CHAPTER 8. Accounting for manufacturing CONTENTS

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

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 $729 500 142 000 240 000 50 000 60 000 64 000 50 000 96 000 56 000 48 000 104 000 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 2002. 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 $64 000 Purchases raw materials 240 000 304 000 Less raw materials inventory 30 June 2002 56 000 Raw materials issued to production $248 000 Direct labour 142 000 Prime costs 390 000 Factory overhead (110% direct labour) 156 200 Total manufacturing costs for the period 546 200 Add work in process, 1 July 2001 50 000 596 200 Less work in process, 30 June 2002 48 000 Cost of goods manufactured 548 200 Add finished goods, 1 July 2001 96 000 644 200 Less finished goods, 30 June 2002 104 000 B. Cost of goods manufactured and sold $540 200 C. SEREFINI LTD Statement of Financial Performance (extract) for the year ended 30 June 2002 Sales $729 500 Cost of goods sold 540 200 Gross profit $189 300

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 2003. The beginning inventories included raw materials $86 000, work in process $61 200, and finished goods $104 400. The company incurred direct labour costs of $551 440, and its total cost of goods manufactured for the year amounted to $2 028 800. 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 $80 400 A B $27 600 27 920 C $ 34 000 31 120 46 680 Total ending inventory $80 400 D $111 800 Required: A. Determine the amounts for A to D. B. Prepare a schedule of cost of goods sold for the year ending 30 June 2003. A. Solution Raw materials Direct labour Factory overhead 46 680 1. Factory overhead application rate --------------- = 150% 31 120 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 $104 400 Cost of goods manufactured 2 028 800 Goods available 2 133 200 Ending finished goods inventory 111 800 Cost of goods sold $2 021 400

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 747 100 17 200 42 800 904 550 38 550 986 000 120 000 15 200 43 100 116 400 3 600 316 000 252 800 60 000 38 650 86 500 92 300 687 100 1 024 550 120 000 Required: A. Prepare a cost of goods manufactured statement for year ended 31 December 2003. B. Prepare a statement of financial performance for year ended 31 December 2003.

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 $15 200 Purchases 116 400 Freight inwards 3 600 135 200 Ending raw materials 17 200 Direct materials used $118 000 Direct labour 316 000 Factory overhead 252 800 Total manufacturing costs for the period 686 800 Beginning work in process 43 100 Total work in process 729 900 Ending work in process 42 800 Cost of goods manufactured $687 100 B. CLOSE-OUT MANUFACTURING CO LTD Statement of Financial Performance for the year ended 31 December 2003 Sales revenue $986 000 Cost of goods sold: Beginning finished goods inventory $38 650 Cost of goods manufactured 687 100 Goods available 725 750 Ending finished goods inventory 38 550 Cost of goods sold 687 200 Gross profit 298 800 Operating expenses: Selling expenses 86 500 Administrative expenses 92 300 178 800 Operating profit before tax $120 000

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 12 000 (b) 75 000 65 000 55 000 (a) 180 000 270 000 (c) 22 000 219 000 (d) (e) 38 500 (f) Case B (h) 33 000 (g) 90 000 45 000 230 000 224 000 (i) 38 500 27 500 (j) (k) 78 000 (l) 24 000 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 $140 000, raw materials inventory $6500 and prepaid expenses $600, prepare the current assets section of the statement of financial position.

8.6 Solution A. (a) $195 000 (b) 27 000 (c) 39 000 (d) 197 000 (e) 73 000 (f) 34 500 (g) 95 000 (h) 27 000 (i) 313 000 (j) 262 500 (k) 235 000 (l) 54 000 B. Cost of Goods Manufactured Statement Case A Case B Direct materials cost 75000 95000 Direct labour 65000 90000 Factory overhead 55000 45000 Manufacturing costs for period (a) 195000 230000 Beginning work in process 12000 (h) 27000 Total work in process (b) (27 000) (33 000) Cost of goods manufactured $180000 $224000 C. Statement of Financial Performance Case A Case B Sales revenue 270 000 (i) 313 000 Cost of goods sold Beg inventory (c) 39 000 38 500 Cost of goods 180 000 224 000 manufactured Cost of goods 219 000 262 500 available for sale End inventory 22 000 (d) 197 000 (j) 27 500 (k) 235 000 Gross Profit (e) 73 000 78 000 Operating expenses 38 500 (i) 54 000 Net profit (f) $34 500 $24 000 D. Statement of Financial Position (Case B) Current assets: Cash at bank $40 000 Accounts receivable 140 000 Raw materials inventory 6 500 Work in process 33 000 Finished goods inventory 27 500 Prepaid expenses 600 Total current assets $247 600

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 $ 18 375 41 250 3 375 28 750 9 375 4 625 67 500 245 000 43 750 22 500 93 750 50 000 46 250 1 075 000 270 000 256 250 88 750 22 500 70 000 20 375 40 000 83 750 28 750 39 375 $ 2 669 250 Additional information relating to the company is as follows: 1. The inventories as of 30 June 2002 were: Raw materials $ 3 875 Work in process 10 875 Finished goods 31250 2. On 1 January 2002 the company paid $67 500 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 $183 750 of factory machinery and $61 250 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, $875. 5. 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)

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?

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 18 375 18 375 Accounts receivable 41 250 41 250 Allowance for doubtful debts 3 375 3 375 Inventories: Finished goods 28 750 28 750 31250 31250 Work in process 9 375 9 375 10 875 10 875 Raw materials 4 625 4 625 3 875 3 875 Prepaid rent 67 500 (1) 33 750 33 750 Machinery and equipment 245 000 245 000 Acc. Dep.- Machinery and equip. 43 750 (2) 35 000 78 750 Accounts payable 22 500 22 500 Bills payable 93 750 93 750 Share capital 50 000 50 000 Retained profits 46 250 46 250 Sales 1 075 000 1 075 000 Direct labour 270 000 (3) 5 000 275 000 Raw material purchases 256 250 256 250 Indirect labour 88 750 (3) 1 500 90 250 Factory supplies 22 500 22 500 Light and power 70 000 70 000 Insurance 20 375 20 375 Factory rent 39 375 (1) 33 750 73 125 Selling expenses 40 000 40 000 Administrative expenses 83 750 (4) 875 84 625 Interest expense 28 750 28 750 1 334 625 1 334 625 Depreciation expense - factory (2) 26 250 26 250 Depreciation expense - office (2) 8 750 8 750 Wages payable 6 500 6500 Admin. expenses payable 875 875 76 125 76 125 Cost of goods manufactured 833 000 833 000 847 750 847 750 Income tax expense 40% 32 950 32 950 Net profit after tax 49 425 49 425 1 106 250 1 106 250 384 375 384 375

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 256 250 260 875 Ending raw materials 3 875 Direct materials used $257 000 Direct labour 275 000 Factory overhead: Indirect labour 90 250 Factory supplies 22 500 Light and power 70 000 Insurance 20 375 Factory rent 73 125 Depreciation 26 250 302 500 Total manufacturing costs for the period 834 500 Beginning work in process 9 375 Total work in process 843 875 Ending work in process 10 875 Cost of goods manufactured $833 000 C. Closing Entries June 2002 30 Manufacturing summary 847 750 Work in process inventory 9 375 Raw materials inventory 4 625 Direct labour 275 000 Raw materials purchases 256 250 Indirect labour 90 250 Factory supplies 22 500 Light and power 70 000 Insurance 20 375 Factory rent 73 125 Depreciation expense factory 26 250 To close manufacturing account with debit balances. 30 Work in process 10 875 Raw materials 3 875 Manufacturing summary 14 750 To establish ending inventories of raw materials and work in process. 30 Profit and loss summary 1 056 825 Finished goods inventory 28 750 Selling expenses 40 000 Administrative expenses 84 625 Interest expense 28 750 Depreciation expense - office 8 750 Manufacturing summary 833 000 Income tax expense 32 950 To close statement of financial performance accounts with debit balances. 30 Finished goods inventory 31 250 Sales 1 075 000 Profit and loss summary 1 106 250 To establish the ending finished goods inventory and close the sales account. 30 Profit and loss summary 49 425 Retained profits 49 425 To close net profit after tax to retained profits. 8.10

8.11 D. Factory overhead and direct labour cost relationships Factory overhead costs 302 500 ------------------------------------------------------ = ------------------ = 1.10 or 110% Direct labour cost 275 000 Labour and overhead included in ending inventories. DL + 1.10 DL + 3 000 = $10 875 2.10 DL = $7 875 Direct labour = $3 750 Factory overhead = $3 750 * 1.10 = $4 125 Finished goods: DL + 1.10 DL + 5 000 = $31 250 2.10 DL = $26 250 Direct labour = $12 500 Factory overhead = $12 500 * 1.10 = $13 750 E. Raw materials turnover ratio Cost of raw materials ratio Cost of raw materials used = ------------------------------------------------------------------------------ Average raw materials inventory 257 000 257 000 = ----------------------------------------- = ------------------ = 60.47 times ( 4 625 + 3 875)/2 4 250 Manufacturing costs ratios: 257 000 ------------------ = 0.31 r 31% 834 500 Direct labour: 257 000 ------------------ = 0.33 or 33% 834 500 Factory overhead costs: 302 500 ------------------ = 0.36 or 36% 834 500 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.