ACCOUNTING FOR MANUFACTURING OPERATIONS

Elements of Product Cost:

(1) Direct Materials – comprise the primary physical substance of the
product manufactured

(2) Direct Labor - pertains to the wages of the workers who directly
worked in the production of goods.

(3) Factory Overhead – also known as manufacturing overhead. It

includes all indirect cost of producing a product such as cost of
indirect material used, indirect labor incurred and other indirect
costs associated in the manufacturing process.

Manufacturing Cost/ Production Cost/ Factory Cost– pertains to sum

of the three elements of cost, i.e., cost direct materials used, direct labor
cost incurred and indirect costs incurred.

Prime Costs – the sum of the costs of direct materials used and direct
labor incurred.

Conversion Costs – the sum of the costs of direct labor incurred and
factory/manufacturing overhead.

Inventory Accounts:
1. Raw materials inventory – refers to the cost of unused raw
materials. It presented in the statement of financial position as
current asset.

2. Work-in-Process Inventory – cost of product still in process at the

end of the period. It presented as current asset in statement of
financial position.

3. Finished Goods Inventory – refers to cost of goods

completed/manufactured which remain unsold at the end of the
period. It is reported in the statement of financial position as current
asset.

COST SYSTEM

Cost System – provides updated information about manufacturing

costs by maintaining a stock card, a perpetual record (purchased
and subsequently issued to production) of the cost of raw materials.
The following is the pro-forma entries:

(1) Raw Materials Inventory xxx

A/P or Cash xxx
To record purchase of direct materials

(2) Raw Materials Inventory xxx

A/P or Cash xxx
To record freight-in.

(3) A/P or Cash xxx

Raw Materials Inventory xxx
To record materials returned to supplier.

(4) A/P xxx

 Raw Materials Inventory xxx
Cash xxx
To record payment within the discount period.

(5) Work-in-Process Inventory (DL) xxx

Factory Overhead Control (IL) xxx
Wages Payable/Cash xxx
To record incurrence of labor cost.

(6) Factory Overhead Control xxx

Various credits xxx
To record incurrence of indirect manufacturing
costs.

Work-in-Process Inventory xxx

Factory Overhead Control xxx
To record transfer of FOH to WIPI.

(8) Finished Goods Inventory xxx

Work-in-Process Inventory xxx
To record goods completed for the period.

(9) A/R xxx

Sales xxx
To record sales.

Cost of Goods Sold xxx

Finished Goods Inventory xxx
To record cost of goods sold.

Computation of Cost of Goods Sold:

Raw Materials Used:
Raw Materials Inventory, Beg. xxx
Add: Net Raw Materials Purchases:
Raw Materials Purchases xxx
Freight-in xxx
Gross Materials Purchases xxx
Less: Purchase Ret. & Allow. xxx
Purchase Discounts xxx xxx xxx
Total Raw Materials Available For Use xxx
Less: Raw Materials Inventory, End xxx xxx
Direct labor xxx
Factory Overhead xxx
Total Manufacturing Costs xxx
Add: Work-in-Process Inventory, Beg. xxx
Total Costs Placed in Process xxx
Less: Work-in-Process Inventory, End xxx
Cost of Goods Manufactured xxx
Add: Finished Goods Inventory, Beg. xxx
Total Goods Available for Sale xxx
Less: Finished Goods Inventory, End xxx
Cost of Goods Sold xxx
xxx
 EXCERCISES

PROBLEM A.

On August 1, 2018, Sietens Company had the following account balances:

Raw materials inventory P 72,000

Work-in-process inventory 108,000
Finished goods inventory 24,000

During August, the following transactions took place:

(1) Raw material was purchased on account, P570,000.

(2) Direct material (P121,200) and indirect material (P15,000) were

issued to production.

(3) Factory payroll paid consisted of P180,000 for direct labor

employees and P42,000 for indirect labor employees.

(4) Office salaries incurred and paid totaled P144,600 for the month.

(5) Utilities of P40,200 were paid; 70% of the utilities cost is for the
factory.

(6) Depreciation of P60,000 was recorded on plant assets; 80% of the

depreciation is related to factory machinery and equipment.

(7) Rent of P66,000 was paid on the building. The factory occupies
60% of the building.

(8) At the end of August, the Work in process inventory balance was
P49,800.

(9) At the end of August the balance in Finished goods inventory was
P53,400.

Sietens, Company uses an actual cost system and debits actual overhead
costs incurred to Work in process inventory. Direct materials are debited
to “Raw Materials Inventory” account while indirect materials are debited
to “Factory Supplies” account when purchased.

Required:
a. Prepare journal entries to record the foregoing transactions.
b. Compute the total manufacturing cost.
c. Compute the total goods placed in process
d. Compute the cost of goods manufactured
e. Compute the total goods available for sale
f. Compute the cost of goods sold
g. Compute the Raw Materials Inventory at the end of August.
SOLUTIONS TO PROBLEM A (SIETENS COMPANY)

a. Journal Entries

(1) Raw Materials Inventory 570,000

Accounts Payable 570,000

(2) Work in Process Inventory (DM used) 121,000

Factory Overhead Control (IM used) 15,000
Raw Materials Inventory 136,000
Factory Supplies

(3) Work in Process Inventory (DL) 180,000

Factory Overhead Control (IL) 42,000
Wages Payable 222,000

(4) Salaries Expense 144,600

Cash 144,600

(5) Factory Overhead Control (P40,200 x 70%) 28,140

Utilities Expense (P40,200 x 30%) 12,060
Cash 40,200

(6) Factory Overhead Control (P60,000 x 80%) 48,000

Depreciation Expense (P60,000 x 20%) 12,000
Accumulated Depreciation 60,000

(7) Factory Overhead Control(P66,000 x 60%) 39,600

Rent Expense (P66,000 x 40%) 26,400
Cash 66,000

Direct Materials Used P 121,000

Direct Labor 180,000
Factory Overhead 172,740
(b) Total Manufacturing Cost P 473,740
Work in Process Inventory, Aug. 1 108,000
(c) Total Cost Placed in Process P 581,740
Work in Process Inventory, Aug. 31 (49,800)
(d) Cost of Goods Manufactured P 531,940
Finished Goods Inventory, Aug.1 24,000
(e) Total Goods Available for Sale P 555,940
Finished Goods Inventory, Aug. 31 (53,400)
(f) Cost of Goods Sold P 502,540
PROBLEM B.
Deezees Manufacturing makes evening dresses. The following
information was gathered from the company records for 2018, the first
year of company operations. Work in process inventory at the end of 2018
was P15,750.

Direct material purchased on account P555,000

Direct material issued to production 447,000
Direct labor payroll accrued 322,500
Indirect labor payroll accrued 93,000
Prepaid factory insurance expired 3,000
Factory utilities paid 21,450
Depreciation on factory equipment recorded 32,550
Factory rent paid 126,000
Sales (all on account) 1,431,000

The company’s gross profit rate for the year was 35%.

REQUIRED:

(a) Prepare journal entries to record the flow of costs for the year,
assuming the company uses a perpetual inventory system and
a single Manufacturing Overhead Control account and that
actual overhead is included in WIP inventory.

(1) Raw Materials Inventory 555,000

Accounts Payable 555,000
To record purchase of materials on account

(2) Work in Process Inventory 447,000

Raw Materials Inventory 447,000
To record materials issued to production.

(3) Work in Process 322,500

Wages Payable 322,500
To record accrued direct labor.

(4) Factory Overhead Control 93,000

Wages Payable 93,000
To record accrued indirect labor.

(5) Factory Overhead Control 3,000

Prepaid Factory Insurance 3,000
To record expiration of factory insurance

(6) Factory Overhead Control 21,450

Cash 21,450
To record payment of factory utilities

(7) Factory Overhead Control 32,550

Accumulated Depreciation 32,550
To record depreciation on factory equipment.

(8) Factory Overhead Control 126,000

Cash 126,000
To record payment of factory rent.
 (9) Accounts Receivable 1,431,000
Sales 1,431,000

Cost of Goods Sold

Finished Goods Inventory

(b) What was the total COGM for 2018?

Direct materials P 447,000

Direct Labor 322,500
Factory Overhead 276,000
Total Manufacturing Cost P 1,045,000
Work in Process, Beginning 0
Total Cost Placed in Process P 1,045,000
Work in Process Inventory, End (15,750)
Cost of Goods Manufactured P 1,029,250

(c) Compute the COGS for 2018.

Cost of Goods Sold (P1,431,000 x 0.65) P930,150

(d) Compute the FGI at December 31, 2018.

Cost of Goods Manufactured P1,029,250

Finished Goods Inventory, Beginning 0
Total Goods Available for Sale P1,029,250
Cost of Goods Sold (930,150)
Finished Goods Inventory, End P 99,100

(e) If profit was P125,000, what were the total operating expenses
for the year?

Sales P1,431,000
Cost of Goods Sold (930,150)
Gross Profit P 500,850
Profit (125,000)
Operating Expenses P 375,850
PROBLEM C.
For each of the following cases, compute the missing amounts:

CASE 1 CASE 2 CASE 3

Sales P 9,300 (g) P112,000
DM used 1,200 (h) 18,200
DL (a) 4,900 (m)
Prime cost 3,700 (i) (n)
Conversion cost 4,800 8,200 49,300
Manufacturing overhead (b) (j) 17,200
COGM 6,200 14,000 (0)
WIPI, beg. 500 900 5,600
WIPI, end (c) 1,200 4,200
FGI, beg. (d) 1,900 7,600
FGI, end 1,200 (k) (p)
COGS (e) 12,200 72,200
GP 3,500 (l) (q)
OPEX (f) 3,500 18,000
Profit 2,200 4,000 (r)

PROBLEM D.
Weatherguard Co. manufactures mailboxes. The following data represent
transactions and balances for December 2018, the company’s first month
of operations:

Purchase DM on P248,000
account………………….
Issued direct material to 186,000
production………
Accrued direct labor payroll………………. 134,000
Paid factory rent 3,600
……………………………
Accrued factory utilities 16,200
……………………
Recorded factory equipment depreciation 15,800
Paid plant supervisor salary…………… 6,400
WIPI, end (6,000 units) 35,000
…………………….
FGI end (3,000 units)……………………… ?
Sales on account (P24 per unit) 648,000
………….

REQUIRED:
a. How many units were sold in December?
Number of Units Sold (P648,000 ÷ P24) 27,000

b. How many units were completed in December?

Units Sold 27,000
Units unsold 3,000
Unsold units, beginning (0)
Units completed 30,000

c. What was the total COGM in December?

Direct materials P186,000
Direct labor 134,000
Factory overhead 42,000
 Work in process beginning -0-
Work in process, ending (35,000)
Cost of goods manufactured P327,000

d. What was the per unit COGM?

COGM per unit (P327,000 ÷ 30,000) P10.90