Chapter 6 - Acc. Operations

Chapter
Accounting for
Manufacturing
Operations
100 Shares
Manufacturing?
$1 par value
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana
The McGraw-Hill Companies, Inc., 2007
Learning
Learning Objectives
Objectives
Explain the purpose of
managerial accounting.
Describe major characteristics
of managerial accounting.
Describe the lean business
model.
Describe accounting concepts
useful in classifying costs.
Define product and period costs
and explain how they impact
financial statements.
Explain how the balance sheets
for manufacturing and
merchandising companies
differ.
Explain how income statements

for manufacturing and
merchandising companies
differ.
Compute cost of goods sold for
a manufacturer.
Explain manufacturing activities
and the flow of manufacturing
costs.
Prepare a statement of cost of
goods manufactured and
explain its purpose and links to
financial statements.
Managerial
Managerial and
and Financial
Financial Accounting
Accounting
Managerial accounting
provides information
for managers of an
organization who
plan and control
its operations.
Financial accounting
provides information
to stockholders,
creditors and others
who are outside
the organization.
Planning
Planning and
and Controlling
Controlling
Controlling
2. Evaluating Actual
Performance versus
Planned Performance
Begin
Implementing Plans
Directing
and
Motivating
Controlling
1. Measuring Actual
Performance
MONI
TORING
FEED
BACK
Planning
Formulating Long- and
Short-Term Plans
Nature
Nature of
of Managerial
Managerial Accounting
Accounting
Financial Accounting
Investors, creditors and

other external users
Managers, employees and

other internal users
2. Purpose of
information
Making investment, credit

and other decisions
Planning, decision
making and control
3. Flexibility
of practice
Structured and often

controlled by GAAP
Relatively flexible
(no GAAP)
4. Timeliness of
information
Often available only

after audit is complete
Available quickly without

need to wait for audit
5. Time dimension
Historical information
with some predictions
Many projections
and estimates
6. Focus of
information
Emphasis on
whole organization
Projects, processes and

segments of an organization
7. Nature of
information
Monetary
information
Monetary and
nonmonetary information
1. Users
Increased
Increased Relevance
Relevance of
of
Managerial
Accounting
Customer
Orientation
Global
Economy
Lean
Business
Model
Elimination
of Waste
Satisfy the
Customer
Positive
Return
Lean
Lean Practices
Practices
Customer
Orientation
in a Global
Economy
Implications
Implications of
of Manufacturing
Manufacturing
Management
Management Principles
Principles
Increase
Use of
Technology
Fixed
Costs
Automation
Labor
Costs
Variable
Costs
Overhead
Decrease
Cost
Cost Accounting
Accounting Concepts
Concepts
Behavior
Traceability
Controllability
Relevance
Function
Classification
Classification by
by Behavior
Behavior
Cost behavior means
how a cost will react to
changes in the level of
business activity.
Total
fixed costs do
not change when
activity changes.
Total
variable costs
change in proportion
to activity changes.
Classification
Classification by
by Behavior
Behavior
Cost
Cost behavior means

how a cost will react to
changes in the level of
business activity.
Activity
Total
fixed costs do
not change when
activity changes.
variable costs
change in proportion
to activity changes.
Cost
Total
Activity
Classification
Classification by
by Traceability
Traceability
Direct costs
Indirect costs
Costs incurred for the

benefit of one specific
cost object.
Costs incurred for the

benefit of more than
one cost object.
Examples: material and

labor cost for a product.
Example: maintenance
expenditures benefiting
two or more
departments.
Classification
Classification by
by Controllability
Controllability
e
or
M
l
ro
nt
Co
Mo
re
Co
ntr
ol
The degree of control depends on the

level of management in the organization.
Very little control

Classification
Classification by
by Relevance:
Relevance:
Opportunity
Opportunity Costs
Costs
The potential benefit that
is given up when one
alternative is selected
over another.
Example: If you were
not attending college,
you could be earning
$20,000 per year.
Your opportunity cost
of attending college
for one year is
$20,000.
Classification
Classification by
by Relevance:
Relevance:
Sunk
Sunk Costs
Costs
All costs incurred in the past that cannot be changed by
any decision made now or in the future.
Sunk costs should not be considered in decisions.
Example: You bought an automobile that cost $15,000
two years ago. The $15,000 cost is sunk because
whether you drive it, park it, trade it, or sell it, you
cannot change the $15,000 cost.
Classification
Classification by
by Function:
Function:
Product
Product Costs
Costs
Direct
Labor
Direct
Material
Manufacturing
Overhead
The
Product
Classification
Classification by
by Function:
Function:
Period
Period Costs
Costs
Period costs are expenses
not charged to the product.
Selling Costs
Costs incurred to obtain
customer orders and to
deliver finished goods
to customers
advertising and shipping.
Administrative Costs
Non-manufacturing costs
of staff support and
administrative functions
accounting, data processing,
personnel, research
and development.
Period
Period and
and Product
Product Costs
Costs
in
in Financial
Financial Statements
Statements
Period Costs
(Expenses)
2007 Income
Statement
Operating
Expenses
2007 Costs
Incurred
Cost of
Sales
Inventory
Sold in 2007
Product Costs
(Inventory)
Inventory Not
Sold in 2007
2007 Balance
Sheet Inventory
Raw Materials
Work in Process
Finished Goods
2008 Income
Statement
Cost of
Sales
Potential
Potential Multiple
Multiple Cost
Cost Classifications
Classifications
Cost
CostItem
Item
Behavior
Behavior
Traceability
Traceability
Function
Function
Material
Material
Variable
Variable
Direct
Direct
Product
Product
Assembly
AssemblyWages
Wages
Variable
Variable
Direct
Direct
Product
Product
Advertising
Advertising
Fixed
Fixed
Indirect
Indirect
Period
Period
Production
ProductionManager's
Manager'sSalary
Salary
Fixed
Fixed
Indirect
Indirect
Product
Product
Office
Office Depreciation
Depreciation
Fixed
Fixed
Indirect
Indirect
Period
Period
Cost
Cost Concepts
Concepts for
for Service
Service Companies
Companies
I suppose these same
cost concepts apply to
service companies.
Reporting
Reporting Manufacturing
Manufacturing Activities
Activities
Merchandisers . . .
Manufacturers . . .
Buy
finished goods.
Buy
raw materials.
Sell
finished goods.
Produce
and sell
finished goods.
SaleMart
Balance
Balance Sheet
Sheet of
of aa Manufacturer
Manufacturer
Work in
Process
Raw
Materials
Finished
Goods
Manufacturing
Inventory
Classifications
Balance
Balance Sheet
Sheet of
of aa Manufacturer
Manufacturer
Work in
Process
Raw
Materials
Materials
waiting to be
processed.
Partially complete
products.
Material to which
some labor and/or
overhead have
been added.
Finished
Goods
Completed
products
for sale.
Balance
Balance Sheet
Sheet of
of aa Manufacturer
Manufacturer
MERCHANDISER
Current Assets
Cash
Receivables
Merchandise
Inventory
MANUFACTURER
Current Assets
Cash
Receivables
Inventories
Raw Materials
Work in Process
Finished Goods
The only difference is inventory.

Income
Income Statement
Statement of
of aa Manufacturer
Manufacturer
Merchandiser
Manufacturer
Beginning
Merchandise
Inventory
Beginning
Finished Goods
Inventory
The major
difference
Cost of Goods
Purchased
Ending
Merchandise
Inventory
Cost of Goods
Manufactured
Ending
Finished Goods
Inventory
Cost of Sales
=
Income
Income Statement
Statement of
of aa Manufacturer
Manufacturer
Cost of goods sold for manufacturers differs only
slightly from cost of goods sold for merchandisers.
Income
Income Statement
Statement of
of aa Manufacturer
Manufacturer
Direct
Direct Materials
Materials
Materials
Materials that
that are
are clearly
clearly and
and easily
easily
identified
identified with
with aa particular
particular product.
product.
Example:
Example:
Steel
Steel used
used to
to
manufacture
manufacture
the
theautomobile.
automobile.
Income
Income Statement
Statement of
of aa Manufacturer
Manufacturer
Direct
Direct Labor
Labor
Labor
Labor costs
costs that
that are
are clearly
clearly traceable
traceable
to,
to, or
or readily
readily identifiable
identifiable with,
with, the
the
finished
finished product.
product.
Example:
Example:
Wages
Wagespaid
paidto
toan
an
automobile
automobileassembly
assembly
worker.
worker.
Income
Income Statement
Statement of
of aa Manufacturer
Manufacturer
Factory
Factory Overhead
Overhead
All
All factory
factory costs
costs except
except
direct
direct material
material and
and direct
direct labor.
labor.
Factory
Factory costs
costs that
that cannot
cannot be
be
traced
traced directly
directly to
to specific
specific units
units produced.
produced.
Examples:
Indirect labor maintenance
Indirect material cleaning supplies
Factory utility costs
Supervisory costs
Income
Income Statement
Statement of
of aa Manufacturer
Manufacturer
Manufacturing costs are often
combined as follows:
Direct
Material
Direct
Labor
Prime
Cost
Manufacturing
Overhead
Conversion
Cost
Question
Question
What
What type
type of
of account
account is
is the
the manufacturing
manufacturing
goods
goods in
in process
process account?
account?
a.
a.
b.
b.
c.
c.
Income
Income statement
statement expense
expense account.
account.
Balance
Balance sheet
sheet inventory
inventory account.
account.
Temporary
Temporary clearing
clearing account
account for
for direct
direct
material
material and
and direct
direct labor.
labor.
d.
d. Holding
Holding account
account for
for manufacturing
manufacturing
overhead
overhead and
and direct
direct labor.
labor.
Question
Question
Question
What
What type
type of
of account
account is
is the
the manufacturing
manufacturing
goods
goods in
in process
process account?
account?
a.
a.
b.
b.
c.
c.
Income
Income statement
statement expense
expense account.
account.
Balance
Balance sheet
sheet inventory
inventory account.
account.
Temporary
Temporary clearing
clearing account
account for
for direct
direct
material
material and
and direct
direct labor.
labor.
d.
d. Holding
Holding account
account for
for manufacturing
manufacturing
overhead
overhead and
and direct
direct labor.
labor.
Question
Question
The
The primary
primary distinction
distinction between
between product
product
and
and period
period costs
costs is
is .. .. ..
a.
a. Product
Product costs
costs are
are expensed
expensed in
in the
the period
period
incurred.
incurred.
b.
b. Product
Product costs
costs are
are directly
directly traceable
traceable to
to
product
product units.
units.
c.
c. Product
Product costs
costs are
are inventoriable.
inventoriable.
d.
d. Period
Period costs
costs are
are inventoriable.
inventoriable.
Question
Question
Question
The
The primary
primary distinction
distinction between
between product
product
and
and period
period costs
costs is
is .. .. ..
a.
a. Product
Product costs
costs are
are expensed
expensed in
in the
the period
period
incurred.
incurred.
b.
b. Product
Product costs
costs are
are directly
directly traceable
traceable to
to
product
product units.
units.
c.
c. Product
Product costs
costs are
are inventoriable.
inventoriable.
d.
d. Period
Period costs
costs are
are inventoriable.
inventoriable.
Flow
Flow of
of Manufacturing
Manufacturing Activities
Activities
Materials
activity
Production activity
Sales activity
Raw
Materials
Beginning
Inventory
Work in Process
Finished Goods
Raw
Materials
Purchases
Factory
Overhead
Beginning Inventory
Beginning Inventory
Direct Labor
Cost of Goods
Manufactured
Raw Materials
Used
Finished
Goods
Ending
Inventory
Raw Materials
Work in Process
Ending Inventory
Ending Inventory
Cost
of
Sales
Statement
Statement of
of Cost
Cost of
of Goods
Goods
Manufactured
Manufactured
Cost of all goods completed and transferred from
work in process to finished goods during a
reporting period.
Direct Materials Used
+ Direct Labor
+ Factory Overhead
= Total Manufacturing Costs
+ Beginning Work in Process
Ending Work in Process
= Cost of Goods Manufactured
Statement
Statement of
of Cost
Cost of
of Goods
Goods
Manufactured
Manufactured
Lets take a look

at Rocky
Mountain Bikes
Statement of Cost
of Goods
Manufactured.
Statement
Statement of
of Cost
Cost of
of Goods
Goods
Manufactured
Manufactured
Statement
Statement of
of Cost
Cost of
of Goods
Goods
Manufactured
Manufactured
Exh.
18-16
Statement
Statement of
of Cost
Cost of
of Goods
Goods
Manufactured
Manufactured
Include all direct labor
costs incurred during the
current period.
Computation of Total Manufacturing Overhead

Indirect labor
9,000
Manufacturing
Manufacturing Statement
Statement
6,000
Factory supervision
Factory utilities
2,600
Property taxes, factory building
1,900
Factory supplies used
600
Factory insurance expired
1,100
Depreciation, building and equipment

Other factory overhead
5,300
3,500
Total factory overhead costs
30,000
Statement
Statement of
of Cost
Cost of
of Goods
Goods
Manufactured
Manufactured
Beginning work in
process inventory is
carried over from the
prior period.
Statement
Statement of
of Cost
Cost of
of Goods
Goods
Manufactured
Manufactured
Ending work in process inventory
contains the cost of unfinished
goods, and is reported in the current
assets section of the balance sheet.
End of Chapter 6

Chapter 6 - Acc. Operations

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Chapter

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Explain how income statements

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

The McGraw-Hill Companies, Inc., 2007

Investors, creditors and

Managers, employees and

Making investment, credit

Structured and often

Often available only

Available quickly without

Projects, processes and

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

The McGraw-Hill Companies, Inc., 2007

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Cost behavior means

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Costs incurred for the

Costs incurred for the

Examples: material and

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

The degree of control depends on the

Very little control

The McGraw-Hill Companies, Inc., 2007

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

The McGraw-Hill Companies, Inc., 2007

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

The only difference is inventory.

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

The McGraw-Hill Companies, Inc., 2007

The McGraw-Hill Companies, Inc., 2007

The McGraw-Hill Companies, Inc., 2007

The McGraw-Hill Companies, Inc., 2007

The McGraw-Hill Companies, Inc., 2007

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

The McGraw-Hill Companies, Inc., 2007

Lets take a look