COST FLOW IN A MANUFACTURING BUSINESS

Product Cost
Costs Purchase of Raw Materials Direct Labor

Statement of FP Materials Inventory Work in Process Inventory

Statement of P/L

PRIME COST - sum of direct materials and direct labor.

CONVERSION COST - sum of direct labor and manufacturing overhead.

ACCOUNTING FOR MANUFACTURING ACTIVITIES:

1) To record purchase of raw materials and indirect materials on account.

Purchases-Raw Materials xx
Indirect Materials xx
Voucher Payable

2) To record cost of defective raw materials returned to vendor.

Voucher Payable xx
Purchases Returns and Allowances

3) To record payment of account within the discount period.

Voucher Payable xx
Purchase Discounts
Cash in bank

4) To record freight and handling of raw materials.

Transportation in xx
Voucher Payable

5) To record payroll for factory employees.

Direct Labor xx
Indirect Labor xx
SSS Contributions Payable
Medicare Contributions Payable
Pag-ibig Contributions Payable
Withholding taxes Payable
 Voucher Payable

6) To record employer's payroll expenses.

Employer's Payroll Contributions-Factory xx
SSS Contributions Payable
Medicare Contributions Payable
Pag-ibig Contributions Payable
EC Contributions Payable

7) Vouchers Payable xx
Cash in bank

8) To record accrual of factory payroll.

Direct Labor xx
Indirect Labor xx
Accrued Payroll

9) To record depreciation of factory building.

Depreciation expense-Factory Bldg. xx
Accum. Depreciation-Factory Bldg.

10) To record repairs on factory building.

Repairs and Maintenance-Factory Bldg. xx
Voucher Payable

11) To record amortization of patents.

Amortization of Patents xx
Patent

12) To record real property taxes on factory site.

Real Property Taxes xx
Vouchers Payable

13) To record factory utilities incurred.

Factory Utilities xx
Vouchers Payable

14) To record cost of tools used.

Tools Used xx
Tools

15) To record sales of finished goods.

Accounts Receivable/Cash xx
Sales
16) To record sales returns of customers.
Sales Returns and Allowances xx
Accounts Receivable

Manufacturing Costs/Product Costs/Inventoriable Costs

1. Direct materials – are the basic ingredients that are transformed into finished produc
Examples: steel sheet for automobile, flour for bread, wood for tables and

2. Direct labor – represent the amount paid as wages to those working directly on the pr
Direct labor costs include all labor costs for specific work performed on products that

3. Factory overhead costs are varied collection of production-related costs that cannot b
Examples:
o indirect materials and supplies - nails, rivets, lubricants, and small tools
o indirect labor costs – wage of a lift-truck driver, maintenance and inspection labor,
o other indirect factory costs;
building maintenance
machinery and tool maintenance
property taxes
property insurance
pension costs
depreciation on plant and equipment
rent expense
utility expense

Non-Manufacturing Costs/Period Costs

1· Marketing or selling expenses
It includes all costs necessary to secure customer orders and get the finish product or
Examples: advertising, shipping, sales travel, sales commissions, sales salaries

2· Administrative or general expenses

It includes all executive, organizational, and clerical expenses that cannot logically be
Examples: executive compensation, general accounting, secretarial, public relations

Financial Reporting

Product Period
Costs Costs
 Financial Reporting

Product Period
Costs Costs

Direct
Direct Overhea
Material
Labor d
s
 Period Cost
Mfg. Overhead Selling and Admin Expenses

ork in Process Inventory Finished Goods Inventory

Cost of Goods Sold

Selling & Admin expenses

17) Closing entries:

a) To close manufacturing accounts with credit balances
and to record (establish) ending inventory for materials and work in p
Raw Materials Inventory, end
Work in Process Inventory, end
Purchases Returns & Allowances
xx Purchases Discounts
Manufacturing Summary

b) To close manufacturing accounts with debit balances.

xx Manufacturing Summary
Raw Materials Inventory, beg.
Work in Process Inventory, beg.
Purchases-Raw Materials
xx Transportation in
xx Direct Labor
Indirect Labor
Indirect Materials
Depreciation Expense-Factory Bldg.
xx Repairs & Maintenance-Factory Bldg.
Patents Amortization
Real Property Taxes
Factory Utilities
Tools Used
xx Employer's Payroll Cont-Factory
xx Factory Supplies Expense
xx Miscellaneous Factory Expense
xx
xx c) To close manufacturing summary and beginning finished goods invent
Income Summary
Manufacturing Summary
Finished Goods Inventory, beg.
xx
xx NOTE: The debit balance in the manufacturing summary represents t
xx
xx d) To establish the ending finished goods inventory.
Finished Goods Inventory, end
Income Summary
xx

xx

xx

xx

xx

xx

xx

xx

xx
 xx

med into finished products through the use of labor and factory overhead in the production process.
d, wood for tables and chairs.

working directly on the product.

rformed on products that can be conveniently and economically traced to end products.

elated costs that cannot be practically or conveniently traced directly to end products.

nd small tools
nce and inspection labor, engineering labor, machine helpers, and supervisors

get the finish product or service into the hands of the customer.
ons, sales salaries

that cannot logically be included under either production or marketing.

etarial, public relations
a
 Purchase of Raw Materials

Activity: Purchase and receipt

of raw materials.

Journal entry: Raw materials xx

Accounts payable/cash xx

it balances
for materials and work in process.
xx
xx
xx
xx
xx

t balances.
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
nning finished goods inventory to income summary.
xx
xx
xx

g summary represents the cost of goods manufactured.

xx
xx
uction process.
 Production of Goods Product Completion

Processing and conversion Finished products are

of raw materials by using completed and moved to
direct labor and overhead. storage area awaiting sale.

Work in process xx Finished goods xx

Factory OH control xx Work in process xx
Raw materials xx

Work in process xx
Factory OH control xx
Salaries & wages payable xx

Work in process xx
Applied OH xx
 Sale of the Product Materials
Cost of materials Cost of materials
Sale and shipment of purchased used in production
finished products to
customers.

Cost of goods sold xx

Finished goods xx
 Work in Process Finished Goods
Cost of materials Cost of completed Cost of completed
used in production products products

Cost of direct labor

Cost of overhead

Cost of Goods Sold

Cost of Goods Sold
Finished Goods Name of the Company
Cost of goods sold Statement of Cost of Goods Manufactured
For the year ended ______________

Raw materials inventory, beginning

Add: Purchases, net
Total materials available for use
Raw materials inventory, ending
st of Goods Sold Indirect materials used
Direct materials used
Direct labor cost
Manufacturing overhead
Total manufacturing costs
Work in process, beginning
Total cost of goods placed in process
Work in process, ending
Cost of goods manufactured
Finished goods, beginning
Total goods available for sale
Finished goods, ending
Cost of goods sold

Schedule of Cost of Goods Manufactured

1) Direct materials used in production:
Beg., Raw materials inventory
Add: Raw materials purchases
Less: End, Raw materials inventory
Direct materials used in production

2) Total manufacturing cost:

Direct materials used
Direct labor
Manufacturing OH
Total manufacturing cost

3) Cost of goods manufactured:

Total manufacturing cost
Add: Beg., WIP inventory
Less: End, WIP inventory
Cost of goods manufactured
4) Schedule of Cost of Goods Sold:
Beg. Finished goods inventory
Add: Cost of goods manufactured
Less: End. Finished goods inventory
Cost of goods sold

5) Manufacturing Overhead:
Indirect labor
Indirect materials
Depreciation expense-Factory bldg
Repairs & maintenance-Factory bldg
Amortization of patents
Real property tax
Factory utilities
Tools used
Employer's payroll contributions-Factory
Factory supplies expense
Miscellaneous factory expense
Total manufacturing overhead
any
Manufactured Service Business
_________
Service revenue xx
xx Less: Cost of service xx
xx Gross income xx
xx Less: Operating expenses xx
(xx) Operating income xx
(xx)
xx
xx
xx
xx
xx
xx
(xx)
xx
xx
xx
(xx)
xx

Problem #1 p10-11
xx 26,490
xx 361,920
(xx) -24,910
xx 363,500

xx 363,500
xx 99,085
xx 277,210
xx 739,795

xx 739,795
xx 101,640
(xx) -100,400
xx 741,035
 xx
xx
(xx)
xx

x 169,250
x
x 46,200
x 14,980
x
x
x 29,220
x
x
x 9,460
x
x
8,100 insurance
62,800 dep. F. e.
277,210
Merchandising Business Manufacturing Business

Sales xx Sales xx
Less: Cost of sales* xx Less: Cost of sales* xx
Gross income xx Gross income xx
Less: Operating expenses xx Less: Operating expenses xx
Operating income xx Operating income xx

Beg. inventory xx Beg. FG inventory xx

Add: Net purchases xx Add: Cost of goods manufactured xx
Goods Available for Sale xx Goods Available for Sale xx
Less: End. inventory xx Less: End. FG inventory xx
Cost of sales* xx Cost of sales* xx