ACCOUNTING FOR MANUFACTURING BUSINESS

RONALD A. RICABLANCA, CPA, DBA

NATURE OF MANUFACTURING BUSINESS

• Manufacturing business is similar to merchandising as far as the selling of goods at marked-up

price is concerned.

• The main difference lies on the accounting for cost of sales.

• Under merchandising, the cost of sale mainly pertains to the cost of merchandise purchased
including the transportation cost of bringing such merchandise to the business place.

• In manufacturing, however, the cost of sales would begin from the conversion of raw materials
into finished goods through the application of labor and various factory costs incidental to the
production of products until the finished goods are sold.
COST ELEMENTS OF MANUFACTURING BUSINESS

• Raw materials

• Direct labor

• Factory overhead
 RAW MATERIALS

• This production cost accounts the cost of direct raw materials used in the
production of products which is the primary physical substance of the
products produced, like cost of wood produce table products, and cloth to
produce pants.
 DIRECT LABOR

• It refers to the cost of labor or effort directly utilized in the making of the
product such as the carpenter’s wages for making the tables and the tailor’s
salary to produce pants.
 FACTORY OVERHEAD

• The cost of factory overhead is also called as manufacturing overhead costs. It

refers to all indirect materials, indirect labor and other miscellaneous items
used in the making of a product.

• Examples are used factory supplies, salary of factory supervisor, factory

depreciation, and 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.

6
MANUFACTURING COST

• This is the sum of the three cost elements: direct materials, direct labor and
factory overhead.

• This is sometimes referred to as production cost or factory cost.

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.
COST OF GOODS MANUFACTURED

• The portion of the total manufacturing cost pertaining to the work which is
100% processed and completed, transferred to finished goods.

• The unsold finished goods, unfinished goods-in-process and unused raw

materials at the end of the period are the available inventories in the factory
which should be reported as part of the current assets of the business.
PRIME COST & CONVERSION COST

• Prime Costs. Consists 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.

• Conversion costs. Includes the cost of direct labor and all indirect costs. This is
called conversion cost because the direct labor and overhead costs transform
the raw materials to finished goods.
COST OF GOODS SOLD

Direct Materials Used xxx

Direct Labor xxx
Factory Overhead xxx
Total Manufacturing Cost xxx
Add: Work in Process Inventory, Beg. xxx
Total Cost 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
PRO-FORMA ENTRIES

1 To record purchase of direct and indirect materials on account.

Raw Materials Inventory Xxx

Factory Supplies Xxx
Accounts Payable

2 To record incurrence of direct and indirect labor.

Work in Process Inventory (DL) Xxx

Factory Overhead Control (IL) Xxx
Wages Payable Xxx
PRO-FORMA ENTRIES

3 To record direct and indirect materials used in the production.

Work in Process Inventory (DM) Xxx

Factory Overhead Control (IM) Xxx
Raw Materials Inventory Xxx
Factory Supplies Xxx

4 To record incurrence of other manufacturing costs. (Ex. Depreciation of plant

machineries and and utilities.

Factory Overhead Control Xxx

Accumulated Depreciation - Machineries Xxx
Cash Xxx
PRO-FORMA ENTRIES

5 To transfer FOH to WIPI

Xxx
Work in Process Inventory

Factory Overhead Control Xxx

6 To record goods completed

Finished Goods Inventory Xxx

Work in Process Inventory Xxx
PRO-FORMA ENTRIES

7 To record sales on account

Accounts Receivable Xxx

Sales Xxx

Cost of Goods Sold Xxx

Finished Goods Inventory Xxx

T- ACCOUNT ANALYSIS

RAW MATERIALS INVENTORY WORK IN PROCESS INVENTORY

Beg. Xxx Used Xxx Beg. Xxx Mfd. Xxx
Purch. Xxx Purc. Disc. Xxx DM Used Xxx
Freight-in Xxx Returns Xxx DL Xxx
Xxx
End. FOH Xxx End. Xxx

FACTORY OVERHEAD CONTROL FINISHED GOODS INVENTORY

Xxx Xxx
Incurrence Transfer Beg. Xxx Sold Xxx

Mfd. Xxx End. Xxx