TOPIC 11 ACCOUNTING FOR MANUFACTURING

Manufacturing consists of activities and process that convert raw materials into finished goods.

Classification of cost behaviour. Manufacturing cost is any cost involved in a process of producing a product.

Types of cost behaviour. 1. Fixed cost Costs that remain the same in total regardless of changes in the activity level. Ex. Supervisory salaries and depreciation Fixed cost per unit vary inversely with activity. As volume increases, unit cost decline and vice versa.

Cost 10,000

2,000 10,000 Units produced

Example: At 2,000 units, the unit cost is RM5 (RM10,000 2,000). When 10,000 units produced, the units costs only RM1 4 (RM10,000/10,000 unit).

2. Variable Cost Costs that vary in total directly and proportionately with the changes in the activity level. Ex. Direct material, direct labour The cost remain the same per unit at every level per activity. Costs (RM)

Units produce Ex. At 2,000 units, the unit costs is RM10 (RM20,000/2,000). When 10,000 units produced, the unit costs remains at RM10 (RM100,000 /10,000 unit). 5

3. Mixed Cost Costs that contain both variable element and fixed element. Mixed costs change in total. It does not change in proportion with the changes in the activity level. Cost(RM) variable costs fixed costs Miles Ex. Assume that local rental of tow truck including insurance, are RM50 per day plus RM0.50 cents per mile.

The elements of manufacturing costs: - manufacturing cost consists of Direct material: material and parts used directly during the manufacturing process. Direct labour: the work of factory employees that are directly involved in producing the product. Manufacturing overhead: costs that are indirectly associated with the manufacturing of the finished goods. Ex. Indirect material, indirect labour, depreciation on factory buildings.
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Direct Material + Direct Labour Direct Material + Direct Labour + Other Direct Costs + Other Direct Costs PrimeCosts Prime Cost Prime Costs + Manufacturing Overhead Prime Costs + Manufacturing Overhead Manufacturing Costs Manufacturing Costs Selling + Administrative Selling +Administrative Expenses expenses

Period Costs Period Costs

PRODUCT VERSUS PERIOD COSTS Manufacturing Costs

Direct Materials Direct Material

Prime Costs Prime Costs

Direct Labour Direct Labour Conversion Conversion Costs Costs Manufacturing Overhead Manufacturing Overhead Product Costs

Non-manufacturing Costs
Selling Expenses Selling Expenses Period Costs Period Costs Administrative Expenses Administrative Expenses

Product Costs costs that are necessary and integral part of producing the finished product. Direct labour and manufacturing overhead are incurred in converting raw materials into finished goods, these costs elements are often referred to as conversion costs. Period costs costs that are identified with a specific time period rather with a salable product. These costs relate to nonmanufacturing costs and therefore are not inventoriable costs.

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Manufacturing Costs in Financial Statements

Format Manufacturing Accounts ABC Manufacturing Company Manufacturing account for the year ended December 2001 Direct Materials RM Raw material as at 1 January 2001 xx Add: Purchases of Raw Material xx Carriage Inward xx Import Duty xx Total Raw Material Available for Use xxx (-) Raw material as at 31 December 2001 (xx) DIRECT MATERIAL USED Direct Labour Wages Direct Expenses PRIME COSTS

RM

xxx xxx xxx xxx

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Continue.. PRIME COSTS

xxx

Overhead Costs Indirect Labor Factory repairs Depreciation factory machine TOTAL OVERHEAD COSTS

xx xx xx xxx xxx xx (xx) XXX

TOTAL MANUFACTURING COSTS Add: WIP Opening Less: WIP Closing COST OF GOODS MANUFACTURED

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ABC Manufacturing Company Income Statement for the year ended December 2001 RM RM Sales xxx Less: Cost of Goods Sold: Finished goods 1 Jan xx Add: Cost of goods manufactured xx Goods Available for Sale xx Less: Finished goods 31 Dec (xx) COST OF GOOD SOLD xx GROSS PROFIT XX Less: Operating Expenses Selling and Distribution Expenses xx Administrative Expenses xx NET / LOSS XX

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