Ch_008_AIA_5e

CHAPTER 8

Accountingfor manufacturing

CONTENTS

8.1 Cost of goods manufactured statement8.2 Cost of goods sold8.3 Statement of financial performance from closing

entries8.4 Missing data in manufacturing entities8.5 Manufacturing worksheet

8.1CHAPTER 8: ACCOUNTING FOR MANUFACTURING

WILEY

Serifini Ltd’s accountant extracted the following data from the company’s accountingrecords for the year ended 30 June 2002:

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?

A.SERIFINI LTD

Cost of Goods Manufactured Statementfor the year ended 30 June 2002

Direct materials:Raw materials inventory, 1 July 2001 $64 000Purchases raw materials 240000

304 000Less raw materials inventory 30 June 2002 56000

Raw materials issued to production $248 000Direct labour 142 000

Prime costs 390 000Factory overhead (110% direct labour) 156200Total manufacturing costs for the period 546 200Add work in process, 1 July 2001 50 000

596 200Less work in process, 30 June 2002 48000Cost of goods manufactured 548 200Add finished goods, 1 July 2001 96000

644 200Less finished goods, 30 June 2002 104 000

B.

Cost of goods manufactured and sold $540200

C.

SEREFINI LTDStatement of Financial Performance (extract)

for the year ended 30 June 2002

Sales $729 500Cost of goods sold 540200Gross profit $189 300

SalesDirect labourPurchases of raw materialsSelling expensesAdministrative expensesInventories at 1 July 2001:

Raw materialsWork in processFinished goods

Inventories at 30 June 2002:Raw materialsWork in processFinished goods

$729 500142 000240 00050 00060 000

64 00050 00096 000

56 00048 000

104 000

ADDITIONAL PROBLEMS

Problem 8.1 Cost of goods manufactured statement

Solution


WILEY

The accountant for Waverley Pty Ltd has compiled information concerning thecompany’s manufacturing costs for the year ended 30 June 2003. The beginning inven-tories 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 ofgoods manufactured for the year amounted to $2 028 800. Factory overhead costs areassigned to work in process and finished goods, using the relationship between directlabour costs and the factory overhead costs incurred. The ending inventories comprisedthe following costs:

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.

1. Factory overhead application rate

=

150%

B.

WAVERLEY PTY LTDSchedule of Cost of Goods Sold


Beginning finished goods inventory $104 400Cost of goods manufactured 2028 800Goods available 2 133 200Ending finished goods inventory 111 800

Cost of goods sold $2021 400

Raw materials

Work in process

Finished goods

Raw materialsDirect labourFactory overhead

$80 400AB

$27 60027 920

C

$ 34 00031 12046 680

Total ending inventory $80 400 D $111 800

Raw materials Work in process Finished goods

Raw materialsDirect labourFactory overhead

$80,4000

________

$27,60027,92041,880

$ 34,00031,12046,680

Total ending inventory $80,400 $97,400 $111,800

Problem 8.2 Cost of goods sold

Solution

46 68031 120----------------


WILEY

Close-Out Manufacturing Co. Ltd, which uses a periodic inventory system, made thefollowing closing entries on 31 December 2003:

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.

Dec. 31 Manufacturing SummaryRaw Materials InventoryWork in Process InventoryRaw Materials PurchasesFreight InwardsDirect LabourFactory Overhead

747 10015 20043 100

116 4003 600

316 000252 800

31 Raw Materials InventoryWork in Process Inventory

Manufacturing Summary

17 20042 800

60 000

31 Profit and Loss SummaryFinished Goods InventorySelling ExpensesAdministrative ExpensesManufacturing Summary

904 55038 65086 50092 300

687 100

31 Finished Goods InventorySales

Profit and Loss Summary

38 550986 000

1 024 550

31 Profit and Loss SummaryRetained Profits

120 000120 000

Problem 8.3 Statement of financial performance from closing entries


WILEY

A.

CLOSE-OUT MANUFACTURING CO LTDCost of Goods Manufactured Statementfor the year ended 31 December 2003

Direct materials:Beginning raw materials $15 200Purchases 116 400Freight inwards 3 600

135 200Ending raw materials 17200

Direct materials used $118 000Direct labour 316 000Factory overhead 252800Total manufacturing costs for the period 686 800Beginning work in process 43100Total work in process 729 900Ending work in process 42800Cost of goods manufactured $687100

B.

CLOSE-OUT MANUFACTURING CO LTDStatement of Financial Performance

for the year ended 31 December 2003

Sales revenue $986 000Cost of goods sold:

Beginning finished goods inventory $38 650Cost of goods manufactured 687100Goods available 725 750Ending finished goods inventory 38 550Cost of goods sold 687200

Gross profit 298 800Operating expenses:

Selling expenses 86 500Administrative expenses 92300 178 800

Operating profit before tax $120000

Solution


WILEY

Two cases of data concerning production costs, other expenses and sales are presentedbelow:

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.

Case A Case BBeginning work in processEnding work in processDirect materials costDirect labourFactory overheadTotal manufacturing costsCost of goods manufacturedSalesBeginning finished goods inventoryEnding finished goods inventoryCost of goods available for saleCost of goods soldGross profitOperating expensesNet profit

12 000(b)

75 00065 00055 000

(a)180 000270 000

(c)22 000

219 000(d)(e)

38 500(f)

(h)33 000(g)

90 00045 000

230 000224 000

(i)38 50027 500

(j)(k)

78 000(l)

24 000

Problem 8.4 Missing data in manufacturing entities


WILEY

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) (27000) (33 000)Cost of goods manufactured $180000 $224000

C.

Statement of Financial Performance

Case A Case B

Sales revenue 270 000 (i) 313 000Cost of goods soldBeg inventory (c) 39 000 38 500Cost of goods 180 000 224 000 manufacturedCost of goods 219 000 262 500available for saleEnd inventory 22 000 (d) 197 000 (j) 27 500 (k) 235 000Gross Profit (e) 73 000 78 000Operating expenses 38500 (i) 54 000Net profit (f) $34 500 $24 000

D.

Statement of Financial Position (Case B)

Current assets:Cash at bank $40 000Accounts receivable 140 000

Raw materials inventory 6 500Work in process 33 000Finished goods inventory 27 500Prepaid expenses 600

Total current assets $247600

Solution


WILEY

The listing of the ledger accounts (unadjusted) of Woodworks Manufacturing Co. Ltd on30 June 2002 is presented below. All ledger balances are normal balances.

Additional information relating to the company is as follows:1. The inventories as of 30 June 2002 were:

Raw materials $ 3 875Work in process 10 875Finished 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 machineryand $61 250 of office equipment. All machinery and equipment is depreciated usinga 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)

WOODWORKS MANUFACTURING CO. LTDUnadjusted List of Accounts

as at 30 June 2002

Balance

Cash at bankAccounts receivableAllowance for doubtful debtsFinished goods inventory, 1/7/01Work in process, 1/7/01Raw materials inventory, 1/7/01Prepaid rentMachinery and equipmentAccumulated depreciationAccounts payableBills payableShare capitalRetained profitsSalesDirect labourRaw material purchasesIndirect labourFactory suppliesLight and powerInsuranceSelling expensesAdministrative expensesInterest expenseFactory rent

$ 18 37541 2503 375

28 7509 3754 625

67 500245 00043 75022 50093 75050 00046 250

1 075 000270 000256 25088 75022 50070 00020 37540 00083 75028 75039 375

$2 669 250

Problem 8.5 Manufacturing worksheet


WILEY

Required:

A. Prepare a worksheet including a pair of columns for unadjusted trial balance, adjust-ments, manufacturing, statement of financial performance, and statement of finan-cial 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 endinginventories 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 dothese ratios reveal to management? What are the limitations of these ratios formanagement control purposes?


WILEY

A.

Solution

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WILEY

B.

WOODWORKS MANUFACTURING CO LTDCost of Goods Manufactured Statement


Direct materials:Beginning raw materials $4 625

Purchases 256 250260 875

Ending raw materials 3 875Direct materials used $257 000Direct labour 275 000Factory overhead:

Indirect labour 90 250Factory supplies 22 500Light and power 70 000

Insurance 20 375Factory rent 73 125Depreciation 26 250 302 500

Total manufacturing costs for the period 834 500Beginning work in process 9375Total work in process 843 875Ending work in process 10 875Cost of goods manufactured $833000

C. Closing Entries

June 200230 Manufacturing summary 847 750

Work in process inventory 9 375Raw materials inventory 4 625

Direct labour 275 000Raw materials purchases 256 250

Indirect labour 90 250Factory supplies 22 500Light and power 70 000

Insurance 20 375Factory rent 73 125

Depreciation expense factory 26 250

To close manufacturing account with debit balances.

30 Work in process 10 875Raw 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 825Finished goods inventory 28 750

Selling expenses 40 000Administrative expenses 84 625

Interest expense 28 750Depreciation expense - office 8 750

Manufacturing summary 833 000Income tax expense 32 950

To close statement of financial performance accounts with debit balances.

30 Finished goods inventory 31 250Sales 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 425Retained profits 49 425

To close net profit after tax to retained profits.


WILEY

D.Factory overhead and direct labour cost relationships

=

1.10 or 110%

Labour and overhead included in ending inventories.

DL

+

1.10 DL

+

3 000

=

$10 8752.10 DL

=

$7 875Direct labour

=

$3 750Factory overhead

=

$3 750 * 1.10

=

$4 125

Finished goods:DL

+

1.10 DL

+

5 000

=

$31 2502.10 DL

=

$26 250Direct labour

=

$12 500Factory overhead

=

$12 500 * 1.10

=

$13 750

E.Raw materials turnover ratio

Cost of raw materials ratio

=

=

=

60.47 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 materialsare held on average which is a measure of the entity’s exposure to inventory losses dueto shrinkage, deterioration, obsolescence, changes in fashion and price fluctuations. Themanufacturing cost ratios can provide some cost control information.

The limitations of these ratios are that, under a periodic inventory system, only aggre-gate financial information is available from the financial statements, and managementmust wait until a physical stocktake is performed to give ending inventory values.Information regarding unit costs of individual products is not available. To be reallyuseful trends and industry comparisons need to be monitored.

Factory overhead costsDirect labour cost

------------------------------------------------------- 302 500275 000-------------------=

257 0004 625 3 875+( )/2

------------------------------------------ 257 0004 250

-------------------=

257 000834 500-------------------

257 000834 500-------------------

302 500834 500-------------------

Cost of raw materials usedAverage raw materials inventory------------------------------------------------------------------------------

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