CHAPTER 8
Accounting
for
manufacturing
CONTENTS
8.1 Cost of goods manufactured statement
8.2 Cost of goods sold
8.3 Statement of financial performance from closing
entries
8.4 Missing data in manufacturing entities
8.5 Manufacturing worksheet
CHAPTER 8: ACCOUNTING FOR MANUFACTURING
8.1
ADDITIONAL PROBLEMS
Problem 8.1
Cost of goods manufactured statement
Serifini Ltd’s accountant extracted the following data from the company’s accounting
records for the year ended 30 June 2002:
Sales
Direct labour
Purchases of raw materials
Selling expenses
Administrative expenses
Inventories at 1 July 2001:
Raw materials
Work in process
Finished goods
Inventories at 30 June 2002:
Raw materials
Work in process
Finished goods
$729 500
142 000
240 000
50 000
60 000
64 000
50 000
96 000
56 000
48 000
104 000
Factory overhead is applied at the rate of 110% of direct labour.
Required:
A. Prepare a cost of goods manufactured statement for the year ended 30 June 2002.
B. What was the company’s cost of goods sold for the year ended 30 June 2002?
C. What was the company’s gross profit for the year ended 30 June 2002?
Solution
A.
SERIFINI LTD
Cost of Goods Manufactured Statement
for the year ended 30 June 2002
Direct materials:
Raw materials inventory, 1 July 2001
Purchases raw materials
Less raw materials inventory 30 June 2002
Raw materials issued to production
Direct labour
Prime costs
Factory overhead (110% direct labour)
Total manufacturing costs for the period
Add work in process, 1 July 2001
$64 000
240 000
304 000
56 000
$248 000
142 000
390 000
156 200
546 200
50 000
596 200
48 000
548 200
96 000
644 200
104 000
$540 200
Less work in process, 30 June 2002
Cost of goods manufactured
Add finished goods, 1 July 2001
B.
Less finished goods, 30 June 2002
Cost of goods manufactured and sold
C.
SEREFINI LTD
Statement of Financial Performance (extract)
for the year ended 30 June 2002
Sales
Cost of goods sold
Gross profit
$729 500
540 200
$189 300
WILEY
CHAPTER 8: ACCOUNTING FOR MANUFACTURING
Problem 8.2
8.2
Cost of goods sold
The accountant for Waverley Pty Ltd has compiled information concerning the
company’s manufacturing costs for the year ended 30 June 2003. The beginning inventories included raw materials $86 000, work in process $61 200, and finished goods
$104 400. The company incurred direct labour costs of $551 440, and its total cost of
goods manufactured for the year amounted to $2 028 800. Factory overhead costs are
assigned to work in process and finished goods, using the relationship between direct
labour costs and the factory overhead costs incurred. The ending inventories comprised
the following costs:
Raw materials
Direct labour
Factory overhead
Total ending inventory
Raw
materials
$80 400
A
B
$80 400
Work in
process
$27 600
27 920
C
D
Finished
goods
$ 34 000
31 120
46 680
$ 111 800
Required:
A. Determine the amounts for A to D.
B. Prepare a schedule of cost of goods sold for the year ending 30 June 2003.
Solution
A.
Raw materials
Raw materials
Direct labour
Factory overhead
Total ending inventory
Work in process
Finished goods
$80,400
0
________
$27,600
27,920
41,880
$ 34,000
31,120
46,680
$80,400
$97,400
$111,800
46 680
1. Factory overhead application rate ---------------- = 150%
31 120
B.
WAVERLEY PTY LTD
Schedule of Cost of Goods Sold
for the year ended 30 June 2003
Beginning finished goods inventory
Cost of goods manufactured
Goods available
Ending finished goods inventory
Cost of goods sold
$104 400
2 028 800
2 133 200
111 800
$2 021 400
WILEY
CHAPTER 8: ACCOUNTING FOR MANUFACTURING
Problem 8.3
8.3
Statement of financial performance from closing
entries
Close-Out Manufacturing Co. Ltd, which uses a periodic inventory system, made the
following closing entries on 31 December 2003:
Dec.
31
31
31
31
31
Manufacturing Summary
Raw Materials Inventory
Work in Process Inventory
Raw Materials Purchases
Freight Inwards
Direct Labour
Factory Overhead
747 100
Raw Materials Inventory
Work in Process Inventory
Manufacturing Summary
17 200
42 800
Profit and Loss Summary
Finished Goods Inventory
Selling Expenses
Administrative Expenses
Manufacturing Summary
904 550
Finished Goods Inventory
Sales
Profit and Loss Summary
38 550
986 000
Profit and Loss Summary
Retained Profits
120 000
15 200
43 100
116 400
3 600
316 000
252 800
60 000
38 650
86 500
92 300
687 100
1 024 550
120 000
Required:
A. Prepare a cost of goods manufactured statement for year ended 31 December 2003.
B. Prepare a statement of financial performance for year ended 31 December 2003.
WILEY
CHAPTER 8: ACCOUNTING FOR MANUFACTURING
8.4
Solution
A.
CLOSE-OUT MANUFACTURING CO LTD
Cost of Goods Manufactured Statement
for the year ended 31 December 2003
Direct materials:
Beginning raw materials
Purchases
Freight inwards
Ending raw materials
Direct materials used
Direct labour
Factory overhead
Total manufacturing costs for the period
Beginning work in process
Total work in process
Ending work in process
Cost of goods manufactured
$15 200
116 400
3 600
135 200
17 200
$118 000
316 000
252 800
686 800
43 100
729 900
42 800
$687 100
B.
CLOSE-OUT MANUFACTURING CO LTD
Statement of Financial Performance
for the year ended 31 December 2003
Sales revenue
Cost of goods sold:
Beginning finished goods inventory
Cost of goods manufactured
Goods available
Ending finished goods inventory
Cost of goods sold
Gross profit
Operating expenses:
Selling expenses
Administrative expenses
Operating profit before tax
$986 000
$38 650
687 100
725 750
38 550
687 200
298 800
86 500
92 300
178 800
$120 000
WILEY
CHAPTER 8: ACCOUNTING FOR MANUFACTURING
Problem 8.4
8.5
Missing data in manufacturing entities
Two cases of data concerning production costs, other expenses and sales are presented
below:
Beginning work in process
Ending work in process
Direct materials cost
Direct labour
Factory overhead
Total manufacturing costs
Cost of goods manufactured
Sales
Beginning finished goods inventory
Ending finished goods inventory
Cost of goods available for sale
Cost of goods sold
Gross profit
Operating expenses
Net profit
Case A
12 000
(b)
75 000
65 000
55 000
(a)
180 000
270 000
(c)
22 000
219 000
(d)
(e)
38 500
(f)
Case B
(h)
33 000
(g)
90 000
45 000
230 000
224 000
(i)
38 500
27 500
(j)
(k)
78 000
(l)
24 000
Required:
A. Calculate the missing amounts for the letters (a) to (l).
B. Using the data in Case A, prepare a cost of goods manufactured statement.
C. Using the data in Case A, prepare a statement of financial performance.
D. Using the data in Case B, and additional data consisting of cash at bank $40 000,
accounts receivable $140 000, raw materials inventory $6500 and prepaid expenses
$600, prepare the current assets section of the statement of financial position.
WILEY
CHAPTER 8: ACCOUNTING FOR MANUFACTURING
8.6
Solution
A.
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
$195 000
27 000
39 000
197 000
73 000
34 500
95 000
27 000
313 000
262 500
235 000
54 000
B.
Cost of Goods Manufactured Statement
Case A
75000
65000
55000
(a) 195 000
12000
(b) (27 000)
$180000
Direct materials cost
Direct labour
Factory overhead
Manufacturing costs for period
Beginning work in process
Total work in process
Cost of goods manufactured
Case B
95000
90000
45000
230000
(h) 27000
(33 000)
$224000
C.
Statement of Financial Performance
Sales revenue
Cost of goods sold
Beg inventory
Cost of goods
manufactured
Cost of goods
available for sale
End inventory
Gross Profit
Operating expenses
Net profit
Case A
270 000
Case B
(i) 313 000
(c) 39 000
180 000
38 500
224 000
219 000
262 500
22 000
(d) 197 000
(e) 73 000
38 500
(f) $34 500
(j)
27 500
78 000
(k) 235 000
(i)
54 000
$24 000
D.
Statement of Financial Position (Case B)
Current assets:
Cash at bank
Accounts receivable
Raw materials inventory
Work in process
Finished goods inventory
Prepaid expenses
Total current assets
$40 000
140 000
6 500
33 000
27 500
600
$247 600
WILEY
CHAPTER 8: ACCOUNTING FOR MANUFACTURING
Problem 8.5
8.7
Manufacturing worksheet
The listing of the ledger accounts (unadjusted) of Woodworks Manufacturing Co. Ltd on
30 June 2002 is presented below. All ledger balances are normal balances.
WOODWORKS MANUFACTURING CO. LTD
Unadjusted List of Accounts
as at 30 June 2002
Balance
Cash at bank
Accounts receivable
Allowance for doubtful debts
Finished goods inventory, 1/7/01
Work in process, 1/7/01
Raw materials inventory, 1/7/01
Prepaid rent
Machinery and equipment
Accumulated depreciation
Accounts payable
Bills payable
Share capital
Retained profits
Sales
Direct labour
Raw material purchases
Indirect labour
Factory supplies
Light and power
Insurance
Selling expenses
Administrative expenses
Interest expense
Factory rent
$
18 375
41 250
3 375
28 750
9 375
4 625
67 500
245 000
43 750
22 500
93 750
50 000
46 250
1 075 000
270 000
256 250
88 750
22 500
70 000
20 375
40 000
83 750
28 750
39 375
$ 2 669 250
Additional information relating to the company is as follows:
1. The inventories as of 30 June 2002 were:
Raw materials
$ 3 875
Work in process
10 875
Finished goods
31250
2. On 1 January 2002 the company paid $67 500 for the next 12 months’ factory rent.
Prepaid rent was debited at the time of the transaction.
3. The Machinery and Equipment account consists of $183 750 of factory machinery
and $61 250 of office equipment. All machinery and equipment is depreciated using
a 7-year life, no residual value, and the straight-line method.
4. Expenses incurred as of year-end but not yet recorded are: direct labour, $5000;
indirect labour, $1500; administrative expenses, $875.
5. The light and power, rent and insurance costs are related to factory operations.
6. Allow for company income tax expense at 40% of net profit before tax.
(continued)
WILEY
CHAPTER 8: ACCOUNTING FOR MANUFACTURING
8.8
Required:
A. Prepare a worksheet including a pair of columns for unadjusted trial balance, adjustments, manufacturing, statement of financial performance, and statement of financial position.
B. Prepare a cost of goods manufactured statement.
C. Prepare the closing entries.
D. Calculate the relationship between factory overhead costs and direct labour costs.
Using that relationship, calculate the labour and overhead included in the ending
inventories if work in process ending inventory contains $3000 of raw materials and
$5000 of raw materials is included in the finished goods inventory.
E. Calculate the raw materials turnover ratio and manufacturing costs ratios. What do
these ratios reveal to management? What are the limitations of these ratios for
management control purposes?
WILEY
Income tax expense
Net profit after tax
Cost of goods manufactured
Depreciation expense - factory
Depreciation expense - office
Wages payable
Admin. expenses payable
Cash at bank
Accounts receivable
Allowance for doubtful debts
Inventories:
Finished goods
Work in process
Raw materials
Prepaid rent
Machinery and equipment
Acc. Dep.- Machinery and equip.
Accounts payable
Bills payable
Share capital
Retained profits
Sales
Direct labour
Raw material purchases
Indirect labour
Factory supplies
Light and power
Insurance
Factory rent
Selling expenses
Administrative expenses
Interest expense
40%
270 000
256 250
88 750
22 500
70 000
20 375
39 375
40 000
83 750
28 750
1 334 625
28 750
9 375
4 625
67 500
245 000
Debit
18 375
41 250
1 334 625
43 750
22 500
93 750
50 000
46 250
1 075 000
3 375
Credit
Unadjusted trial balance
76 125
(2) 26 250
(2) 8 750
(4) 875
(1) 33 750
(3) 1 500
(3) 5 000
Debit
Adjustments
6 500
875
76 125
(2) 35 000
(1) 33 750
Credit
847 750
26 250
275 000
256 250
90 250
22 500
70 000
20 375
73 125
9 375
4 625
Debit
833 000
847 750
10 875
3 875
Credit
Manufacturing
WOODWORKS MANUFACTURING CO LTD
Worksheet for the year ended 30 June 2002
32 950
49 425
1 106 250
833 000
8 750
40 000
84 625
28 750
28 750
1 106 250
1 075 000
31250
Statement of Financial
Performance
Debit
Credit
384 375
31250
10 875
3 875
33 750
245 000
Debit
18 375
41 250
32 950
49 425
384 375
6 500
875
78 750
22 500
93 750
50 000
46 250
3 375
Credit
Statement of Financial Position
CHAPTER 8: ACCOUNTING FOR MANUFACTURING
8.9
Solution
A.
WILEY
CHAPTER 8: ACCOUNTING FOR MANUFACTURING
8.10
B.
WOODWORKS MANUFACTURING CO LTD
Cost of Goods Manufactured Statement
for the year ended 30 June 2002
Direct materials:
Beginning raw materials
Purchases
Ending raw materials
Direct materials used
Direct labour
Factory overhead:
Indirect labour
Factory supplies
Light and power
Insurance
Factory rent
Depreciation
Total manufacturing costs for the period
Beginning work in process
Total work in process
Ending work in process
Cost of goods manufactured
$4 625
256 250
260 875
3 875
$257 000
275 000
90 250
22 500
70 000
20 375
73 125
26 250
834 500
9 375
843 875
10 875
$833 000
302 500
C. Closing Entries
June 2002
30
Manufacturing summary
847 750
Work in process inventory
Raw materials inventory
Direct labour
Raw materials purchases
Indirect labour
Factory supplies
Light and power
Insurance
Factory rent
Depreciation expense factory
To close manufacturing account with debit balances.
30
Work in process
Raw materials
30
Profit and loss summary
1 056 825
Finished goods inventory
Selling expenses
Administrative expenses
Interest expense
Depreciation expense - office
Manufacturing summary
Income tax expense
To close statement of financial performance accounts
30
9 375
4 625
275 000
256 250
90 250
22 500
70 000
20 375
73 125
26 250
10 875
3 875
Manufacturing summary
14 750
To establish ending inventories of raw materials and work in process.
28 750
40 000
84 625
28 750
8 750
833 000
32 950
with debit balances.
Finished goods inventory
31 250
Sales 1 075 000
Profit and loss summary 1 106 250
To establish the ending finished goods inventory and close the sales account.
30
Profit and loss summary
Retained profits
To close net profit after tax to retained profits.
49 425
49 425
WILEY
CHAPTER 8: ACCOUNTING FOR MANUFACTURING
8.11
D.
Factory overhead and direct labour cost relationships
Factory overhead costs
302 500
------------------------------------------------------- = ------------------- = 1.10 or 110%
Direct labour cost
275 000
Labour and overhead included in ending inventories.
DL + 1.10 DL + 3 000
2.10 DL
Direct labour
Factory overhead
=
=
=
=
=
Finished goods:
DL + 1.10 DL + 5 000 =
2.10 DL =
Direct labour =
Factory overhead =
=
$10 875
$7 875
$3 750
$3 750 * 1.10
$4 125
$31 250
$26 250
$12 500
$12 500
$13 750
* 1.10
E.
Raw materials turnover ratio
Cost of raw materials ratio
Cost of raw materials used
= -----------------------------------------------------------------------------Average raw materials inventory
257 000
257 000
= ------------------------------------------ = ------------------- = 60.47 times
( 4 625 + 3 875 )/2
4 250
Manufacturing costs ratios:
257 000
------------------- = 0.31 r 31%
834 500
Direct labour:
257 000
------------------- = 0.33 or 33%
834 500
Factory overhead costs:
302 500
------------------- = 0.36 or 36%
834 500
The raw materials turnover ratio indicates how long inventory items of raw materials
are held on average which is a measure of the entity’s exposure to inventory losses due
to shrinkage, deterioration, obsolescence, changes in fashion and price fluctuations. The
manufacturing cost ratios can provide some cost control information.
The limitations of these ratios are that, under a periodic inventory system, only aggregate financial information is available from the financial statements, and management
must wait until a physical stocktake is performed to give ending inventory values.
Information regarding unit costs of individual products is not available. To be really
useful trends and industry comparisons need to be monitored.
WILEY