CHAPTER 1

MANUFACTURING
ACCOUNTS
 Introduction

• Manufacturing companies have several different

accounts compared to service and merchandising
companies.

• These include three types of inventory accounts:

 raw materials inventory

 work-in-process inventory

 finished goods inventory

Reporting Activities
 Merchandisers  Manufacturers
 Buy finished goods.  Buy raw materials.
 Sell finished goods.  Produce and sell
finished goods.

SaleMart
 Manufacturing Company

Raw
Materials

Work in
Process
Finished
Product
COSTS IN MANUFACTURING

Direct materials
Direct labour
Direct expenses Direct / Prime cost

Plus
Indirect / manufacturing overhead Production cost
Plus
Administrative expenses
Selling and distribution expenses
Financial charges Total cost
 THE CLASSIFICATION OF COSTS IN
MANUFACTURING BUSINESS
Direct Costs / Prime Costs

 Expenditure which can be easily traced or identified in a particular

product.
Consist of three elements:

1) Direct materials
- main materials used in producing
certain product
2) Direct labour
- wages paid to the direct worker
3) Direct expenses
- expenses incurred directly in producing certain
product
 DIRECT MATERIALS

STEEL TO PRODUCE A CAR

DIRECT EXPENSES

SPECIAL EQUIPMENT/MACHINERY,
ROYALTY (HONDA, MAZDA)

DIRECT LABOUR

WAGES PAID TO AN ASSEMBLY WORKERS

Indirect costs / manufacturing overheads

 Expenditure which cannot be easily traced or

identified in a specific product; i.e.:
 factory / production / manufacturing
overheads such as rent of factory, depreciation
of machines
Non-manufacturing Costs

Administrative
Costs
Selling & Financial
Distribution Costs
Costs
All executive,
organizational The cos
t
, and clerical involves
Costs in
costs. getting
necessary to the
fund/cap
get the order ital
Eg: ban
and deliver the k
charges
product.
 Types of Cost Classifications
(Classification by Traceability)

Direct costs Indirect costs

 Costs traceable to a  Costs that cannot be

single cost object. traced to a single cost
object.
 Examples: material and
labor cost for a product.  Example: A maintenance
expenditure benefiting
two or more
departments.
 Raw Materials

Raw materials purchased that will be converted

into finished product.

 Direct materials can be physically and directly
Steel used in the
frame of a
associated with the finished product. mountain bike.

 Indirect materials:
1. Do not become part of the finished product, or
2. Cannot be traced directly to the product.
3. Part of manufacturing overhead.
Labour

Direct Labour :

Work of factory employees that can be physically and directly

associated with converting raw materials into finished goods.
Example:
Wages paid to a
mountain bike
assembly worker.
Indirect Labour :

 Work of factory employees that has no physical association

with the finished product or for which it is impractical to trace to
the goods produced.
Manufacturing Overhead
 Costs that are indirectly associated with manufacturing
the product.
 Factory costs that cannot be separately or readily traced
directly to products
 Includes all manufacturing costs except direct materials
and direct labor.
Examples:
Indirect material – cleaning supplies
Indirect labor – maintenance
Factory utility costs
Supervisory costs
 (1) Manufacturing Account

Cost of Goods Completed @

Cost of Goods Manufactured

Work in Process – partially completed units of product.

Total Manufacturing Costs – sum of PRODUCTION COST (direct
material costs, direct labor costs and manufacturing overhead)
all incurred in the current period.
 HOW TO CALCULATE MANUFACTURING/
PRODUCTION COST???
1. Calculate the direct materials used in production

Raw materials stock at the beginning of the year

(+) Purchase of raw materials
(- ) Raw materials stock at the end of the year
= COST OF DIRECT MATERIALS USED IN PRODUCTION

‘PLUS’
COST OF DIRECT MATERIALS USED INTO PRODUCTION

2. Add direct labour

(+) Direct labour

3. Add direct expenses

(+) Direct expenses

= DIRECT COST @ PRIME COST

4. Add indirect / manufacturing overhead

(+) Indirect expenses / manufacturing overhead

= TOTAL PRODUCTION COST

= TOTAL PRODUCTION COST

5. Add opening WIP and closing WIP

(+) Opening WIP inventory

(-) Closing WIP inventory

= PRODUCTION COST OF GOODS COMPLETED

@
COST OF GOODS COMPLETED
@
COST OF GOODS MANUFACTURED
 p le
a m
Ex

SO 6
(2) Income Statement

Merchandiser Manufacturer

Beginning Beginning
Merchandise Finished Goods
Inventory Inventory
+ +
Cost of Goods The major Cost of Goods
Purchased difference Manufactured
_ _
Ending Ending
Merchandise Finished Goods
Inventory Inventory
Cost of Goods
= Sold =
 p le Cost of Goods sold for a
a m
Ex Merchandiser and Manufacturer
 Cost of goods sold for manufacturers differs only
slightly from cost of goods sold for merchandisers.

Merchandising Company Manufacturing Company

Cost of goods sold: Cost of goods sold:
Beg. merchandise Beg. finished
inventory $ 14,200 goods inv. $ 11,200
+ Purchases 234,150 + Cost of goods
= Goods available manufactured 170,500
for sale $ 248,350 = Goods available
- Ending for sale $ 181,700
merchandise - Ending
inventory (12,100) finished goods
= Cost of goods inventory (10,300)
sold $ 236,250 = Cost of goods
sold $ 171,400
(3) Balance Sheet

MERCHANDISER MANUFACTURER

Current Assets Current Assets

 Cash  Cash
 Receivables  Receivables
 Merchandise  Inventories:
Inventory Raw Materials
Work in Process
Finished Goods

The only difference is inventory.

Manufacturer’s Balance Sheet
 p le
a m
Ex
 Apportionment of expenses
Expenses:
Indirect manufacturing overhead:-
- to be charged in the manufacturing account section

Administration expenses, to be charged

Selling & distribution expenses, in the
Financial charges Income
Statement
Basis used to apportion expenses:

Rent expense
RM1,000

65% (RM650) 35% (RM350)

Office building Factory i n g
c m
o nt
e tu r
a c
n e se) f
I m
te p en a nu /c
t a M A H)
S t ex O
e n (M
R
FORMAT
ABC Sdn.Bhd
Manufacturing Account for the year ended
2015
MANUFACTURING PART

Stock of Raw Material (opening) xxx

Add: Purchases (raw material) xx
(-) Return Outwards (xx)
(+) Carriage Inwards xx xxx
Less: Stock of Raw Material (Closing) (xx)
Cost of raw material used xxxx
Direct labour xxx
Direct expenses xxx
Prime Cost xxxx
Prime Cost xxxx

(+) Manufacturing Overhead (MOH)/Indirect Manufacturing Cost

General factory Expenses xx
Lighting xx
Rent xx
Insurance xx
Depreciation xx
Indirect labour xx
xxx
Total Cost Of Production/Manufacturing cost xxxx
(+) Work in Progress (Opening) xx
(-) Work In Progress (Closing) (xx)
PRODUCTION COST OF GOODS COMPLETED c/d XXX
 ABC Sdn.Bhd
Income Statement for the year ended 2015

Jul 6, 2023
 Income Statement For The Year Ended 31 Dec 2015

Sales xxx
(-) Return Inwards (xx)
xxx
Less: Cost of goods sold
Stock of finish goods (opening) xx
(+) PRODUCTION COST OF GOODS COMPLETED b/d XXX
(-) Stock of finish goods (closing) (xx)
Cost of goods sold xx
GROSS PROFIT xxx
GROSS PROFIT XXX

Add: Other Revenues

Discount Received xx
Rent Received xx xx
xxx
Less: EXPENSES
Administrative Expenses xx
Finance expenses xx
Selling & Distribution Expenses xx (xx)
NET PROFIT XXX