CHAPTER 8. Accounting for manufacturing CONTENTS

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1 CHAPTER 8 Accounting for manufacturing CONTENTS 8.1 Cost of goods manufactured statement 8.2 Cost of goods sold 8.3 Statement of financial performance from closing entries 8.4 Missing data in manufacturing entities 8.5 Manufacturing worksheet

2 8.1 ADDITIONAL PROBLEMS Problem 8.1 Cost of goods manufactured statement Serifini Ltd s accountant extracted the following data from the company s accounting records for the year ended 30 June 2002: Sales Direct labour Purchases of raw materials Selling expenses Administrative expenses Inventories at 1 July 2001: Raw materials Work in process Finished goods Inventories at 30 June 2002: Raw materials Work in process Finished goods $ Factory overhead is applied at the rate of 110% of direct labour. Required: A. Prepare a cost of goods manufactured statement for the year ended 30 June B. What was the company s cost of goods sold for the year ended 30 June 2002? C. What was the company s gross profit for the year ended 30 June 2002? Solution A. SERIFINI LTD Cost of Goods Manufactured Statement for the year ended 30 June 2002 Direct materials: Raw materials inventory, 1 July 2001 $ Purchases raw materials Less raw materials inventory 30 June Raw materials issued to production $ Direct labour Prime costs Factory overhead (110% direct labour) Total manufacturing costs for the period Add work in process, 1 July Less work in process, 30 June Cost of goods manufactured Add finished goods, 1 July Less finished goods, 30 June B. Cost of goods manufactured and sold $ C. SEREFINI LTD Statement of Financial Performance (extract) for the year ended 30 June 2002 Sales $ Cost of goods sold Gross profit $

3 8.2 Problem 8.2 Cost of goods sold The accountant for Waverley Pty Ltd has compiled information concerning the company s manufacturing costs for the year ended 30 June The beginning inventories included raw materials $86 000, work in process $61 200, and finished goods $ The company incurred direct labour costs of $ , and its total cost of goods manufactured for the year amounted to $ Factory overhead costs are assigned to work in process and finished goods, using the relationship between direct labour costs and the factory overhead costs incurred. The ending inventories comprised the following costs: Raw materials Work in process Finished goods Raw materials Direct labour Factory overhead $ A B $ C $ Total ending inventory $ D $ Required: A. Determine the amounts for A to D. B. Prepare a schedule of cost of goods sold for the year ending 30 June A. Solution Raw materials Direct labour Factory overhead Factory overhead application rate = 150% Raw materials Work in process Finished goods $80,400 0 $27,600 27,920 41,880 $ 34,000 31,120 46,680 Total ending inventory $80,400 $97,400 $111,800 B. WAVERLEY PTY LTD Schedule of Cost of Goods Sold for the year ended 30 June 2003 Beginning finished goods inventory $ Cost of goods manufactured Goods available Ending finished goods inventory Cost of goods sold $

4 8.3 Problem 8.3 Statement of financial performance from closing entries Close-Out Manufacturing Co. Ltd, which uses a periodic inventory system, made the following closing entries on 31 December 2003: Dec. 31 Manufacturing Summary Raw Materials Inventory Work in Process Inventory Raw Materials Purchases Freight Inwards Direct Labour Factory Overhead 31 Raw Materials Inventory Work in Process Inventory Manufacturing Summary 31 Profit and Loss Summary Finished Goods Inventory Selling Expenses Administrative Expenses Manufacturing Summary 31 Finished Goods Inventory Sales Profit and Loss Summary 31 Profit and Loss Summary Retained Profits Required: A. Prepare a cost of goods manufactured statement for year ended 31 December B. Prepare a statement of financial performance for year ended 31 December 2003.

5 8.4 Solution A. CLOSE-OUT MANUFACTURING CO LTD Cost of Goods Manufactured Statement for the year ended 31 December 2003 Direct materials: Beginning raw materials $ Purchases Freight inwards Ending raw materials Direct materials used $ Direct labour Factory overhead Total manufacturing costs for the period Beginning work in process Total work in process Ending work in process Cost of goods manufactured $ B. CLOSE-OUT MANUFACTURING CO LTD Statement of Financial Performance for the year ended 31 December 2003 Sales revenue $ Cost of goods sold: Beginning finished goods inventory $ Cost of goods manufactured Goods available Ending finished goods inventory Cost of goods sold Gross profit Operating expenses: Selling expenses Administrative expenses Operating profit before tax $

6 8.5 Problem 8.4 Missing data in manufacturing entities Two cases of data concerning production costs, other expenses and sales are presented below: Beginning work in process Ending work in process Direct materials cost Direct labour Factory overhead Total manufacturing costs Cost of goods manufactured Sales Beginning finished goods inventory Ending finished goods inventory Cost of goods available for sale Cost of goods sold Gross profit Operating expenses Net profit Case A (b) (a) (c) (d) (e) (f) Case B (h) (g) (i) (j) (k) (l) Required: A. Calculate the missing amounts for the letters (a) to (l). B. Using the data in Case A, prepare a cost of goods manufactured statement. C. Using the data in Case A, prepare a statement of financial performance. D. Using the data in Case B, and additional data consisting of cash at bank $40 000, accounts receivable $ , raw materials inventory $6500 and prepaid expenses $600, prepare the current assets section of the statement of financial position.

7 8.6 Solution A. (a) $ (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) B. Cost of Goods Manufactured Statement Case A Case B Direct materials cost Direct labour Factory overhead Manufacturing costs for period (a) Beginning work in process (h) Total work in process (b) (27 000) (33 000) Cost of goods manufactured $ $ C. Statement of Financial Performance Case A Case B Sales revenue (i) Cost of goods sold Beg inventory (c) Cost of goods manufactured Cost of goods available for sale End inventory (d) (j) (k) Gross Profit (e) Operating expenses (i) Net profit (f) $ $ D. Statement of Financial Position (Case B) Current assets: Cash at bank $ Accounts receivable Raw materials inventory Work in process Finished goods inventory Prepaid expenses 600 Total current assets $

8 8.7 Problem 8.5 Manufacturing worksheet The listing of the ledger accounts (unadjusted) of Woodworks Manufacturing Co. Ltd on 30 June 2002 is presented below. All ledger balances are normal balances. WOODWORKS MANUFACTURING CO. LTD Unadjusted List of Accounts as at 30 June 2002 Balance Cash at bank Accounts receivable Allowance for doubtful debts Finished goods inventory, 1/7/01 Work in process, 1/7/01 Raw materials inventory, 1/7/01 Prepaid rent Machinery and equipment Accumulated depreciation Accounts payable Bills payable Share capital Retained profits Sales Direct labour Raw material purchases Indirect labour Factory supplies Light and power Insurance Selling expenses Administrative expenses Interest expense Factory rent $ $ Additional information relating to the company is as follows: 1. The inventories as of 30 June 2002 were: Raw materials $ Work in process Finished goods On 1 January 2002 the company paid $ for the next 12 months factory rent. Prepaid rent was debited at the time of the transaction. 3. The Machinery and Equipment account consists of $ of factory machinery and $ of office equipment. All machinery and equipment is depreciated using a 7-year life, no residual value, and the straight-line method. 4. Expenses incurred as of year-end but not yet recorded are: direct labour, $5000; indirect labour, $1500; administrative expenses, $ The light and power, rent and insurance costs are related to factory operations. 6. Allow for company income tax expense at 40% of net profit before tax. (continued)

9 8.8 Required: A. Prepare a worksheet including a pair of columns for unadjusted trial balance, adjustments, manufacturing, statement of financial performance, and statement of financial position. B. Prepare a cost of goods manufactured statement. C. Prepare the closing entries. D. Calculate the relationship between factory overhead costs and direct labour costs. Using that relationship, calculate the labour and overhead included in the ending inventories if work in process ending inventory contains $3000 of raw materials and $5000 of raw materials is included in the finished goods inventory. E. Calculate the raw materials turnover ratio and manufacturing costs ratios. What do these ratios reveal to management? What are the limitations of these ratios for management control purposes?

10 8.9 A. Solution WOODWORKS MANUFACTURING CO LTD Worksheet for the year ended 30 June 2002 Statement of Financial Position Unadjusted trial balance Adjustments Manufacturing Statement of Financial Performance Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit Cash at bank Accounts receivable Allowance for doubtful debts Inventories: Finished goods Work in process Raw materials Prepaid rent (1) Machinery and equipment Acc. Dep.- Machinery and equip (2) Accounts payable Bills payable Share capital Retained profits Sales Direct labour (3) Raw material purchases Indirect labour (3) Factory supplies Light and power Insurance Factory rent (1) Selling expenses Administrative expenses (4) Interest expense Depreciation expense - factory (2) Depreciation expense - office (2) Wages payable Admin. expenses payable Cost of goods manufactured Income tax expense 40% Net profit after tax

11 B. WOODWORKS MANUFACTURING CO LTD Cost of Goods Manufactured Statement for the year ended 30 June 2002 CHAPTER 8: ACCOUNTING FOR MANUFACTURING Direct materials: Beginning raw materials $4 625 Purchases Ending raw materials Direct materials used $ Direct labour Factory overhead: Indirect labour Factory supplies Light and power Insurance Factory rent Depreciation Total manufacturing costs for the period Beginning work in process Total work in process Ending work in process Cost of goods manufactured $ C. Closing Entries June Manufacturing summary Work in process inventory Raw materials inventory Direct labour Raw materials purchases Indirect labour Factory supplies Light and power Insurance Factory rent Depreciation expense factory To close manufacturing account with debit balances. 30 Work in process Raw materials Manufacturing summary To establish ending inventories of raw materials and work in process. 30 Profit and loss summary Finished goods inventory Selling expenses Administrative expenses Interest expense Depreciation expense - office Manufacturing summary Income tax expense To close statement of financial performance accounts with debit balances. 30 Finished goods inventory Sales Profit and loss summary To establish the ending finished goods inventory and close the sales account. 30 Profit and loss summary Retained profits To close net profit after tax to retained profits. 8.10

12 8.11 D. Factory overhead and direct labour cost relationships Factory overhead costs = = 1.10 or 110% Direct labour cost Labour and overhead included in ending inventories. DL DL = $ DL = $7 875 Direct labour = $3 750 Factory overhead = $3 750 * 1.10 = $4 125 Finished goods: DL DL = $ DL = $ Direct labour = $ Factory overhead = $ * 1.10 = $ E. Raw materials turnover ratio Cost of raw materials ratio Cost of raw materials used = Average raw materials inventory = = = times ( )/ Manufacturing costs ratios: = 0.31 r 31% Direct labour: = 0.33 or 33% Factory overhead costs: = 0.36 or 36% The raw materials turnover ratio indicates how long inventory items of raw materials are held on average which is a measure of the entity s exposure to inventory losses due to shrinkage, deterioration, obsolescence, changes in fashion and price fluctuations. The manufacturing cost ratios can provide some cost control information. The limitations of these ratios are that, under a periodic inventory system, only aggregate financial information is available from the financial statements, and management must wait until a physical stocktake is performed to give ending inventory values. Information regarding unit costs of individual products is not available. To be really useful trends and industry comparisons need to be monitored.

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