24–3 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.
24–4 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.
24–5 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). Elements of Manufacturing Costs
24–6 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.
24–7 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.
24–8 Adjusting Entries Since Raw Materials Inventory and Work-in- Process 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 manu- facturing firm is equivalent to Merchandise Inventory for a merchandising firm.
24–9 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).
24–10 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).
24–11 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).
24–12 Adjusting Entries (g) Depreciation of factory building, $25,000.
24–13 Adjusting Entries (h) Depreciation of factory equipment, $46,000.
24–22 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.
24–23 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.
Adjusting Entries T accounts for Manufacturing Summary and Income Summary.
24–26 * 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. Closing Entries
24–27 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 weighted- average-cost method. A manufacturer may use a perpetual or a periodic inventory system.
24–28 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-in- process inventory. The manufacturer has to estimate the cost of overhead used to produce the ending work-in- process inventory.
24–29 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 Overhead Rate $405,000 $565,000 = = 0.72 = 72% (rounded)
24–30 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 job- order 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.
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.
24–33 Job-Order Cost Accounting System (e) Transferred completed production to Finished Goods Inventory.
24–35 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.