Cost Accounting (1) First Grade

INVENTORIES FOR A MANUFACTURING BUSINESS

■ A manufacturing business has three inventory accounts: Raw Materials, Work In Process , and Finished Goods
Inventory. At the end of the fiscal period the balance of each of the three accounts will appear in the Current Assets
section in the balance sheet.

1- Raw Materials Inventory:

The Raw Materials Inventory account reflects the cost of raw materials and supplies that will be used in the
manufacturing process. ‫ هي الخامات واالدوات المستخدة في االنتاج‬:‫مخزون الخامات‬

2- Work in Process Inventory

The Work in Process inventory account reflects the cost of raw materials, direct labor. and manufacturing overhead of
goods on which manufacturing has begun but has not be completed
..‫ هو منتجات بدا العمل فيها ولكن لم تنتهي بعد‬:‫مخزون انتاج تحت التشغيل‬

3- Finished Goods Inventory

The Finished Goods inventory account reflects the costs of goods that have been completed and are ready for sale Thls
account corresponds to the Merchandise inventory account of a merchandising business.

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Self- Review
1. What is the difference between a retail business and a manufacturing business?

2. Describe how an income statement for a merchandising business differs from an income statement for a
manufacturing business?

3. What costs are involved in the manufacture of a product? How are these costs classified

4. What is the difference between prime cost and conversion cost?

5. What are the names of the inventory accounts used by a manufacturing business?

Answers to Self-Review

1. A retail business buys the merchandise which it sells to its customers. A manufacturing business purchases raw
materials which it converts into finished goods to be sold to Customers.

2- The income statements for a merchandising business and a manufacturing business differ in the Cost of Goods
Sold section. A merchandising business shows merchandise inventory in the Cost of Goods Sold section, whereas a
manufacturing business shows finished goods inventory.

3. The costs involved in manufacturing a product include materials, labor, and other costs, called manufacturing
overhead. Materials and labor that are used in large enough quantities to be traced to the product are classified as
direct materials and direct labor All other costs, including indirect materials and indirect labor, are classified as
manufacturing overhead.

4. Direct materials and direct labor are added together to get prime cost while the sum of direct labor and
manufacturing overhead equal conversion cost.

5. A manufacturing business has three inventory accounts: Raw Materials Inventory, Work in Process Inventory, and
Finished Goods Inventory

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Cost Accounting (1) First Grade
Management Accounting: Objectives
1- Costing services, products, other objectives of interest to management;
2- Planning, controlling, evaluating, & continuous improvement;
3- Decision making.

Information needs: Costing & Decision Making

The Management Process

Planning
The detailed formulation to achieve
a particular end or goal.
Require setting objectives and
identifying methods to achieve those
objectives.
Controlling Decision making
Monitoring plan’s implementation The process of choosing
and taking corrective action. among competing
Depends on feedback. alternatives
gathering feedback to ensure that
the plan is being properly followed.

Comparison: Management vs. Financial Accounting

VI

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Cost Accounting (1) First Grade
Current Focus
1-Need for innovation and relevant produces:
 Activity based management
 ABC Improves accuracy of assigning costs

2-Customer orientation
 Strategic positioning to maintain competitive advantage
 Value chain framework to focus on customer value

3-Cross functional perspective

 Understand importance of value chain from manufacturing to marketing to distribution to customer service

Value Chain
A value chain combines the output of several firms to meet customer needs.
Value chain: Major business functions or activities that add value to a product.

Sarbanes Oxley
 Enhanced the role of the management accountant by
1- Establishing controls over management
2- Raising importance of management’s assessment of internal controls

Certifications
1- Signifies the accountant has met requirements for Education and Experience
2- Signifies the accountant has passed a qualifying examination