This document discusses the key differences and accounting treatment between merchandising and manufacturing companies. A merchandising company purchases finished goods for resale, while a manufacturing company purchases raw materials and transforms them into finished products through a production process. Manufacturing companies divide costs into production/non-production areas and classify costs as product or period costs. Journal entries are provided to record transactions from raw materials procurement through finished goods inventory and cost of goods sold.
This document discusses the key differences and accounting treatment between merchandising and manufacturing companies. A merchandising company purchases finished goods for resale, while a manufacturing company purchases raw materials and transforms them into finished products through a production process. Manufacturing companies divide costs into production/non-production areas and classify costs as product or period costs. Journal entries are provided to record transactions from raw materials procurement through finished goods inventory and cost of goods sold.
This document discusses the key differences and accounting treatment between merchandising and manufacturing companies. A merchandising company purchases finished goods for resale, while a manufacturing company purchases raw materials and transforms them into finished products through a production process. Manufacturing companies divide costs into production/non-production areas and classify costs as product or period costs. Journal entries are provided to record transactions from raw materials procurement through finished goods inventory and cost of goods sold.
This document discusses the key differences and accounting treatment between merchandising and manufacturing companies. A merchandising company purchases finished goods for resale, while a manufacturing company purchases raw materials and transforms them into finished products through a production process. Manufacturing companies divide costs into production/non-production areas and classify costs as product or period costs. Journal entries are provided to record transactions from raw materials procurement through finished goods inventory and cost of goods sold.
A merchandising company purchases goods in finished condition and
sells it to customers, while a manufacturing company purchases raw materials or parts and converts or transforms it into finished products. Examples of merchandising companies are: Department stores, Grocery stores, Auto parts and car dealers. Examples of manufacturing companies are: Food processing companies, furniture shop, and beverages companies. Production Area Area and Non-Production
A Manufacturing company is divided in three departments,
the production department,
the administrative department
and the sales department.
The production department (production area) is in charge of manufacturing the finished products of a company.
The Administrative department and the sales department
(non-production area) is in charge with the executive, organizational, clerical, general management of an organization, warehousing, transporting, or delivering a product. Stages of Production
The production process passes through three basic
stages: 1. Work not started or raw materials; 2. Work started but not completed or work in process; and 3. Finished work or finished goods. Inventory Accounts of a Manufacturing Company 1. Raw Materials Inventory, 2. Work in Process Inventory, and 3. Finished Goods Inventory. Classifications of Manufacturing Costs (Production Area) 1. Direct materials − Are raw materials that become an essential part of the finished product. These are costs that can be easily traced to the product. 2. Direct labor − Are labor costs that are directly incurred in manufacturing the product. These can be easily traced to specific product. 3. Manufacturing overhead −It refers to all manufacturing costs or expenses incurred in the manufacturing or production department. This excludes direct materials and direct labor. These costs cannot be easily traced to particular units of products. Manufacturing overhead is also termed as factory overhead. Manufacturing overhead includes: indirect materials-are raw materials that are part of the finished product, but that cannot be easily traced to it. indirect labor costs are labor cost that cannot be directly traced to the production of the products. Other expenses incurred in the manufacturing department or production are.(depreciation, maintenance repairs on equipment, utilities, taxes, depreciation and insurance on manufacturing facilities, etc.) Classifications of nonmanufacturing costs (Non-Production Area)
1. Selling costs – These includes all costs to sell the finished
products. 2. Administrative costs – These includes organizational and executive costs related with the administration of an organization. Product Cost and Period Costs 1. Product costs – Includes all the costs that are incurred in manufacturing a product. Product cost includes direct materials, direct labor, and manufacturing overhead. These are also known as inventoriable cost. Product costs are recognized as expenses when the products are sold. 1. Period costs – Includes administrative and selling costs Period costs are recognized as expense in the period incurred. Prime cost and Conversion Cost
•Prime cost is the sum or total of direct materials and direct labor.
•Conversion cost is the sum or total of direct labor and factory
overhead costs Journal Entries for a Manufacturing Company
Purchase of raw materials:
Raw materials xxx Cash or Accounts Payable xxx
Direct raw materials used in the production:
Work in process xxx Raw materials xxx Journal Entries for a Manufacturing Company
Direct raw materials used in the production:
Work in process xxx Raw materials xxx Indirect raw materials used in the production: Factory overhead xxx Raw Materials xxx Journal Entries for a Manufacturing Company
Direct labor incurred in the production:
Work in process xxx Cash or Salaries and wages payable xxx
Indirect labor incurred in the production: Factory overhead xxx Cash or Salaries and wages payable xxx
Journal Entries for a Manufacturing Company
Expenses incurred in the Manufacturing or production
department other than direct material, indirect material, direct labor, indirect labor: Factory overhead xxx Various Accounts xxx
Journal Entries for a Manufacturing Company
Expenses incurred in the administrative department:
Expenses-G&A xxx Various Accounts xxx
Expenses incurred in the sales department: Expense-selling xxx Various Accounts xxx Journal Entries for a Manufacturing Company
To close Factory Overhead to Work in Process
Work in Process xxx
Factory Overhead xxx Journal Entries for a Manufacturing Company
To transfer the amount of completed product/s from Work in
Process to Finished goods.
Finished goods xxx
Work in Process xxx Journal Entries for a Manufacturing Company
To transfer the amount of Finished goods sold to Cost of goods
sold
Cost of Good Sold xxx
Finished goods xxx Flow of Costs in Perpetual Inventory Accounts
Materials Work in Process Finished Goods
Materials DM DM COGM COGM SOLD Purchased IM DL
FOHA Cost of Goods Sold Wages Payable Factory Overhead SOLD
Total DL IM FOHA Wages IL IL Based on predetermined OFOH overhead rate
Summary of cost flows
Statement of Cost of Goods Manufactured • Beginning work in process xxxx • Raw materials used xxx • Direct labor xxx • Variable overhead xxx • Fixed overhead xxx • Current period manufacturing costs xxxx • Total costs to account for xxxx • Ending work in process (xxxx) • Cost of goods manufactured xxxx Raw Materials Used
Beginning raw materials xxx
Purchases of raw materials xxx Raw materials available xxx Ending raw materials (xxx) Total raw materials used xxx
To Statement of Cost of Goods Manufactured
Schedule of Cost of Goods Sold Beginning Finished Good xxxx Cost of Goods Manufactured xxxx Cost of Goods Available for Sale xxxx Ending Finished Goods xxxx Cost of Goods Sold xxxx
From Schedule of Cost of Goods Manufactured
Statement of Comprehensive Income Sales xxx
Less: Cost of Goods Sold xxx
Gross Income xxx
Less: Operating Expenses
General and administrative expenses xxx
Selling expenses xxx xxx
xxx Net income Demonstration Problem
The account balances are listed below for Pet Manufacturing Company for the month of March.
Finished goods inventory, March 31 P29,000
Raw materials purchases 70,000 Indirect materials used 21,000 Direct labor 48,000 Work-in-process inventory, March 31 73,000 Factory supervisory salaries 12,000 Raw materials inventory, March 1 12,000 Factory utilities expense 4,000 Raw materials inventory, March 31 21,000 Work-in-process inventory, March 1 54,000 Factory depreciation expense 5,000 Finished goods inventory, March 1 33,000
Required: Prepare the journal entries. Prepare a cost of goods manufactured and sold statement for Pet Manufacturing Company for the month ended March 31 When goods were sold for P250,000, Administrative expenses and selling expenses incurred amounted to P 20,000 and P5,000 respectively. Journal Entries for a Manufacturing Company
Purchase of raw materials:
Raw materials 70,000 Cash or Accounts Payable 70,000 Journal Entries for a Manufacturing Company
Direct raw materials used in the production:
Work in process 40,000 Raw materials 40,000 Journal Entries for a Manufacturing Company
Indirect raw materials used in the production:
Work in process 21,000 Raw materials 21,000 Journal Entries for a Manufacturing Company
Direct labor incurred in the production:
Work in process 48,000 Cash or Salaries and wages payable 48,000
Journal Entries for a Manufacturing Company
Indirect labor incurred in the production: Factory overhead 12,000 Cash or Salaries and wages payable 12,000
Journal Entries for a Manufacturing Company
Expenses incurred in the Manufacturing or production
department other than direct material, indirect material, direct labor, indirect labor: Factory overhead 9,000 Utilities payable/ Cash 4,000 Accumulated Depreciation 5,000
Factory utilities expense
Factory depreciation expense 4,000 5,000
Journal Entries for a Manufacturing Company
Expenses incurred in the administrative department:
Expenses-G&A 20,000 Various Accounts 20,000
Expenses incurred in the sales department: Expense-selling 5,000 Various Accounts 5,000 Journal Entries for a Manufacturing Company
To close Factory Overhead to Work in Process
Work in Process 42,000
Factory Overhead 42,000 Journal Entries for a Manufacturing Company
To transfer the amount of completed product/s from Work in
Process to Finished goods.
Finished goods 111,000
Work in Process 111,000 Journal Entries for a Manufacturing Company
To transfer the amount of Finished goods sold to Cost of goods
IM 21,000 115,000 COGS IL 12,000 FOH 42,000 Utilities 4,000 Accum Dep 5,000 Direct Materials Used Beginning raw materials inventory P12,000
Add: Purchase of raw materials 70,000
Raw materials available P82,000
Less: Ending raw materials inventory (21,000)
Raw materials put into production P61,000
21,000 Less: Indirect materials used
Direct materials used 40,000
Solution:
Statement of Cost of Goods Manufactured
Beginning work-in-process inventory P54,000 Manufacturing costs Direct materials put into production P40,000 Direct labor 48,000 Manufacturing overhead Indirect materials P21,000 Factory supervisory salaries 12,000 Factory utilities expense 4,000 Factory depreciation expense 5,000 Total manufacturing overhead 42,000 Total manufacturing costs 130,000 Total cost of work-in-process P184,000 Less: Ending work-in-process inventory (73,000) Cost of goods manufactured P111,000 Schedule of Cost of Goods Sold
