Manufacturing Accounting

1. Manufacturing Accounting

2. Manufacturing Accounting • Recall: • Assets are measured at full absorption cost • Includes all costs of acquiring asset and putting in place • Expenses are measured at the carrying value of the asset sacrificed • Issue: How do we measure all the costs?

3. Cost Allocation • Same issue exists for merchandising firms • Easier for merchandising, • purchase price (major) • shipping cost (minor) • taxes (minor)

4. Manufacturing costs • Have to include costs for: • direct materials (major) • direct labor (major) • overhead (major) • utilities, indirect labor, depreciation on plant, etc.

5. Have to spread between: • inventory (balance sheet) • raw materials • work-in-process • finished goods • cost of goods sold (income statement)

6. Review of Cost Classification • Period costs--just like merchandising • not part of inventory/cost of goods sold • can’t be matched to a future benefit • charged to expense as incurred • SG&A, most interest costs, etc. • Product costs--cost of obtaining inventory • originally held in inventory account • charged to cost of goods sold when sold

7. Manufacturing Product Costs • Direct costs--can be traced to units produced • direct labor • direct materials • Overhead--can’t be traced to units • indirect labor--e.g., janitorial, supervisory • indirect materials--e.g., miscellaneous supplies • other--e.g., depreciation, utilities, rent • allocated to units based on “drivers”

8. Steps in recording • Place purchases in raw materials inventory • Transfer raw materials inventory to work-in-process inventory when production starts

9. Add in direct labor and overhead to WIP • Transfer costs of completed units to finished goods inventory

10. Transfer costs associated with sold goods to CGS