accounting for manufacturing business
TRANSCRIPT
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 1/56
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 2/56
Nature of Manufacturing Business
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 3/56
Merchandisingincludes cost of
merchandise purchased
including the
transportation cost of
bringing merchandise to
the business place.
Manufacturinginvolves 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.
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 4/56
Chart of Accounts of Manufacturing BusinessAcct
No. Assets:
110
111112
120
130
140
150
160
161162
165
170
180
190
200
210
220
221
240
241
250
251
Cash in Bank
Cash on HandPetty Cash
Accounts Receivable
Allowance for Uncollectible Accounts
Notes Receivable – Short-term
Interest Receivable
Finished Goods
Work in ProcessRaw 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
Acct No.
Liabilities:
310
320321
330
340
350
360
370
380390
400
410
420
430
440
Accounts Payable
Notes Payable – Short-termInterest Payable
Accrued Salary Payable
Accrued Rent Payable
Bank Loans Payable – Short-term
Income Tax Payable
Withholding Tax Payable
SSS Contribution PayablePhilHealth 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
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 5/56
Acct
No. Cost and Expenses:
810
811
812
813
814
815
820
830
840
850
860870
880
890
900
905
910
920
930
940
950
960
Purchases
Purchases returns
Purchases allowances
Purchases discounts
Freight-in
Cost of goods sold
Salary Expense
Rent Expense
Utilities Expense
Uncollectible Accounts Expense
Advertising ExpenseInsurance 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. Revenues:
610
611
612
613
620
630
640
650
660
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
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 6/56
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 3:
Sell finished goods to
customers
Phase 4:
Collect from customers
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 7/56
Cost Elements of
Manufacturing Business
3 Types of Production Costs:
1. Raw Materials
2. Direct Labor3. Factory Overhead
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 8/56
Raw Materials
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 9/56
Direct Labor
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 10/56
Factory Overhead
The cost of factory overhead is called as
manufactur ing overhead cost . It refers to all indirectmaterials, 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.
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 11/56
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 accounting 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.
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 12/56
The unsold finished goods, unfinished goods-in-
process 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)
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 13/56
Comparative Cost Flow
The comparative cost flow of merchandising and manufacturing
business could be outlined as follows:
MERCHANDISING
Merchandise beginning Pxxx
Add (Deduct) Net purchases
Purchases Pxxx
Freight-in xxx
Purchase discount (xxx)
Purchase allowances (xxx)
Purchase returns (xxx) xxxTotal goods available for sale Pxxx
Less: Unsold merchandise at
the end of the period xxx
Cost of goods sold Pxxx
MANUFACTURING Direct materials, beginning Pxxx
Add (Deduct) Net purchases
Purchases Pxxx
Freight-in xxx
Purchase discount (xxx)
Purchase allowances (xxx)
Purchase returns (xxx) xxx
Total direct materials for usePxxx
Less: Unused raw materials at the end of the
period xxx
Direct materials used Pxxx
Add: Direct labor Pxxx
Factory overhead xxx xxx
Total manufacturing costs Pxxx
Add: work-in-process, beg. xxx
Total work-put-in-process PxxxLess: work-in-process, end xxx
Total costs of goods manufacturedPxxx
Add: finished goods, beg. xxx
Total finished goods for sale Pxxx
Less: finished goods, end xxx
Cost of goods manufactured and sold 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 Manuf actured and
Sold for manufacturing firms because the
items purchased are converted into
finished products before they are sold.
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 14/56
ASSETS IN THE BALANCE SHEET
Raw Materials
Direct Labor
Factory Overhead:
• Indirect Materials
• Indirect labor
• Factory depreciation
and other factory
expenses W O R K - I N - P R O C E S
S
I N V E N T O R Y
EXPENSE IN THEINCOME STATEMENT
Cost of
goods sold
F I N
I S H E D G O O D S
I N V E N T O R Y
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 15/56
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 andoverhead costs transform the raw materials to finished goods.
Indirect manufacturing cost is also called manufacturing
overhead or factory overhead cost.
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 16/56
The Cost of Goods
Manufactured and Sold
The cost of goods manufactured and sold
account 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
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 17/56
Raw materials used:
Beginning raw materials inventory P 70,000
Add: Net raw materials purchases
Raw materials purchases P 200,000
Freight-in 5,000
Gross raw materials purchases 205,000
Less: Purchase discounts P2,500
Purchase returns 1,500
Purchase allowances 1,000 5,000 200,000
Total raw materials available for use P 270000
Less: Ending raw materials inventory 20,000 P250000
Direct labor 400,000
Factory overhead 150,000
Total manufacturing cost P800000
Add: Work in process, beginning 100,000
Total cost of goods in process P900000
Less: Work in process, ending 150,000
Total cost of goods manufactured P750000
Add: Finished goods, beginning 50,000
Total finished goods available for sale P800000
Less: Finished goods, ending 150,000
Cost of oods manufactured and sold P650000
VALROX Manufacturing
Schedule of Cost of Goods Manufactured and Sold
For the Year Ended December 31, 200x
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 18/56
Cost versus Non-Cost SystemThe accounting 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 pricedecision-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 accounting using the
non-cost system.
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 19/56
Under the non-cost system, the manufacturing cost should be summarized
in manufacturing account which basically includes the following postings:
Debit Credit
1. Beginning 4. Purchase return
Inventory
5. Purchase discounts
2. Purchases
6. Manufacturing
3. Freight-In Summary
Direct Raw MaterialsDebit Credit
1. Work-in-process, 5. Work-in-process,
beginning end (per account)
2. Direct raw
materials used
6. Transferred to
3. Direct Labor Finished goods
(per account)
4. Factory overhead
Manufacturing Summary
Debit Credit1. Actual payroll
paid 3. Manufacturing
summary
2. Accrued payroll
Direct Labor
Debit Credit
1. Actual payroll,
indirect
2. Accrued payroll,
indirect
3. Factory utilities 7. Manufacturing
4. Taxes/Insurances Summary
5. Depreciation
Factory6. Factory supplies
Factory Overhead
Debit Credit
1. Manufacturing
Summary
Work-In-Process
Debit Credit
1. Beginning
Inventory
2. Manufacturing Finished goods sold Summary
Finished Goods
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 20/56
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
2. The appropriate journal entry for the finished goods inventory end would be
Finished goods, end xxx
Income summary 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.
Debit Credit
1. Finished goods
sold
Cost of Goods Manufactured and Sold
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 21/56
Transactions Related to ManufacturingProcess
Business transactions of manufacturing firms are
generally similar to the merchandising firm except that
a merchandising firm doest not produce goods.
The accounting for the production of goods includes
the following pro-forma entries ( comparing periodic
non cost accounting system from perpetual cost
accounting system):
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 22/56
Transactions Related to Manufacturi
Process
Business transactions of manufacturing
firms are generally similar to the merchan-
dising firm except that a merchandising firm
does not produce goods.
The accounting for the production of
goods includes the following pro-forma
entries (comparing periodic non-costaccounting system from perpetual cost
accounting system):
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 23/56
Transactions Related to Manufacturing
Process
Accounting 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
Accounts Payable 125 000 Accounts Payable 125 000
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 24/56
2. Returned defective raw materials to vendor, P5,000.
Non-Cost System VS Cost System
Accounts Payable 5 000 Accounts Payable 5 000
Purchase Returns 5 000 Raw materials, inty. 5 000
3. Paid the accounts payable less P2,000 cash discount.
Non-Cost System VS Cost SystemAccounts Payable 120 000 Accounts Payable 120 000
Cash 118 000 Cash 118 000
Purchase Returns 2 000 Raw materials, inty. 2 000
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 25/56
4. Issued raw materials, P97,000 & factory supplies,
P20,000 for factory use.
Non-Cost System VS Cost System
No entry 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 VS Cost System
No entry Raw materials, Inty. 2 000
WIP – Raw materials 2 000
Note : WIP means work-in-process
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 26/56
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 27/56
Accounting 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
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 28/56
8. Closed direct labor cost account.
Non-Cost System VS Cost System
WIP – Direct Labor 100 000 No Entry
Direct Labor 100 000
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 29/56
Accounting forFactory Overhead
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 30/56
Non- Cost System Cost System
Depreciation expense- Work-in-process, FOH 17,000
factory 12,000 Accum. Depreciation-
Insurance expense- factory machine 12,000
factory 4,000 Cash 5,000
Miscellaneous
expense-factory 1,000
Accum. Depreciation-
factory machine 12,000
Cash 5,000
9.Recorded other factory overhead expenses:
Depreciation of factory machine, P12,000; Paid
factory insurance expense, P4000 and miscellaneousfactory expense, P1,000.
VS
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 31/56
Non- Cost System Cost System
Manufacturing overhead
summary 60,000
factory supplies 20,000
Indirect labor 23,000 No entry
Dep’n expense -
factory
12,000
Insurance expense
- factory 4,000
Miscellaneous expense
- factory 1,000
10. Summarized factory overhead accounts.
VS
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 32/56
Non- Cost System Cost System
Work-in-process, FOH 60,000
Manufacturing
overhead
No entry
summary 60,000
11. Closed factory overhead
VS
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 33/56
Accounting for Cost of
Goods Manufactured
and Sold
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 34/56
Non- Cost System Cost System
*Cost of goods Cost of goods
Manufactured 196,000 Manufactured 196,00
0
WIP – Raw
materials
76,000 WIP – Raw
materials
76,000
WIP – Direct
labor
80,000 WIP – Direct labor 80,000
WIP - FOH 40,000 WIP – FOH 40,000
12. Recorded 80% goods completed.
VS
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 35/56
Non- Cost System Cost System
Cost of goods Cost of goods
Manufactured andsold
206,000 Manufactured andsold
206,000
*Finished goods,
end
10,000 Finished goods,
end
10,000
Finished goods,beg 20,000 Finishedgoods, beg20,000
Cost of goods Cost of goods
manufactured 196,000 manufactured 196,000
13. Closed cost elements of cost of sales (assuming
that finished goods - beginning, P20,000 and finished
goods – ending, P10,000)
VS
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 36/56
Non- Cost System Cost System
Sales 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
Incomesummary
Incomesummary
14. Closed revenue and cost of sales to
income summary (assuming that the total
sales is P400,000).
VS
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 37/56
CostAccumulation
Procedures
Process Costing
Job Order Costing
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 38/56
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 thecosts of the different groups of
products because the product is
uniform. Thus, each processing
depar tment becomes a cost center .
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 39/56
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).
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 40/56
Distinction between Process
Costing and Job Order Costing
Process Costing Job Order Costing1. Homogenous units pass 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
the individual processing department’s
costs by the equivalent units of
production.
3. Unit costs are determine by dividing
the total costs on the job cost sheet by
the number of units on the job.
4. The cost of production report
provides the detail for the work-in-
process account for each processing
departments.
4. The job cost sheet provides the
detail for work-in-process account.
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 41/56
Job Order
Costing
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 42/56
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:
J O B O R D E R S
Total 001 002 003 Direct raw
materials P1,500,000 P1,300,00 P100,000 P100,000
Direct labor 950,000 800,000 100,000 50,000
Indirect labor 475,000 350,000 85,000 40,000
Factory supplies 75,000 50,000 15,000 10,000
P3,000,000 P2,500,000 P300,000 P200,000
Status at the end of
accounting period Completed In process In process
Journal entries
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 43/56
Journal entries
1. To record the costs incurred
GENERAL LEDGER
Date Description Page number 200Debit Credit
(a) Work-in-process - materials 1,500,000
Work-in-process - direct labor 950,000
Work-in-process - indirect labor 475,000
Work-in-process - factory supplies 75,000
Raw materials 1,500,000
Cash 1,425,000
Accounts payable 75,000
Note: individual subsidiary ledger for each job order is maintained; hence the
above entries affecting the work-in-process accounts are posted in the general
ledger and subsidiary ledger.
2 To record the completed job order 001
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 44/56
GENERAL LEDGER
Date Description Page number 200
Debit Debit
(c) Accounts receivable 3,125,000
Sales 3,125,000
To record billing for job order 001.
(d) Cost of goods manufactured and sold 2,500,000Cost of goods manufactured 2,500,000
To record cost of goods sold
(e) Sales 3,125,000
Cost of goods manufactured and sold 3,125,000
Income summaryTo close revenue and cost of goods sold
GENERAL LEDGER
Date Description Page number 200
Debit Credit
(b) Cost of goods manufactured 2,500,000Work-in-process – Job 001 2,500,000
2. To record the completed job order 001
3. Supposing that Job Order 001 was billed at P3,125,000 (using
perpetual inventory system), the journal entries would be:
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 45/56
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 work-
in-process or finish goods inventories. In addition, raw
materials should arrive when needed, in the quantities
needed for production.
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 46/56
JIT is a pull system, that is productionis determined by customer demand , and the
need for raw materials is determined by
production. Accordingly, manufacturingfirms 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
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 47/56
1. The amount of raw materials purchased , direct labor used, and
manufacturing overhead applied on the cost of goods sold
account 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 account 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 account called raw and in-process inventory.
This accounting method eliminates the need for separate
raw materials, work-in-process and finished goods inventory
accounts, so is saves record-keeping time and cost.
Illustration:
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 48/56
Illustration:
Japan company incurs the ff. cost in connection with
the production of a product named Kamukhamo:
Raw materials purchased P 100,000
Direct labor used 150,000
Manufacturing overhead applied 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 accounting would be:
GENERAL JOURNAL
The recording of raw materials
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 49/56
Date Description Page Number 100
Debit Credit a) Cost of goods sold 100,000
Accounts payable 100,000 To record the purchase of
Inventory on acount b) Cost of goods sold 150,000
Accrued wages payable 150,000 To record the labor used in
production. c) Cost of goods sold 50,000
Factory overhead 50,000 To record the overhead applied
to production d) Raw and in-process inventory 15,000
Cost of goods sold 15,000 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.
Accordingly, the cost of goods
sold account is immediately
debited upon requisition of the
basic manufacturing costs. This
is accordance with the principle
that the cost of finished goods
should be expensed at the periodof production.
At the end of the production
period, the raw material unused
and the work-in-process are
adjusted in the raw and in-
process inventory account.
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.
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 50/56
Cost of Goods Sold Account
No.16 Debit Credit
Direct Materials 100,000 Raw and in-process 15,000 Direct Labor 150,000
Factory Overhead 50,000 300,000 285,000 Raw and In-Process Inventory Account
No. 18 Debit Credit
Cost of goods sold 15,000
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 51/56
Activity-BasedCosting System
(ABC SYSTEM)
C ( C) S
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 52/56
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 overheadcosts 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 goodexample 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
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 53/56
concept:ACTIVITY-BASED COSTING OVERVIEW
Activity Level Types of Activities Types of Costs Example of Cost Drivers
Facility Owning buildings Depreciation Number of square feetsustaining Occupying buildings Property taxes Number of square feet
Using buildings Utilities BTUs of heat produced
Maintaining buildings Insurance Number of square feet
Product Testing products Testing costs* Number of tests required
sustaining Designing products Design costs* Number of hours of design timeMaintaining products inventory Carrying costs* Number of parts required
Using specialized machinery Depreciation No. of specialized processes required
Batch related Ordering parts Ordering costs* Number of orders placed
Setting up machines Setup costs* Number of setups required
Handling materials Moving costs* Number of moves required
Requisitioning parts Requisition cost Number of requisition made
Unit related Cutting/drilling units Power costs Number of machine hours
Assembling units Indirect labor Number of labor hours
Painting units Indirect material Direct materials cost
Inspecting units Rework costs* Number of units reworked*Includes the salaries and wa es of those individuals involved in the acitivit .
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 54/56
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 hoursP10 per development
hour
Product testing costs P 30,000 30 quality test P1,000 per test
Setup and inspection P150,000 150 production runsP1,000 per production
run
Machine usage costs P 50,00010,000 machine
hoursP5 per machine hour
Assuming that during the period the production of New
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 55/56
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) = P 12,000
Development costs: (P10x 2,000 devt.hours) = 20,000Product testing costs: (P1,0000x10 quality tests) = 10,000
Setup and inspection costs: (P1,000x150 production runs) = 150,000
Machine usage costs: (P5x1000) = 5,000
Total Manufacturing overhead applied in the period = P 197,000
8/13/2019 Accounting for Manufacturing Business
http://slidepdf.com/reader/full/accounting-for-manufacturing-business 56/56
The appropriate journal entry to reflect the applied
manufacturing overhead costs for the period would be:
GENERAL JOURNAL
Page
100
Number
Date Descriptions Debit Credita) Work-in-process inventory – Kamukhamo 197,000
Factory overhead – Building 12,000
Factory overhead – Development 20,000
Factory overhead – Testing 10,000
Factory overhead –
Setup and inspection 150,000
Factory overhead – Machining 5,000
To record applied manufacturing overhead for
The period