Manufacturing Accounts

1) Product costs: Direct Materials, direct labour, (indirect production costs) manufacturing overheads (indirect materials, indirect
labour, factory maintenance, factory cleaning, supervisor’s salary, etc)
The word plant or factory can also help identify a manufacturing overhead......appear on the statement of cost of goods manufactured

2) Period costs: Indirect, not related to production.... can often be identified by the use of the word office, admin, selling,
distribution.....appear on the income statement as expenses

Name of Company
Cost of Goods Manufactured Statement
for the period ended date
Direct materials:
Beginning raw materials $xxx
Add Net purchases xxx
Add Freight inwards xxx
Total Materials available xxx
Ending raw materials (xxx)
Direct materials used $xxx
Direct labour xxx
Factory overhead:
Depreciation – factory machinery xxx
Power xxx
Rent xxx
Supplies xxx
Indirect labour xxx
Repairs xxx
Rates xxx xxx
Manufacturing costs incurred in the xxx
period/
Add: Beginning work in process xxx
Total manufacturing costs to account for/ xxx
total work in process
Less: Ending work in process (xxx)
Cost of goods manufactured xxx
Problem 20.23: Cost of goods manufactured and income statement

The following accounts and amounts (balances are normal balances) were taken from the records of Prider Manufacturers Ltd at 30
June 2019.

Required
(a) Prepare a cost of goods manufactured statement for the year ended 30 June 2019.
(b) Prepare an income statement for the year ended 30 June 2019.
(c) The industry average for Gross Profit margin is 30% and the Profit margin is 10%. Explain how Prider Manufacturers Ltd s
financial performance compares to the industry average.
(LO6)
(a)

PRIDER MANUFACTURERS PTY LTD

Cost of Goods Manufactured Statement
for the year ended 30 June 2019
Direct materials:
Beginning raw materials $115 200
Net purchases of raw materials ($1 1 272 000
280 000 – $8000)
Freight inwards 17 400
Materials available 1 404 600
Ending raw materials (124 800)
Direct materials used $1 279 800
Direct labour 390 000
Factory overhead:
Depreciation – factory machinery 38 400
Power 36 000
Rent 240 000
Supplies 296 000
Indirect labour 128 000
Repairs 77 800
Rates 48 000 864 200
Manufacturing costs incurred in the/for 2 534 000
the period
Add: Beginning work in process 54 000
Total manufacturing costs to account 2 588 000
for/total work in process
Less: Ending work in process (60 000)
Cost of goods manufactured $2 528 000
 PRIDER MANUFACTURERS PTY LTD
Income statement
for the year ended 30 June 2019
SALES $3 800 000
Less: Sales – returns (62 800)
Net sales Revenue $3 737 200
COST OF SALES:
Beginning finished goods inventory 260 000
*Cost of goods manufactured 2 528 000
Cost of goods available for sale 2 788 000
Ending finished goods inventory (250 000)
Cost of sales/cost of goods sold (2 538 000)
GROSS PROFIT 1 199,200

EXPENSES:
Selling and distribution expenses:
Advertising 120 000
Sales travel expense 36 600
Sales commissions 114 600 271 200
Administrative expenses:
Depreciation – office equipment 14 400
Office rent expense 60 000
Office salaries 422 400 496 800 (768 000)
PROFIT BEFORE TAX 431,200

© Gross Profit Margin = 1 199 200 Profit margin = 431,200

GP/net sales rev x 100 3 737 200 Profit/net sales rev x 100 = 3,737,200
= 32% = 11.5%

Prider Manufacturers Ltd has achieved a slightly higher gross profit margin to the industry and is performing above the industry on profit
margin. This would suggest that Prider Manufacturers Ltd has good control of its expenses.
Exercise 20.2: Product and period costs

As the Human Resources manager for Beautiful Bottles Pty Ltd, a company manufacturing bottles for the food industry, you have been
asked by the accountant to help reduce the product costs of each bottle. You have compiled the following information to help with the
decision.

You are considering two options. The first option is to replace one of the senior production staff with a junior staff member. This option
will reduce the amount of quality control checks that the company can perform. The second option is not to replace two of the junior
staff when they resign. This will reduce the number of bottles that can be produced by 300 000 bottles per year.

Required
(a) Explain what some of the qualitative factors are that may arise from each of the two options being considered and whether these
may favour one option over the other.
(b) Calculate the Direct Labour cost per bottle under the current conditions and each of the two proposed options.
(c) Using the qualitative factors from requirement (a) and the quantitative factors from requirement (b) explain which option you
would consider the best for Beautiful Bottles Pty Ltd.
(LO1 and LO2)
(a)

Option 1:
 This option could lead to a loss of quality due to the reduction in quality control checks. This in turn would lead to more bottles being returned.
A loss of reputation with regards to the reliability of the bottles could damage the reputation of the company and lead to a loss of long-term
profit even though short-term profits may initially improve.

Option 2:
 The loss of sales and possible inability to meet customers’ demand could lead to the loss of some customers who may seek an alternative
supplier who can sell them all the bottles they need. There may be both a short term and a long term decrease in profits as a result of this
option.

(b) Analysis based on direct labour costs of three options:

Current conditions:
DL cost/ bottle = ($140 000 + $400 000) / 3 300 000
= $0.163 DL cost/bottle

Option 1:
DL cost/bottle = ($70 000 + $440 000) / 3 300 000
= $0.154 DL cost/bottle

Option 2:
DL cost/bottle = ($140 000 + $320 000) / 3 000 000
= $0.153 DL cost/bottle

c) Option 1 reduces the direct labour cost per bottle slightly less than option 2 but doesn’t lead to a reduction in production levels so this would
result in the best short term profit increase. Both options may have negative long term profit impacts but the extent of this is uncertain. On
balance, option 1 would appear to be the best choice for Beautiful Bottles Pty Ltd.
Exercise 20.6: Cost of goods manufactured

Smart Manufacturing Systems Pty Ltd provides the following information.

Required
(a) Calculate total manufacturing costs for the period ending 30 June 2019.
(b) Calculate cost of goods manufactured for the period ending 30 June 2019.
(c) Calculate cost of sales for the period ending 30 June 2019.
(d) Calculate profit or loss after tax for the period ending 30 June 2019.
(LO5)
(a)
Direct materials 18 000
Direct labour 30 000
Factory depreciation 6000
Indirect labour 15 000
Total manufacturing costs $ 69 000

Direct materials used:

Materials (1 July 2018) + materials purchased – materials (30 June 2019)
= $40 000 + $16 000 – $38 000
= $18 000

(b)
Total manufacturing costs 69 000
Work in process (1 July 2018) 13 000
Total cost of work in process/costs to a/c 82 000
for during the year
Less: Work in process (30 June 2019) (14 000)
Cost of goods manufactured $68 000
©
Finished goods inventory (1 July 2018) 20 000
Cost of goods manufactured 68 000
Total cost of goods available for sale 88 000
Less: Finished goods inventory (30 June 2019) (18 000)
Cost of sales/cost of goods sold $70 000

(d)
Sales 108 000
Less: Cost of sales 70 000
Gross margin 38 000
Less: Advertising and admin expenses 32 000
Income before taxes 6 000
Less: Income tax expense 2 000
Profit after tax $4 000
Exercise 20.8: Work in process
Information from the records of Smart Manufacturing Systems Pty Ltd for the year ended 30 June 2019 is given below.

(a) Calculate the cost of work in process inventory on 1 July 2018.

SMART MANUFACTURING SYSTEMS PTY LTD
Cost of Goods Manufactured Statement
for the year ended 30 June 2019
Direct materials:
Beginning raw materials $24 000
Purchases 210 000
Raw materials available 234 000
Ending raw materials (25 500)
Direct materials used $208 500
Direct labour (240 000  2) 120 000
Factory overhead 240 000
Manufacturing costs/costs incurred 568 500
during the period
Add: Beginning work in process (671 300 *102 800
– 568 500)
Total work in process/ costs to account for 671 300
Less: Ending work in process (50 500)
Cost of goods manufactured $620 800

COGM + ending WIP = Total WIP- Total manufacturing costs = beginning WIP.
* Work in process on 1 July 2018 is $102 800
Exercise 20.12: Valuation of manufacturing inventories

During the year ended 30 June 2019, Fast Fones Industries Pty Ltd incurred the following costs.

The company charges factory overhead costs to work in process inventory and finished goods inventory using an overhead application
rate based on direct materials costs.

Required
(a) Determine the company’s overhead application rate.
(b) If the company’s ending finished goods inventory of $841 600 included $25 600 of direct labour costs, determine the inventory’s
material and overhead costs. If direct material is DM.......Then factory overheads are 2.4DM
(a)
Overhead application rate:
Factory overhead 6853440
= = $ 2 . 40 per DM$
Direct material costs 2855600

(b)
DM + 2.4 DM + 25 600 = 841 600
3.4DM = 816 000
     DM = 816 000/3.4
= $240 000

Direct material = $240 000

Overhead = 2.4 (240 000) = $576000
Exercise 20.14: Manufacturing statement with missing data

For each company below, fill in the missing data. Each company is independent.

Sales – COGS = Gross profit

Gross profit – operating expenses = profit
COGS = Beginning finished goods + COGM – ending finished goods
COGM = Beg WIP + DL + DM +Factory o/h – ending WIP
 Income statement
Company Company Company
X Y Z
Sales $320 000 $1 120 000 (5) 120 000
Beginning finished goods 18 300 (2) 49 000 7800
Cost of goods manufactured 197 700 761 200 (6) 61 350
Ending finished goods 24 000 26 200 9150 (9)
Cost of sales 192 000 (1) 784 000 60 000
Gross profit 128 000 336 000 60 000 (10)
Operating Expenses 89 600 (3) 235 200 18 000 (11)
Profit 38 400 100 800 (7) 42 000
Beginning work in process 19 300 32 400 4750 (12)
Direct labour 21 500 (4) 256 000 42 150
Raw materials used 18 750 124 000 6150
Factory overhead 159 750 385 800 13 900
Ending work in process 21 600 37 000 (8) 5600

(See explanations below.)

(1) 320 000 – 128 000 = $192 000

(2) 192 000 + 24 000 – 197 700 = $18 300
(3) 128 000 – 38 400 = $89 600
(4) 197 700 + 21 600 – 159 750 – 18 750 – 19 300 = $21 500
(5) 336 000 + 784 000 = $1 120 000
(6) 784 000 + 26 200 – 49 000 = $761 200
(7) 336 000 – 235 200 = $100 800
(8) 761 200 – 32 400 – 256 000 – 124 000 – 385 800 = $37 000
(9) 7800 + 61 350 – 60 000 = $9150
(10) 120 000 – 60 000 = $60 000
(11) 60 000 – 42 000 = $18 000
(12) 61 350 + 5600 – 13 900 – 6150 – 42 150 = $4750
Problem 20.17: Accounting for a manufacturing entity

During the year ended 30 June 2019, Beautiful Bottles Pty Ltd incurred the following costs in connection with its production activities.

The beginning and ending inventory values were as follows.

Required
(a) Calculate the relationship between factory overhead costs and direct labour cost.
(b) Prepare a cost of goods manufactured statement for the year ended 30 June 2019.
(c) Prepare closing entries using the Manufacturing Summary account.
(d) Prepare the general journal entry to close the Manufacturing Summary account.
(a)
Factory overhead calculation:
Factory electricity $71 000
Indirect labour 90 000
Depreciation 65 000
Plant rent 56 000
Supplies (factory) 23 000
Repairs (factory) 26 000
Factory overhead costs $331 000
Factory overhead costs 331000
= =4
Direct labour cost 82750

BEAUTIFUL BOTTLES PTY LTD Cost of Goods Manufactured

Statement
for the year ended 30 June 2019
Direct materials:
Beginning raw materials $28 400
Purchases 390 000
Materials available 418 400
Ending raw materials (23 600)
Direct materials used $394 800
Direct labour 82 750
Factory overhead:
Electricity 71 000
Indirect labour 90 000
Depreciation 65 000
Rent 56 000
Supplies 23 000
Repairs 26 000 331 000
Total manufacturing cost/ costs incurred 808 550
for the period
Add: Beginning work in process 52 400
Total work in process/ costs to account 4 860 950
Less: Ending work in process (62 000)
Cost of goods manufactured $798 950
(c) Closing entries:

2019
June 30 Manufacturing summary 884 550
Raw materials inventory (beginning) 28400
Work in process inventory (Beginning) 52 400
Raw materials purchases 390 000
Direct labour 82 750
Electricity expense 71 000
Indirect labour expense 90 000
Depreciation – machinery 65 000
Rent expense 56 000
Supplies expense 23 000
Repairs expense 26 000
To close manufacturing accounts with debit balances.

30 Raw materials inventory (ending) 23 600

Work in process inventory (ending) 62
000
Manufacturing summary 85 600
To establish ending raw materials and work in process inventories.

(d) There is a debit balance of 798,950 in the manufacturing account, close it to p and L summary.

30 Profit or loss summary 798 950

Manufacturing summary 798 950
To close manufacturing summary account.
Problem 20.27: Manufacturing worksheet and cost of goods manufactured statement

The unadjusted trial balance of Innovative Computers Pty Ltd on 30 June 2019 is presented below.
The following additional information is available.

1. The inventories as of 30 June 2019 were as follows.

2. The Machinery and Equipment account comprises $250 000 of factory machinery and the balance of office equipment. All machinery
and equipment are depreciated using the straight-line method over an 8-year life. There were no plant and equipment acquisitions or
disposals during the accounting period. Depn on machine = 31,250 (overhead), Depn on equipment = 18,750 (period cost)

3. On 1 May 2019, the company paid $12 000 for 12 months insurance cover on the factory. Prepaid Insurance was debited at the time of
the transaction. 2000 (for 2 mths including May and June) overhead for insurance

4. Accrued expenses at year-end but not yet recorded: direct labour, $10 000; indirect labour, $3500; selling and distribution expenses,
$20 000. DL = 10,000, Indirect L = 3,500 (overhead) and 20,000 of period costs

5. All electricity, rent, rates and taxes, and insurance are charged to factory operations. Overheads.

6. An additional stationery expense payable of $1500 is to be recorded and treated as an administrative expense. No invoice has been
received. 1,500 period cost

7. Ignore income tax.

Required
(a) Prepare a worksheet including pairs of columns for unadjusted trial balance, adjustments, manufacturing, and the financial
statements.
(b) Prepare a cost of goods manufactured statement for the year ended 30 June 2019.
 INNOVATIVE COMPUTERS PTY LTD
Worksheet
For the year ended 30 June 2019
Unadjusted trial Adjustments Manufacturing Income statement Balance sheet
balance
Account Title Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash at Bank 60 000 60 000
Trade Debtors 85 120 85 120
Finished Goods 145 000 145 000 163 750 163 750
Work in Process 80 000 80 000 82 000 82 000
Raw Materials 37 500 37 500 32 000 32 000
Prepaid Insurance 12 000 (3) 2 000 10 000
Machinery and Equipment 400 000 400 000
Acc. Depr. Machinery & Equip. 140 000 (2) 50 000 190 000
Trade Creditors 83 750 83 750
Loan Payable 120 000 120 000
Share Capital 300 000 300 000
Retained Earnings 98 780 98 780
Sales 3 513 600 3 513 600
Purchases – Raw Materials 1 645 000 1 645 000
Direct Labour 420 000 (4) 10 000 430 000
Indirect Labour 105 000 (4) 3 500 108 500
Factory Supplies 140 700 140 700
Electricity 102 250 102 250
Rent 180 000 180 000
Insurance 80 600 (3) 2 000 82 600
Rates & Taxes 37 500 37 500
Selling & Distribution 154 500 (4) 20 000 174 500
Expenses
Administrative & Office 210 000 (6) 1 500 211 500
Expenses
Sales Commissions 351 360 351 360
Interest Expense 9 600 9 600
Depr. Expense – Factory (2) 31 250 31 250
Depr. Expense – Office (2) 18 750 18 750
Wages Payable (4) 13 500 13 500
Selling Expenses Payable (4) 20 000 20 000
Admin & Office Exp Payable (6) 1 500 1 500

Cost of Goods Manufactured 2 761 300 2 761 300

4 256 130 4 256 130 87 000 87 000 2 875 300 2 875 300 3 672 010 3 677 350 832 870 827 530
Loss Before Tax 5 340 5 340
 3 677 350 3 677 350 832 870 832 870

Note 1: Calculations rounded to whole dollars. Note 2: Assumed all insurance expense to be charged to factory.
(b)
INNOVATIVE COMPUTERS PTY LTD
Cost of Goods Manufactured Statement
for the year ended 30 June 2019
Direct materials:
Beginning raw materials $37 500
Purchases of raw materials 1 645 000
1 682 500
Ending raw materials (32 000)
Direct materials used $1 650 500
Direct labour 430 000
Factory overhead:
Indirect labour 108 500
Supplies 140 700
Electricity 102 250
Rent 180 000
Insurance 82 600
Rates and taxes 37 500
Depreciation 31 250
Total factory overhead 682 800
Manufacturing costs incurred in the 2 763 300
period
Add: Beginning work in process 80 000
Total manufacturing costs to account for 2 843 300
Less: Ending work in process (82 000)
Cost of goods manufactured $2 761 300