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Chapter

26
Accounting for
Manufacturing Activities
Section 1: Accounting for
Manufacturing Activities
Section Objectives
1. Prepare a statement of cost of goods manufactured.
2. Explain the basic components of manufacturing
cost.
3. Prepare an income statement for a manufacturing
business.
4. Prepare a balance sheet for a manufacturing
business.
McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
 Comparison

Manufacturing Businesses

Merchandising Businesses
 Merchandising businesses purchase goods to be resold in
the same condition and form but at a profit.
 Manufacturing businesses purchase and convert raw
materials into finished goods to be sold at a profit.

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Objective 1

Prepare a statement of
cost of goods
manufactured.

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Statement of Cost of Goods Manufactured
Parisian Manufacturing Inc.
Statement of Cost of Goods Manufactured
Year Ended December 31,20--

Work in Process Inventory, Jan. 1 11,900.00

Raw Materials
Raw Materials Inventory, Jan. 1 27,000.00
Materials Purchases 159,700.00
Less Purchases Discounts (3,000.00)
Net Purchases 156,700.00
Total Materials Available 183,700.00
Less Raw Materials Inventory, Dec. 31 24,500.00
Raw Materials Used 159,200.00
Direct Labor 95,000.00
Manufacturing Overhead
Indirect Labor 5,000.00
The Cost of Goods Manufactured
Payroll Taxes—Factory 9,000.00
line item
replaces the Purchases line
Utilities—Factory item on the income
9,000.00
Repairs and Maintenance—Factory
statement. 6,500.00
Indirect Materials and Supplies 7,200.00
Depreciation—Factory Building 7,500.00
Depreciation—Factory Equipment 5,000.00
Insurance—Factory 3,900.00
Property Taxes—Factory 8,418.00
Total Manufacturing Overhead 61,518.00
Total Manufacturing Cost 315,718.00
Total Work in Process for Year 327,618.00
Less Work in Process Inventory, Dec. 31 11,500.00
Cost of Goods Manufactured 316,118.00

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Objective 2

Explain the basic

components of
manufacturing cost.

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Manufacturing Costs Consist of Three Components

Raw Direct Manufacturing

Materials Labor Overhead

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 Raw Materials

 Raw materials consist of direct and indirect materials.

 Examples of direct materials are wood, glue, varnish, or
hardware for a furniture maker.
 Indirect materials are used to work on the products, but
do not become a part of the product.

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Raw Materials and the Statement of Cost of
Goods Manufactured

Parisian Manufacturing Inc.

Statement of Cost of Goods Manufactured
Year Ended December 31,20--

Work in Process Inventory, Jan. 1 11,900.00

Raw Materials
Raw Materials Inventory, Jan. 1 27,000.00
Materials Purchases 159,700.00
Less Purchases Discounts (3,000.00)
Net Purchases 156,700.00
Total Materials Available 183,700.00
Less Raw Materials Inventory, Dec. 31 24,500.00
Raw Materials Used 159,200.00

2. Compute raw 1. Compute total

materials used. materials available.

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QUESTION:

What are direct labor costs?

ANSWER:

Direct labor costs are costs of the

personnel who work directly on the
manufactured product.

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 Examples of Direct Labor Costs

 Salaries of workers who shape the lumber.

 Salaries of workers who assemble the pieces into tables.
 Labor costs for workers who paint the final products.

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 Indirect Labor

 Costs of personnel who support production

but are not directly involved in manufacturing
(supervisors, janitors, maintenance staff).

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 Manufacturing Overhead

 Manufacturing overhead includes all of the costs

other than direct labor and direct materials.
 Manufacturing overhead may include the following:
 Indirect labor - Costs attributable to personnel
who support the production process.
 Utilities
 Depreciation
 Repair and maintenance
 Property taxes
 Insurance

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 Work in Process

 Products in the production process,

but not yet completed.
 Accounted for in the cost of goods
manufactured section of the income
statement.

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Accounting for Work in Process on the Income Statement

Parisian Manufacturing Inc.

Statement of Cost of Goods Manufactured
Year Ended December 31,20--

Work in Process Inventory, Jan. 1 11,900.00

Raw Materials
Raw Materials Inventory, Jan. 1 27,000.00
Materials Purchases 159,700.00
Less Purchases Discounts (3,000.00)
Net Purchases 156,700.00
Total Materials Available 183,700.00
Less Raw Materials Inventory, Dec. 31 24,500.00
Raw Materials Used 159,200.00
Direct Labor 95,000.00
Manufacturing Overhead
Indirect Labor 3,600.00
Payroll Taxes—Factory 9,917.75
Utilities—Factory 9,000.00
Repairs and Maintenance—Factory 6,500.25
Indirect Materials and Supplies 7,200.00
An estimate
Depreciation—Factory Building is made of the costs of raw materials,
8,000.00
direct labor,
Depreciation—Factory and manufacturing
Equipment 5,000.00 overhead that
Insurance—Factory 4,300.00
apply to work in process
Property Taxes—Factory at the end of the period.
8,000.00
Total Manufacturing Overhead 61,518.00
Total Manufacturing Cost 315,718.00
Total Work in Process for Year 327,618.00
Less Work in Process Inventory, Dec. 31 11,500.00
Cost of Goods Manufactured 316,118.00

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Objective 3

Prepare an income
statement for a
manufacturing business.

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Income Statement for a Manufacturing Concern
Parisian Manufacturing Inc.
Income Statement
Year Ended December 31,20--

Revenue
Sales 625,000.00
Less Sales Returns & Allowances 5,000.00
Net Sales 620,000.00
Cost of Goods Sold
Finished Goods Inventory, Jan. 1 32,500.00
Cost of Goods Manufactured 316,118.00
Total Goods available for Sale 348,618.00
Less Finished Goods Inventory, Dec. 31 29,000.00
Cost of Goods Sold 319,618.00
Gross Profit on Sales 300,382.00
Figure taken from the cost of
goods Operating Expenses
manufactured statement
Selling Expenses (Control) 83,500.00
Administrative Expenses (Control) 95,090.00
Total Operating Expenses 178,590.00
Net Income Before Income Taxes 121,792.00
Income Tax Expense 30,448.00
Net Income Before Income Taxes 91,344.00

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Objective 4

Prepare a balance sheet

for a manufacturing
business.

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 Inventories and the Balance Sheet
for a Manufacturing Business

PARISIAN MANUFACTURING INC.

Partial Balance Sheet
December 31, 20--
Inventories
Raw Materials 24,500.00
Work in Process 11,500.00
Finished Goods 29,000.00 65,000.00

The balance sheet for a manufacturing business

contains three inventory categories.

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 Inventory

 Managers need frequent and reliable information on

inventory.
 Perpetual inventory systems are used to update all
additions to and deletions from inventory as they occur.
 A physical inventory is taken annually to verify the
perpetual inventory records.

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 Chapter

26
Accounting for
Manufacturing Activities
Section 2: Completing the
Accounting Cycle
Section Objectives
5. Prepare a worksheet for a manufacturing business.
6. Record the end-of-period adjusting entries for a
manufacturing business.
7. Record closing entries for a manufacturing
business.
8. Record reversing entries for a manufacturing
business.
McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
Objective 5

Prepare a worksheet for

a manufacturing
business.

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 The Accounting Cycle for a
Manufacturing Business

 The steps in the accounting cycle do not change for a

manufacturing business.
 The worksheet must be constructed to facilitate preparation
of the cost of goods manufactured statement.
 The worksheet has two new columns:
 Cost of Goods Manufactured Debit column
 Cost of Goods Manufactured Credit column

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The worksheet of a manufacturing business
contains several new accounts:

 Raw Materials Inventory

 Work in Process Inventory
 Finished Goods Inventory
 Direct Labor
 Various Manufacturing Overhead Accounts
 Manufacturing Summary

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QUESTION:

What is the Manufacturing Summary

account?

ANSWER:

The Manufacturing Summary

account is the account to which all
items on the statement of cost of
goods manufactured are closed.
It is similar to the Income Summary account.
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 Adjusting Inventory Accounts
Raw Materials Work in Process Finished Goods

1. DR Manufacturing Summary 3. DR Manufacturing Summary 5. DR Income Summary

CR Raw Materials Inventory CR Work in Process Inventory CR Finished Goods Inventory
for beginning inventory for beginning inventory for beginning inventory
amount amount amount

2. DR Raw Materials Inventory 4. DR Work in Process Inventory 6. DR Finished Goods Inventory

CR Manufacturing Summary CR Manufacturing Summary CR Income Summary
for ending inventory for ending inventory for ending inventory
amount amount amount

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Adjusting Entries on the Worksheet

 Inventory
 Uncollectible accounts
 Expired insurance
 Supplies on hand
 Depreciation
 Accrued salaries
 Payroll taxes on accrued payroll
 Income tax payable

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 Preparing Financial Statements
From the Worksheet

Three sets of columns exist for the financial

statements:

Cost of Goods Balance Income

Manufactured Sheet Statement

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Objective 6

Record the end-of-period

adjusting entries for a
manufacturing business.

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Adjusting Entries for a Manufacturing Business
2010 (Adjustment a)
Dec. 31 Manufacturing Summary 27,000.00
Raw Materials Inventory 27,000.00
(Adjustment b)
31 Raw Materials Inventory 24,500.00
Manufacturing Summary 24,500.00

(Adjustment c)
Manufacturing Summary 11,900.00
31 Work in Process Inventory 11,900.00

(Adjustment d)
Work in Process Inventory 11,500.00
31 Manufacturing Summary 11,500.00

(Adjustment e)
Income Summary 32,500.00
31 Finished Goods Inventory 32,500.00

(Adjustment f)
Finished Goods Inventory 29,000.00
31 Income Summary 29,000.00

Inventory accounts are credited for beginning

inventory and debited for ending inventory.
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 Adjusting Entries for a Manufacturing Business
Record
2010 (Adjustment g) uncollectible
Dec. 31 Administrative Expense (Control) 1,240.00 accounts
Allowance for Doubtful Accounts 1,240.00 expense
(Adjustment h)
Record
31 Insurance—Factory 3,900.00
Administrative Expense (Control) 100.00
expired
Prepaid Insurance 4,000.00 insurance
amount
(Adjustment i)
Supplies on Hand 800.00
Record
Indirect Materials and Supplies 800.00
supplies on
(Adjustment j) hand
31 Depreciation—Factory Building 7,500.00
31 Depreciation—Factory Equipment 5,000.00 Record
Administrative Expense (Control) 1,000.00 depreciation
Accumulated Depr.—Factory Building 7,500.00 expense
Accumulated Depr.—Factory Equipment 5,000.00
Accumulated Depr.—Office Equipment 1,000.00

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Adjusting Entries for a Manufacturing Business

2010 (Adjustment k) Record

Dec.
31
Direct Labor 3,000.00 accrued
Indirect Labor 500.00 wages
Salaries and Wages Payable 3,500.00
Record
(Adjustment l) payroll taxes
Payroll Taxes—Factory 257.75
Social Security Tax Payable 217.00 on accrued
Medicare Tax Payable 50.75 wages
(Adjustment m)
Income Tax Expense 2,025.00 Record
31 Income Tax Payable 2,025.00 estimated
income tax
31

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Objective 7

Record closing entries

for a manufacturing
business.

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 Closing Entries

1. Close accounts to Manufacturing Summary.

2. Close revenue and expense accounts to Income
Summary.
3. Close Manufacturing Summary to Income Summary.
4. Close Income Summary to Retained Earnings.

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Objective 8

Record reversing entries

for a manufacturing
business.

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 Reversing Entries
 Reversing entries may be made for
adjustments for accruals.
 Reversing entries are also made for
expenditures which were initially debited to
expense accounts.
 Reversing entries are optional.

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 Thank You
for using

College Accounting, 12th Edition

Price • Haddock • Farina

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