Manufacturing

→ buys raw materials and processes them into finished goods, then sells it to customers
Elements of manufacturing cost – all costs related to the production process
 Direct materials – raw materials that become physical part of a finished product
 Direct labor – compensation of employees/workers who physically convert raw materials into
finished products
 Manufacturing overhead – all manufacturing cost that cannot be classified as direct materials or direct
labor: cannot be conveniently or economically traced to specific products
- Indirect materials and supplies
- Indirect labor costs -
- Other indirect labor costs
--- Prime costs (direct materials and direct labor; Conversion costs (direct labor and manufacturing
overhead)
Manufacturing Inventory Accounts
--- currents assets:
 Finished goods inventory – cost of completed goods that remained unsold at period end
 Work in progress inventory – cost of the goods that are in the manufacturing process but are not yet
complete at period end
 Raw materials inventory – cost of direct materials on hand intended to use in the manufacturing
process
 Factory supplies inventory – cost of unused indirect materials at period end
Accounting for Manufacturing Activities
Two Accounting Systems for Manufacturing activities
o Cost system -keeps perpetual records of the costs of the raw material, work in progress, and finished
goods inventories
o Non-cost system – based on a periodic inventory system; cost of raw material, work in progress, and
finished goods are based on a physical count of the quantities on hand at period end
Statement of Cost of Goods Manufactured
--- also called the manufacturing statement; consists of the total manufacturing costs related to the
products completed during an accounting period
 Total manufacturing costs – costs of direct materials used, direct labor, and manufacturing overhead
incurred and charged to production during an accounting period

Statement of Cost of Goods Sold

Finished goods inventory, Beg. xx
Add: Cost of Goods Manufactured xx
Goods Available for Sale xx
Less: Finished goods inventory, End xx
Cost of Goods Sold xx
Worksheet for a Manufacturing Entity
--- includes a column for cost of goods manufactured
o beg raw materials inventory and work in process are debited in the manufacturing columns while
related ending inventories are credited;
o difference between the total debits and total credits is then extended to the debit column of the
income statement;
o beg finished goods inventory is extended to the debit side of the income statement columns while
ending finished goods inventory to the credit column.