CENTURY 21 ACCOUNTING © Thomson/South-Western

LESSON 19-1LESSON 19-1

Elements of Manufacturing Cost

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THREE TYPES OF BUSINESS ENTITIESTHREE TYPES OF BUSINESS ENTITIES

1. Service businesses – fulfill people’s wants and needs primarily through the efforts of people providing services, not inventory or merchandise

Financial statements do not contain Inventory or Purchases accounts.

Ex. Accounting & law firms, medical practices, and beauty/barber shops

2. Merchandising businesses – fulfill people’s wants and needs by providing tangible items called inventory or merchandise

These businesses purchase inventory and, without changing the form of the good, resell the products to customers.

Financial statements contain Inventory and Purchases accounts.Ex. department stores and grocery stores

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LESSON 19-1

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THREE TYPES OF BUSINESS ENTITIESTHREE TYPES OF BUSINESS ENTITIES

3. Manufacturing businesses – buy materials and use labor and machinery to change the materials into a finished product for sale Sell their finished product to merchandising businesses, who then

sell to customersFinancial statements contain several Inventory and Purchases

accounts: Raw-Materials Inventory, Work-in-Process Inventory, and Finished-Goods Inventory.

Examples: auto makers, furniture makers, clothing makers

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ELEMENTS OF MANUFACTURING ELEMENTS OF MANUFACTURING COSTCOST

A manufacturing business buys materials & uses labor & machinery to change the materials into a finished product

A manufacturing company needs to know the costs required to produce finished products that it sells

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LESSON 19-1

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LESSON 19-1

THREE COST ELEMENTSTHREE COST ELEMENTS

The manufacturing cost of any finished product includes three cost elements:Direct materialsDirect laborFactory overhead

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DIRECT MATERIALSDIRECT MATERIALS Materials that are of significant value in the cost of

a finished product & that become an identifiable part of the product are called direct materials

Include all items used in the manufacturing process that have sufficient value to justify charging the cost directly to the product Ex. - Motor used in production of copy machine

Dollar amounts that are small & not considered important in decision making may be combined with other amounts in the accounting records & financial statements Ex. – Small gears or screws used in copy machine (cost of all gears

will be combined)

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LESSON 19-1

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DIRECT LABORDIRECT LABOR

Salaries of factory workers who make a product are called direct labor

Include salaries only of persons working directly on a product Salaries of supervisors, maintenance workers, & others

whose efforts do not apply directly to the manufacture of a product are NOT considered to be direct labor

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LESSON 19-1

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FACTORY OVERHEADFACTORY OVERHEADAll expenses other than direct materials &

direct labor that apply to making products are called factory overhead

Indirect Materials Indirect Labor Other Indirect Costs

Depreciation of buildings & equipment Repairs to factory buildings & equipment Insurance on building, equipment, & stock Taxes on property owned Heat, light, & power

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LESSON 19-1

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FACTORY OVERHEADFACTORY OVERHEAD Indirect Materials - Materials used in the

completion of a product that are of insignificant value to justify accounting for separately are called indirect materials Glue, solder, bolts, & rivets Cleaning supplies & lubricants for the machinery

Indirect Labor - Salaries paid to factory workers who are not actually making products are called indirect labor Time clerks, supervisors, maintenance people, receiving

clerks, & inspectors

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LESSON 19-1

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LESSON 19-1

INVENTORIES FOR A INVENTORIES FOR A MANUFACTURING BUSINESSMANUFACTURING BUSINESS

A manufacturing business has three inventory accounts related to the products it manufacturesMaterialsWork in processFinished goods

All three accounts are classified as current assets

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LESSON 19-1

INVENTORIES FOR A INVENTORIES FOR A MANUFACTURING BUSINESSMANUFACTURING BUSINESS

A Materials inventory account shows the costs of materials on hand that have not yet been used in making a product Includes all products meant for production that have not

been used

Products that are being manufactured but are not yet complete are called work in process Shows all costs that have been spent on products that

are not yet complete

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LESSON 19-1

INVENTORIES FOR A INVENTORIES FOR A MANUFACTURING BUSINESSMANUFACTURING BUSINESS

Manufactured products that are fully completed are called finished goods Shows the cost of completed products still on hand and

unsold

Perpetual vs. periodic inventoryPerpetual inventory - a system which updates inventory

on a continuous basis; an ongoing maintenance of stockPeriodic inventory – a system which updates inventory

on a periodic basis such as monthly, quarterly or annually

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LESSON 19-1

COST RECORDS/LEDGERSCOST RECORDS/LEDGERS Manufacturing businesses keep detailed cost records for 3

purposes To determine accurate costs for each product made To provide specific cost information to managers who must identify

high cost areas so that corrective action can be taken To provide cost summary information for journal entries

Three subsidiary ledgers provide the detailed cost information for the three manufacturing inventory accounts Materials ledger Cost ledger Finished goods ledger

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LESSON 19-1

COST RECORDSCOST RECORDS A ledger containing all records of materials is

called a materials ledger Perpetual inventory record provides detailed cost information

about each type of material

Materials Requisition - prepared to request materials, both direct & indirect, for a specific job

Job time Record – prepared to record employee time for each job

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LESSON 19-1

COST RECORDSCOST RECORDS

A ledger containing all cost sheets for products in the process of being manufactured is called a cost sheet/ledger Cost Sheet - Record of all charges for direct materials,

direct labor, & factory overhead for each job

A ledger containing records of all finished goods on hand is called a finished goods ledger Similar to a materials ledger but for the finished good

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LESSON 19-1

MANUFACTURING COST FLOWSMANUFACTURING COST FLOWS page 562

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2a2a

33

44

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2b2b 2c2c Manufacturing costs are recorded on cost forms as costs occur

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LESSON 19-1

TERMS REVIEWTERMS REVIEW

direct materials direct labor factory overhead indirect materials indirect labor

work in process finished goods materials ledger cost ledger finished goods ledger

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