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
 CHAPTER 8: ACCOUNTING FOR MANUFACTURING 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 $729 500
Direct labour 142 000
Purchases of raw materials 240 000
Selling expenses 50 000
Administrative expenses 60 000
Inventories at 1 July 2001:
Raw materials 64 000
Work in process 50 000
Finished goods 96 000
Inventories at 30 June 2002:
Raw materials 56 000
Work in process 48 000
Finished goods 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
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 CHAPTER 8: ACCOUNTING FOR MANUFACTURING 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 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 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 Work in Finished

materials process goods
Raw materials $80 400 $27 600 $ 34 000
Direct labour A 27 920 31 120
Factory overhead B C 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.

Solution
A.

Raw materials Work in process Finished goods

Raw materials $80,400 $27,600 $ 34,000
Direct labour 0 27,920 31,120
Factory overhead ________ 41,880 46,680
Total ending inventory $80,400 $97,400 $111,800

46 680
1. Factory overhead application rate ---------------- = 150%
31 120

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

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 CHAPTER 8: ACCOUNTING FOR MANUFACTURING 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 747 100

Raw Materials Inventory 15 200
Work in Process Inventory 43 100
Raw Materials Purchases 116 400
Freight Inwards 3 600
Direct Labour 316 000
Factory Overhead 252 800
31 Raw Materials Inventory 17 200
Work in Process Inventory 42 800
Manufacturing Summary 60 000
31 Profit and Loss Summary 904 550
Finished Goods Inventory 38 650
Selling Expenses 86 500
Administrative Expenses 92 300
Manufacturing Summary 687 100
31 Finished Goods Inventory 38 550
Sales 986 000
Profit and Loss Summary 1 024 550
31 Profit and Loss Summary 120 000
Retained Profits 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.

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 CHAPTER 8: ACCOUNTING FOR MANUFACTURING 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

WILEY
 CHAPTER 8: ACCOUNTING FOR MANUFACTURING 8.5

Problem 8.4 Missing data in manufacturing entities

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

Case A Case B
Beginning work in process 12 000 (h)
Ending work in process (b) 33 000
Direct materials cost 75 000 (g)
Direct labour 65 000 90 000
Factory overhead 55 000 45 000
Total manufacturing costs (a) 230 000
Cost of goods manufactured 180 000 224 000
Sales 270 000 (i)
Beginning finished goods inventory (c) 38 500
Ending finished goods inventory 22 000 27 500
Cost of goods available for sale 219 000 (j)
Cost of goods sold (d) (k)
Gross profit (e) 78 000
Operating expenses 38 500 (l)
Net profit (f) 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.

WILEY
 CHAPTER 8: ACCOUNTING FOR MANUFACTURING 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) 195 000 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

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 CHAPTER 8: ACCOUNTING FOR MANUFACTURING 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 $ 18 375

Accounts receivable 41 250
Allowance for doubtful debts 3 375
Finished goods inventory, 1/7/01 28 750
Work in process, 1/7/01 9 375
Raw materials inventory, 1/7/01 4 625
Prepaid rent 67 500
Machinery and equipment 245 000
Accumulated depreciation 43 750
Accounts payable 22 500
Bills payable 93 750
Share capital 50 000
Retained profits 46 250
Sales 1 075 000
Direct labour 270 000
Raw material purchases 256 250
Indirect labour 88 750
Factory supplies 22 500
Light and power 70 000
Insurance 20 375
Selling expenses 40 000
Administrative expenses 83 750
Interest expense 28 750
Factory rent 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)

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 CHAPTER 8: ACCOUNTING FOR MANUFACTURING 8.8

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 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?

WILEY
 A.

WOODWORKS MANUFACTURING CO LTD

Worksheet for the year ended 30 June 2002
Unadjusted trial balance Adjustments Manufacturing Statement of Financial Statement of Financial Position
Performance
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash at bank 18 375 18 375
Solution

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 6 500
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
CHAPTER 8: ACCOUNTING FOR MANUFACTURING
8.9

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 CHAPTER 8: ACCOUNTING FOR MANUFACTURING 8.10

B.
WOODWORKS MANUFACTURING CO LTD
Cost of Goods Manufactured Statement
for the year ended 30 June 2002
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.
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 CHAPTER 8: ACCOUNTING FOR MANUFACTURING 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 aggre-
gate 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.

WILEY