred to as production cost or factory cost. 2.Work-in-process. The portion of the total manufacturing costs that pertains to the goods under process which are not yet 100% completed at the end of the ing period. 3.Cost of goods manufactured. The portion of the total manufacturing costs pertaining to the work which is 100% processed and completed, transferred to finished goods.
The unsold finished goods, unfinished goods-inprocess and unused raw materials at the end of the period are inventories, which should be reported as part of the current assets of the business. The ending inventories of each type of business are compared as follows: MERCHANDISING
MANUFACTURING
1. Merchandise inventory (Unsold merchandise at the end of the period)
1. Finished goods inventory (unsold) 2. Work-in-process inventory (incomplete) 3. Raw materials inventory (unused) 4. Factory supplies inventory (unused)
Comparative Cost Flow The comparative cost flow of merchandising and manufacturing business could be outlined as follows: MANUFACTURING MERCHANDISING Merchandise beginning Add (Deduct) Net purchases
Direct materials, beginning Pxxx
Purchases Freight-in Purchase discount
Pxxx xxx (xxx)
Purchase allowances
(xxx)
Purchase returns
(xxx)
xxx
Total goods available for sale
Pxxx
Less: Unsold merchandise at the end of the period Cost of goods sold
xxx Pxxx
The Cost of Sales can be described as Cost of Goods Sold for a merchandising business since the items purchased are already the final product sold. On the other hand, it is described as the Cost of Goods Manufactured and Sold for manufacturing firms because the items purchased are converted into finished products before they are sold.
Pxxx
Add (Deduct) Net purchases Purchases Freight-in Purchase discount Purchase allowances Purchase returns Total direct materials for use
Pxxx xxx (xxx) (xxx) (xxx)
Less: Unused raw materials at the end of the period Direct materials used Add: Direct labor Factory overhead Total manufacturing costs Add: work-in-process, beg. Total work-put-in-process Less: work-in-process, end Total costs of goods manufactured Add: finished goods, beg. Total finished goods for sale Less: finished goods, end Cost of goods manufactured and sold
xxx Pxxx
xxx Pxxx Pxxx xxx
xxx Pxxx xxx Pxxx xxx
Pxxx xxx Pxxx xxx Pxxx
ASSETS IN THE BALANCE SHEET
EXPENSE IN THE INCOME STATEMENT
Factory Overhead: • Indirect Materials • Indirect labor • Factory depreciation and other factory expenses
FINISHED GOODS INVENTORY
Direct Labor
WORK-IN-PROCESS INVENTORY
Raw Materials
Cost of goods sold
Prime Cost and Conversion Cost The cost elements of a manufacturing firm could be combined and formed as (1) prime costs and (2) conversion costs. 1. Prime Costs consist of direct materials and direct labor used to make the product . This cost is called prime cost or direct cost because the primary materials and main labor are combined in making the product.
2. Conversion Costs includes the costs of direct labor and all indirect costs. This is called conversion cost because the direct labor and overhead costs transform the raw materials to finished goods. Indirect manufacturing cost is also called manufacturing overhead or factory overhead cost.
The Cost of Goods Manufactured and Sold The cost of goods manufactured and sold is generally used to describe the merchandise sold by a manufacturing business. The schedule of cost of goods manufactured and sold is presented as follows (all amounts assumed):
VALROX Manufacturing Schedule of Cost of Goods Manufactured and Sold For the Year Ended December 31, 200x Raw materials used: Beginning raw materials inventory Add: Net raw materials purchases Raw materials purchases Freight-in Gross raw materials purchases Less: Purchase discounts Purchase returns Purchase allowances Total raw materials available for use Less: Ending raw materials inventory Direct labor Factory overhead Total manufacturing cost Add: Work in process, beginning Total cost of goods in process Less: Work in process, ending Total cost of goods manufactured Add: Finished goods, beginning Total finished goods available for sale Less: Finished goods, ending Cost of goods manufactured and sold
P 70,000 P 200,000 5,000 205,000 P2,500 1,500 1,000
5,000
200,000 P 270000 20,000 P250000 400,000 150,000 P800000 100,000 P900000 150,000 P750000 50,000 P800000 150,000 P650000
Cost versus Non-Cost System The ing for manufacturing activities may be done using either Cost System or Non-Cost System.
1. Cost System maintains detailed perpetual records of the cost of raw materials, work-in-process and finished goods inventory. This system provides an updated information about manufacturing costs which serves as helpful guide for price decision-making. 2. Non-cost system determines the cost of goods manufactured based on the periodic actual physical count of ending inventory for materials, work-in-process, and finished goods, converting these into value using the adapted cost method (FIFO or weighted average). This chapter discusses the manufacturing ing using the non-cost system.
Under the non-cost system, the manufacturing cost should be summarized in manufacturing which basically includes the following postings: Direct Raw Materials Debit Credit 1. Beginning 4. Purchase return Inventory 5. Purchase discounts 2. Purchases 6. Manufacturing 3. Freight-In Summary
Manufacturing Summary Debit Credit 1. Work-in-process, 5. Work-in-process, beginning end (per ) 2. Direct raw materials used 3. Direct Labor
6. Transferred to Finished goods (per )
4. Factory overhead
Direct Labor Debit 1. Actual payroll paid
Credit 3. Manufacturing summary
2. Accrued payroll
Factory Overhead Debit Credit 1. Actual payroll, indirect 2. Accrued payroll, indirect 3. Factory utilities 7. Manufacturing 4. Taxes/Insurances Summary 5. Depreciation Factory 6. Factory supplies
Work-In-Process Debit Credit 1. Manufacturing Summary
Finished Goods Debit Credit 1. Beginning Inventory 2. Manufacturing Summary
Finished goods sold
Notes: 1. The cost of goods manufactured and sold, computed as follows: Finished goods, beginning Pxxx Add: Transferred to finished goods xxx Total Pxxx Less: Finished goods inventory,end xxx Cost of goods manufactured and sold Pxxx
Cost of Goods Manufactured and Sold Debit Credit 1. Finished goods sold
2. The appropriate journal entry for the finished goods inventory end would be
Finished goods, end Income summary
xxx xxx
The debit to finished goods end represents the item to be reported in the SFP, while the credit to income summary is the finished goods end to the income statement representing a reduction of the cost of finished goods sold during the period.
Transactions Related to Manufacturing Process Business transactions of manufacturing firms are generally similar to the merchandising firm except that a merchandising firm doest not produce goods. The ing for the production of goods includes the following pro-forma entries ( comparing periodic non-cost ing system from perpetual cost ing system):
Transactions Related to Manufacturin Process Business transactions of manufacturing firms are generally similar to the merchandising firm except that a merchandising firm does not produce goods. The ing for the production of goods includes the following pro-forma entries (comparing periodic non-cost ing system from perpetual cost ing system):
Transactions Related to Manufacturing Process ing for Materials: 1. Purchased raw materials, P105,000 & factory supplies, P20,000. Non-Cost System
VS
Cost System
Purchases
105 000
Raw Materials, Inty.
105 000
Factory Supplies
20 000
Factory Supplies
20 000
s Payable
125 000
s Payable
125 000
2. Returned defective raw materials to vendor, P5,000. Non-Cost System s Payable
5 000
Purchase Returns
Cost System
VS
s Payable 5 000
5 000
Raw materials, inty.
5 000
3. Paid the s payable less P2,000 cash discount. Non-Cost System s Payable Cash Purchase Returns
Cost System
VS
120 000
s Payable 118 000 2 000
Cash Raw materials, inty.
120 000 118 000 2 000
4. Issued raw materials, P97,000 & factory supplies, P20,000 for factory use. Non-Cost System No entry
VS
Cost System
WIP - Raw Materials
97 000
WIP - Overhead
20 000
Raw materials, Inty.
97 000
Factory Supplies
20 000
5. Returned excess raw materials to storeroom, P2,000. Non-Cost System No entry
VS
Cost System
Raw materials, Inty. WIP – Raw materials
Note : WIP means work-in-process
2 000 2 000
6. Closed raw materials cost s (assume raw materials beginning is P2,000). Non-Cost System
VS
Raw materials, Inty. - end
5 000
WIP – Raw materials
95 000
Purchase returns
5 000
Purchase discounts
2 000
Raw materials, Inty. - beg. Purchases
Cost System
No entry
2 000 105 000
ing for Labor: 7. Paid payroll of factory: Direct workers, P100,000; Supervisor, P20,000; Janitor, P3,000. Non-Cost System
VS
Cost System
Direct Labor
100 000
WIP, Direct Labor
100 000
Indirect Labor
23 000
WIP, Factor Overhead
23 000
Cash
123 000
Cash
123 000
8. Closed direct labor cost . Non-Cost System WIP – Direct Labor Direct Labor
VS
100 000
Cost System No Entry
100 000
ing for Factory Overhead
9.Recorded other factory overhead expenses: Depreciation of factory machine, P12,000; Paid factory insurance expense, P4000 and miscellaneous factory expense, P1,000. Non- Cost System Depreciation expensefactory
Work-in-process, FOH 12,000
factory machine 4,000
Cash
Miscellaneous expense-
factory
17,000
Accum. Depreciation-
Insurance expensefactory
Cost System
VS
1,000
Accum. Depreciationfactory machine
12,000
Cash
5,000
12,000 5,000
10. Summarized factory overhead s. Non- Cost System
VS
Cost System
Manufacturing overhead summary
60,000
factory supplies
20,000
Indirect labor
23,000
Dep’n expense factory
12,000
Insurance expense - factory
4,000
Miscellaneous expense - factory
1,000
No entry
11. Closed factory overhead Non- Cost System Work-in-process, FOH
VS 60,000
Manufacturing overhead summary
Cost System
No entry 60,000
ing for Cost of Goods Manufactured and Sold
12. Recorded 80% goods completed. Non- Cost System
VS
*Cost of goods
Manufactured
WIP – Raw materials WIP – Direct labor WIP - FOH
Cost System
Cost of goods
196,000
Manufactured
196,00 0
76,000
WIP – Raw materials
76,000
80,000
WIP – Direct labor
80,000
40,000
WIP – FOH
40,000
13. Closed cost elements of cost of sales (assuming that finished goods - beginning, P20,000 and finished goods – ending, P10,000) Non- Cost System
VS
Cost of goods
Cost System
Cost of goods
Manufactured and sold
206,000
Manufactured and sold
206,000
*Finished goods, end
10,000
Finished goods, end
10,000
Finished goods, beg
20,000
Cost of goods manufactured
Finished goods, beg
20,000
Cost of goods 196,000
manufactured
196,000
14. Closed revenue and cost of sales to income summary (assuming that the total sales is P400,000). Non- Cost System Sales
Cost System
VS
400,000
Sales
400,000
Cost of goods
206,000
Cost of goods
206,000
manufactured and sold
194,000
manufactured and sold
194,000
Income summary
Income summary
Cost Accumulation Procedures Process Costing Job Order Costing
Process Costing Is a system applicable to continuous process of production of the same or similar (i.e. homogenous) goods. There is no need to determine the costs of the different groups of products because the product is uniform. Thus, each processing department becomes a cost center.
Job Order Costing Is a system of allocating costs to group of unique products. It is applicable to the production of customer’s specified products. Each job becomes a cost center from which costs are accumulated. A subsidiary record called a JOB ORDER SHEET is needed to keep track of all unfinished jobs (work-in-process) and finished jobs (finished goods).
Distinction between Process Costing and Job Order Costing Process Costing
Job Order Costing
1. Homogenous units through a series of similar process.
1. Unique jobs are worked on a time period.
2. Costs are accumulated by processing department.
2. Costs are accumulated by individual job order.
3. Unit costs are computed by dividing 3. Unit costs are determine by dividing the individual processing department’s the total costs on the job cost sheet by costs by the equivalent units of the number of units on the job. production.
4. The cost of production report provides the detail for the work-inprocess for each processing departments.
4. The job cost sheet provides the detail for work-in-process .
Job Order Costing
Job Order Costing Assumptions: Raw materials are recorded under perpetual inventory system. Total materials issuance for the period based on store requisition slip, patrol costs per payroll summary, and cash voucher and payable voucher for supplies is as follow: Total Direct raw materials Direct labor Indirect labor Factory supplies Status at the end of ing period
P1,500,000 950,000 475,000 75,000 P3,000,000
JOB ORDERS 001 002 003 P1,300,00 800,000 350,000 50,000 P2,500,000 Completed
P100,000 100,000 85,000 15,000 P300,000 In process
P100,000 50,000 40,000 10,000 P200,000 In process
Journal entries 1. To record the costs incurred GENERAL LEDGER Date (a)
Description Work-in-process - materials Work-in-process - direct labor Work-in-process - indirect labor Work-in-process - factory supplies Raw materials Cash s payable
Page number Debit 1,500,000 950,000 475,000 75,000
200
Credit
1,500,000 1,425,000 75,000
Note: individual subsidiary ledger for each job order is maintained; hence the above entries affecting the work-in-process s are posted in the general ledger and subsidiary ledger.
2. To record the completed job order 001 GENERAL LEDGER Date
(b)
Description
Cost of goods manufactured Work-in-process – Job 001
Page number Debit 2,500,000
200 Credit 2,500,000
3. Supposing that Job Order 001 was billed at P3,125,000 (using perpetual inventory system), the journal entries would be: GENERAL LEDGER
Date (c)
(d)
(e)
Description s receivable Sales To record billing for job order 001.
Page number Debit 3,125,000
200 Debit 3,125,000
Cost of goods manufactured and sold Cost of goods manufactured To record cost of goods sold
2,500,000
Sales Cost of goods manufactured and sold Income summary To close revenue and cost of goods sold
3,125,000
2,500,000
3,125,000
Just-in-time is a manufacturing model based on the philosophy that storing inventory is a non-value added activity that a company should try to reduce or eliminate. Hence, the best decision is to maintain zero or minimal inventories. This manufacturing model implies that products should be produced when needed in the quantities needed by customers , so there is little need for workin-process or finish goods inventories. In addition, raw materials should arrive when needed, in the quantities needed for production.
JIT is
a pull system, that is production is determined by customer demand , and the need for raw materials is determined by production. Accordingly, manufacturing firms that adopt this model use the backflush costing system, which is described as follows:
1. The amount of raw materials purchased , direct labor used, and manufacturing overhead applied on the cost of goods sold for the period will expensed during the same period.
2. At the end of the period, if any inventory remains on hand, it is necessary to make an entry for the adjustment of the cost of goods sold to reflect the cost of the remaining inventory. 3. The cost of the ending inventory , whether it is a raw material, work-in-process, or finished goods, is recorded in a current asset called raw and in-process inventory. This ing method eliminates the need for separate raw materials, work-in-process and finished goods inventory s, so is saves record-keeping time and cost.
Illustration: Japan company incurs the ff. cost in connection with the production of a product named Kamukhamo:
Raw materials purchased Direct labor used Manufacturing overhead applied
P 100,000 150,000 50,000
At the end of the period the cost of Kamukhamo still-in-process is P10,000 and there are 5,000 raw material still unused. The journal entries of the above JIT production activities using backflush ing would be:
GENERAL JOURNAL Page Number
Date a)
Description
Debit
Cost of goods sold s payable To record the purchase of Inventory on acount
100,000
b)
Cost of goods sold Accrued wages payable To record the labor used in production.
150,000
c)
Cost of goods sold Factory overhead
50,000
100
Credit
100,000 Accordingly, the cost of goods
sold is immediately debited upon requisition of the basic manufacturing costs. This is accordance with the principle 150,000 that the cost of finished goods should be expensed at the period of production.
50,000
To record the overhead applied to production d)
Raw and in-process inventory Cost of goods sold To record raw materials and work-in-process inventory
The recording of raw materials, labor and overhead is eliminated because the products are presumed to be in accordance with the customer’s demand.
15,000 15,000
At the end of the production period, the raw material unused and the work-in-process are adjusted in the raw and inprocess inventory . The cost of goods sold, net of raw and in-process inventory at the end of the period is actually the amount of the total cost of goods manufactured and sold.
Cost of Goods Sold Debit
Credit
Direct Materials
100,000
Direct Labor
150,000
Factory Overhead
No.16
Raw and in-process
15,000
50,000 300,000 285,000
Raw and In-Process Inventory Debit Cost of goods sold 15,000
No. 18
Credit
Activity-Based Costing System (ABC SYSTEM)
Activity-Based Costing (ABC) System Activity-based costing uses more than one predetermined overhead rate to assign overhead costs for each activity utilized in production. Accordingly, this method ensures that the amount of overhead assigned represents the resources consumed. When companies use an activity-based costing(ABC) system, they first assign estimated manufacturing overhead costs to activity level called cost pools. A cost pool is a group of costs that change in response to the same cost driver. Cost Drivers measure activity in the conversion cycle and are assumed to cause the change of conversion cycle cost. A good example of cost driver is the number of hours used for a particular type of activity.
The following activity-based costing overview facilitates an understanding of the concept: ACTIVITY-BASED COSTING OVERVIEW
Activity Level
Types of Activities
Types of Costs
Example of Cost Drivers
Facility sustaining
Owning buildings Occupying buildings Using buildings Maintaining buildings
Depreciation Property taxes Utilities Insurance
Number of square feet Number of square feet BTUs of heat produced Number of square feet
Product sustaining
Testing products Deg products Maintaining products inventory Using specialized machinery
Testing costs* Design costs* Carrying costs* Depreciation
Number of tests required Number of hours of design time Number of parts required No. of specialized processes required
Batch related
Ordering parts Setting up machines Handling materials Requisitioning parts
Ordering costs* Setup costs* Moving costs* Requisition cost
Number of orders placed Number of setups required Number of moves required Number of requisition made
Unit related
Cutting/drilling units Assembling units Painting units Inspecting units
Power costs Indirect labor Indirect material Rework costs*
Number of machine hours Number of labor hours Direct materials cost Number of units reworked
*Includes the salaries and wages of those individuals involved in the acitivity.
Illustration Assume the following costs and cost drivers of the cost pools of New Products Manufacturing Company:
Predetermined overhead rates: Cost drivers
Costs assigned Total cost driver
Cost driver per unit
Building costs
P400,000
100,000 sq. ft.
P4 per square foot
Development costs
P200,000
20,000 hours
P10 per development hour
Product testing costs
P 30,000
30 quality test
P1,000 per test
Setup and inspection
P150,000
150 production runs
P1,000 per production run
Machine usage costs
P 50,000
10,000 machine hours
P5 per machine hour
Assuming that during the period, the production of New Products Manufacturing Company actually required the following resources to produce Kamukhamo products: •3,000 square feet of building space •2,000 hours of development time •10 quality tests •150 production runs •1,000 machine runs Using the predetermined overhead rates, the manufacturing overhead is applied to the production, as follows: Building costs: (P 4x 3,000 sq.feet) Development costs: (P10x 2,000 devt.hours) Product testing costs: (P1,0000x10 quality tests) Setup and inspection costs: (P1,000x150 production runs) Machine usage costs: (P5x1000) Total Manufacturing overhead applied in the period
= P 12,000 = 20,000 = 10,000 = 150,000 = 5,000 = P 197,000
The appropriate journal entry to reflect the applied manufacturing overhead costs for the period would be: GENERAL JOURNAL
Date Descriptions a) Work-in-process inventory – Kamukhamo Factory overhead – Building Factory overhead – Development Factory overhead – Testing Factory overhead – Setup and inspection Factory overhead – Machining To record applied manufacturing overhead for The period
Page 100 Number Debit 197,000
Credit 12,000 20,000 10,000 150,00 0 5,000
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