Manufacturing Business

Difference Between a Merchandising Company and a

Manufacturing Company

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

sold

Cost of Good Sold 115,000

Finished goods 115,000

Cash/Accounts Receivable 250,000

Sales 250,000
 Raw Materials WIP FG

BB 12,000 21,000 IM BB 54,000 BB 33,000

40,000 DM DM 40,000 111,000 COGM COGM 111,000 115,000 COGS
Purch 70,000
DL 48,000
FOH 42,000
EB 21,000 EB 29,000
EB 73,000

COGS

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

Cost of goods manufactured P111,000

Add: Beginning finished goods inventory 33,000

Finished goods available for sale P144,000

Less: Ending finished goods inventory (29,000)

Cost of goods sold P115,000

Statement of Comprehensive Income
Sales P250,000

Less: Cost of Goods Sold 115,000

Gross Income 135,000

Less: Operating Expenses

General and administrative expenses P20,000

Selling expenses 5,000 25,000

110,000
Net income
End