MANUFACTURING

OPERATIONS
Prepared by:

RICHPHER G. GAGALAC
 COMPARING MERCHANDISING
AND MANUFACTURING
• A merchandiser
normally buys
a product that
is ready for • A manufacturer buys raw
resale when it materials and processes
is received. them into finished goods
that it sells to customers.
While manufacturing begins the process of designing and
creating goods, merchandising completes the task by taking
products and getting them into the hands of consumers.
ELEMENTS OF MANUFACTURING COSTS
• Direct • Direct Labor • Manufacturing
Materials – it is the Overhead –
These materials compensation of This includes all
become a part of employees or workers manufacturing
a finished physically convert raw costs that cannot
product. materials into finished be classified as
goods. direct materials or
direct labor.
Direct Materials Direct Labor
• These materials become • For Nike, direct labor
a part of a finished includes the wages of the
product. machine operators and the
Consider a pair of Nike persons who assemble the
basketball shoes as the shoes.
finished product.
• The efforts of these persons
• Its leather uppers, the are directly traceable to the
rubber and plastics finished product.
soles, and the laces are
among direct materials
Manufacturing Overhead
• Indirect materials and supplies. Glue, thread, nails, lubricants and
small tools.

• Indirect labor costs. Salaries of plant managers and engineers,

wages of forklift operators, maintenance and inspection labor, and
machine helpers.

• Other indirect manufacturing costs, includes building, machinery

and tool maintenance, real property taxes, property insurance, rent
expense, utilities expense and depreciation on property and
equipment
• Prime Costs –
Direct Materials and Direct Labor

• Conversion Costs –
Direct labor and manufacturing overhead.
MANUFACTURING INVENTORY ACCOUNTS
WORK IN FINISHED RAW FACTORY
PROCESS GOODS MATERIALS SUPPLIES
INVENTORY INVENTORY INVENTORY INVENTORY

This account gives

the cost of the It is the cost of This account holds It is the cost of
goods that are in the completed goods the cost of direct unused indirect
manufacturing that have materials on hand materials at
process but are not remained unsold that is intended for period end.
yet complete at the at the end of the use in the
end of the accounting period. manufacturing
accounting period. process.
 ACCOUNTING FOR
MANUFACTURING ACTIVITIES
COST SYSTEM
Keeps perpetual records
of the costs of raw
material. Work in process
and finished goods.
Keeps perpetual records of the costs of raw
material. Work in process and finished goods.
NON-COST SYSTEM
The costs of raw materials,
work in process, and finished
goods inventories are based
on physical counts of the
quantities on hand at the end
of each period.
Keeps perpetual records of the costs of raw material.
Work in process and finished goods.
The following are the pro-forma journal entries of the
more common transactions for a manufacturing
entity:
1) To record purchased of raw materials and indirect materials on
account.
Purchases – Raw Materials XXX
Indirect Materials XXX
Vouchers Payable XXX
2. To record cost of defective raw materials returned to vendor.
Voucher Payable xxx
Purchases Returns and Allowances xxx

3. To record payment of account within the discount period:

Vouchers Payable xxx
Purchases Discounts xxx
4. To record freight and handling of raw materials:
Transportation In xxx
Vouchers Payable xxx

5. To record payroll for factory employees:

Direct Labor xxx

Indirect Labor xxx
SSS Contributions Payable xxx
Medicare Contributions Payable xxx
PAG-IBIG Contributions Payable xxx
Withholding Taxes Payable xxx
Vouchers Payable xxx
6. To record payroll for factory employees:

Employer’s Payroll Contributions-Factory xxx

SSS Contributions Payable xxx
Medicare Contributions Payable xxx
PAG-IBIG Contributions Payable xxx
EC Contributions Payable xxx

7. To record distribution of payroll:

Vouchers Payable xxx
Cash In Bank xxx
8. To record accrual of factory payroll:
Direct Labor xxx
Indirect Labor xxx
Accrued Payroll xxx

9. To record depreciation of factory building:

Depreciation Expense- Factory Bldg. xxx
Accumulated Depreciation – Factory bldg. Xxx

10. To record repairs on factory building:

Repairs and Maintenance – Factory Bldg. xxx
Vouchers Payable xxx
11. To record amortization of patents:
Amortization of Patents xxx
Patent xxx

12. To record real property taxes on factory site:

Real Property Taxes xxx
Vouchers Payable Xxx

13. To record factory utilities incurred:

Factory Utilities xxx
Vouchers Payable xxx
14. To record cost of tools used:
Tools Used xxx
Tools xxx

15. To record sales of finished goods:

Accounts Receivable xxx
Sales xxx

16. To record sales returns of customers:

Sales Returns and Allowances xxx
Accounts Receivable xxx
CLOSING ENTRIES
A. To close manufacturing accounts with credit balances, and to record
ending inventory for materials and work in process:

Raw Materials Inventory, End xxx

Work in Process Inventory, End xxx
Purchases Returns and Allowances xxx
Purchases Discounts xxx
Manufacturing Summary xxx
B. To close manufacturing accounts with debit balances:
Manufacturing Summary xxx
Raw Materials Inventory, Beginning xxx
Work in Process Inventory, beginning xxx
Purchases – Raw Materials xxx
Transportation In xxx
Direct Labor xxx
Indirect Labor xxx
Indirect Materials xxx
Depreciation Expense – Factory Bldg. xxx
Repairs and Maintenance – Factory Bldg xxx
Amortization of Patents xxx
Real Property Taxes xxx
Factory Utilities xxx
Tools Used xxx
Employer’s Payroll Contributions-Factory xxx
Factory Supplies Expense xxx
Miscellaneous Factory Expense xxx
C. To close manufacturing summary and beginning finished goods
inventory to income summary:

Income Summary xxx

Manufacturing Summary xxx
Finished Goods Inventory, beginning xxx

*THE DEBIT BALANCE in the manufacturing summary represents

the cost of goods manufactured.
D. To established the ending finished goods inventory:
Finished Goods Inventory, Ending xxx
Income Summary xxx

The other closing entries after this procedure are the same as
those for a merchandising entity.
STATEMENT OF COST OF GOODS MANUFACTURED
Renante Balocating Manufacturers
Statement of Cost of Goods Manufactured
For the Year Ended December 31, 2021

Direct Materials Used:

Raw Materials Inventory, beginning Pxxx
Add: Net Cost of Purchases:
Purchases – Raw Materials Pxxx
Less: Purchase Returns and Allowances Pxxx
Purchases Discounts xxx xxx
Net Purchases Pxxx
Add: Transportation In xxx xxx
Raw Materials Available for Use Pxxx
Less: Raw Materials Inventory, end xxx PXXX
Direct Labor XXX
Manufacturing Overhead
Indirect Labor Pxxx
Indirect Materials xxx
Depreciation Expense – Factory Bldg. xxx
Repairs and Maintenance – Factory Bldg. xxx
Amortization of Patents xxx
Real Property Taxes xxx
Factory Utilities xxx
Tools Used xxx
Employer’s Payroll Contributions Factory xxx
Factory Supplies Expense xxx
Miscellaneous Factory Expense xxx XXX
Total Manufacturing Costs P XXX
Total Manufacturing Costs P XXX
Add: Work in Process, beginning xxx
Total Cost of Goods Placed in Process P XXX
Less: Work In Process, end xxx
Cost of Goods Manufactured P XXX
References
• Basic Financial Accounting and Reporting 2022 – Edition by Prof. WIN
Ballada
• https://smallbusiness.chron.com/differences-between-
merchandising-company-manufacturing-company-21423.html