LESSON 19 1 Elements of Manufacturing Cost CENTURY

LESSON 19 -1 Elements of Manufacturing Cost CENTURY 21 ACCOUNTING © Thomson/South-Western

2 THREE 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 n Financial statements do not contain Inventory or Purchases accounts. n 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 n These businesses purchase inventory and, without changing the form of the good, resell the products to customers. n Financial statements contain Inventory and Purchases accounts. n Ex. department stores and grocery stores CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 19 -1

3 THREE TYPES OF BUSINESS ENTITIES 3. Manufacturing businesses – buy materials and use labor and machinery to change the materials into a finished product for sale n Sell their finished product to merchandising businesses, who then sell to customers n Financial statements contain several Inventory and Purchases accounts: Raw-Materials Inventory, Work-in-Process Inventory, and Finished-Goods Inventory. n Examples: auto makers, furniture makers, clothing makers CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 19 -1

4 ELEMENTS OF MANUFACTURING COST n A manufacturing business buys materials & uses labor & machinery to change the materials into a finished product n A manufacturing company needs to know the costs required to produce finished products that it sells CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 19 -1

5 THREE COST ELEMENTS page 561 n The manufacturing cost of any finished product includes three cost elements: n Direct materials n Direct labor n Factory overhead CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 19 -1

6 DIRECT MATERIALS n 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 n Include all items used in the manufacturing process that have sufficient value to justify charging the cost directly to the product n Ex. - Motor used in production of copy machine n Dollar amounts that are small & not considered important in decision making may be combined with other amounts in the accounting records & financial statements n Ex. – Small gears or screws used in copy machine (cost of all gears will be combined) CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 19 -1

7 DIRECT LABOR n Salaries of factory workers who make a product are called direct labor n Include salaries only of persons working directly on a product n 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 CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 19 -1

8 FACTORY OVERHEAD n All expenses other than direct materials & direct labor that apply to making products are called factory overhead n Indirect Materials n Indirect Labor n Other Indirect Costs n n n Depreciation of buildings & equipment Repairs to factory buildings & equipment Insurance on building, equipment, & stock Taxes on property owned Heat, light, & power CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 19 -1

9 FACTORY OVERHEAD n Indirect Materials - Materials used in the completion of a product that are of insignificant value to justify accounting for separately are called indirect materials n Glue, solder, bolts, & rivets n Cleaning supplies & lubricants for the machinery n Indirect Labor - Salaries paid to factory workers who are not actually making products are called indirect labor n Time clerks, supervisors, maintenance people, receiving clerks, & inspectors CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 19 -1

10 INVENTORIES FOR A MANUFACTURING BUSINESS page 561 n A manufacturing business has three inventory accounts related to the products it manufactures n. Materials n. Work in process n. Finished goods n All three accounts are classified as current assets CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 19 -1

11 INVENTORIES FOR A MANUFACTURING BUSINESS page 561 n A Materials inventory account shows the costs of materials on hand that have not yet been used in making a product n Includes all products meant for production that have not been used n Products that are being manufactured but are not yet complete are called work in process n Shows all costs that have been spent on products that are not yet complete CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 19 -1

12 INVENTORIES FOR A MANUFACTURING BUSINESS page 561 n Manufactured products that are fully completed are called finished goods n Shows the cost of completed products still on hand unsold n Perpetual vs. periodic inventory n. Perpetual inventory - a system which updates inventory on a continuous basis; an ongoing maintenance of stock n. Periodic inventory – a system which updates inventory on a periodic basis such as monthly, quarterly or annually CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 19 -1

13 COST RECORDS/LEDGERS page 562 n Manufacturing businesses keep detailed cost records for 3 purposes n To determine accurate costs for each product made n To provide specific cost information to managers who must identify high cost areas so that corrective action can be taken n To provide cost summary information for journal entries n Three subsidiary ledgers provide the detailed cost information for the three manufacturing inventory accounts n Materials ledger n Cost ledger n Finished goods ledger CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 19 -1

14 COST RECORDS page 562 n A ledger containing all records of materials is called a materials ledger n Perpetual inventory record provides detailed cost information about each type of material n Materials Requisition - prepared to request materials, both direct & indirect, for a specific job n Job time Record – prepared to record employee time for each job CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 19 -1

15 COST RECORDS page 562 n A ledger containing all cost sheets for products in the process of being manufactured is called a cost sheet/ledger n Cost Sheet - Record of all charges for direct materials, direct labor, & factory overhead for each job n A ledger containing records of all finished goods on hand is called a finished goods ledger n Similar to a materials ledger but for the finished good CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 19 -1

16 MANUFACTURING COST FLOWS 2 b 1 2 c 2 a page 562 Manufacturing costs are recorded on cost forms as costs occur 5 3 4 CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 19 -1

17 TERMS REVIEW n n n direct materials direct labor factory overhead indirect materials indirect labor CENTURY 21 ACCOUNTING © Thomson/South-Western page 564 n n n work in process finished goods materials ledger cost ledger finished goods ledger LESSON 19 -1