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Chapter Outline Notes
B. Manufacturer’s Balance Sheet—carry several unique assets and
usually reports these three inventories:
1. Raw Materials Inventory—goods a company acquires to
use in making products Includes both direct and indirect
materials.
2. Work in Process Inventory— consists of products in the
process of being manufactured but not yet complete.
3. Finished Goods Inventory—consists of completed
products ready for resale.
C. Manufacturer’s Income Statement—the main difference between a
merchandiser’s and manufacturer’s income statement is in items
that make-up cost of goods sold (CGS).
2. A Merchandiser computes cost of goods sold as:
Beginning merchandise inventory
+ cost of goods purchased
Cost of goods available for Sale
- Ending merchandise inventory
Cost of Goods Sold
3. A Manufacturer computes cost of goods sold as:
Beginning finished goods inventory
+ cost of goods manufactured*
Cost of goods available for Sale
- Ending finished goods inventory
Cost of Goods Sold
4. *Cost of goods manufactured is the sum of direct materials,
direct labor, and overhead costs incurred in production.
D. Flow of Manufacturing Activities—the three manufacturing
activities are:
1. Materials Activities
Beginning raw materials
+ Raw materials Purchases
Raw materials available for use in production
- Ending Raw Materials Inventory
Raw Materials Used in Production
2. Production Activities—Four factors come together in
production:
a. Beginning Work in process inventory—consists of partly
produced goods from the previous period.
b. Direct materials used—traceable materials added during
the period.
c. Direct labor used—traceable labor added during the
period.
d. Overhead used—nontraceable manufacturing costs added
during the period.
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Chapter Outline Notes
Note: The production activity results in goods either finished or
unfinished. Both groups represent product costs. The cost of finished
goods make up the cost of goods manufactured for the year.
Unfinished goods are identified as ending goods in process
inventory.
3. Sales Activities—Newly completed units are combined with
beginning finished goods inventory to make up total finished
goods available for sale. The cost of those goods that are sold
during the year is reported on the income statement.
E. Manufacturing Statement (also called the schedule of manufacturing
activities or the schedule of cost of goods manufactured)—reports
costs of both materials and production activities. Contains
information used by management for planning and control. It is not a
general purpose financial statement. It is divided into four parts:
1. Direct material used—determined by adding the beginning raw
materials inventory to this period's materials purchases to obtain
total raw materials available for use during year and then
subtracting ending raw materials inventory which was
determined from a physical count.
2. Direct labor incurred—includes payroll taxes and fringe benefits
and is taken directly from the direct labor account balance.
3. Overhead costs—generally lists each important factory overhead
item along with its cost. If a summary number is used, a separate
detailed schedule is usually prepared.
4. Computation of cost of goods manufactured—as follows:
Direct Materials
Direct Labor
Factory Overhead
Total Manufacturing Costs
add: Beginning Work in Process
Total Work In Process Inventory
Less: Ending Work In Process Inventory
Cost of Goods Manufactured
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Chapter Outline Notes
IV. Trends in Managerial Accounting
A. Customer Orientation—increase emphasis on understanding
changing needs and wants of customers as most important part
of business.
B. Global Economy—expands competitive boundaries and
provides customers more choices.
C. E-Commerce—customers expect and demand to be able to buy
items electronically.
D. Service Economy—service businesses account for 60% to 70%
of total economic activity. Lean business model—goal is to
eliminate waste while “satisfying the customer” and “providing
a positive return to the company”.
E. Lean Practices—the philosophy of continuous improvement has
led to adoption of :
1. Total Quality Management (TQM)—applies quality
improvement to all aspects of business.
2. Just-in-time Manufacturing (JIT)—system that acquires
inventory and produces only when and order is received, a
demand-pull system, that delivers to customers on time.
F. Value Chain—series of activities that add value to products or
services.
G. Corporate Social Responsibility (CSR)—concept that goes
beyond just following the law. In addition to maximizing
shareholder value, the corporation must often consider the
demands of the stakeholders including society.
V. Decision Analysis
A. Raw Material Inventory Turnover
1. Assess how effectively raw materials inventory is managed.
2. Calculated as raw materials inventory used divided by
average raw materials inventory.
3. Reveals how many times a company turns over its raw
materials inventory during a period. High ratio is generally
preferred as long as demand can be met.
B. Days’ Sales in Raw Materials Inventory
1. Measures how long it takes raw materials to be used in
production.
2. Calculated as ending raw materials inventory divided by raw
materials used, and multiplied by 365.
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Alternate Demo Problem 14
Using the following information for Superior Manufacturing Company,
prepare a manufacturing statement and an income statement for the year
ended December 31, 2015. (Assume a 25% income tax.) Further assume
that all raw materials used were direct materials and the factory overhead
costs were totaled for you on a separate schedule..
Raw Materials Inventory January 1, 2015………………………. $20,000
Raw Materials Inventory December, 31, 2015………………….. 40,000
Work in Process Inventory January 1, 2015……………………. 50,000
Work in Process Inventory December 31, 2015………………… 80,000
Finished Goods Inventory January 1, 2015................................ 120,000
Finished Goods Inventory December 31, 2015.......................... 60,000
Administrative Expenses.............................................................. 30,000
Selling Expenses........................................................................... 60,000
Sales............................................................................................... 600,000
Raw Materials purchases during 2015…………………………… 150,000
Direct Labor …………………………………………………………... 120,000
Factory Overhead (per separate schedule)……………………… 180,000
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Solution: Alternate Demo Problem 14
SUPERIOR MANUFACTURING COMPANY
Manufacturing Statement
For Year Ended December 31, 2015
Raw Materials Inventory, 1/1/15............................... $ 20,000
Raw Materials Purchases......................................... 150,000
Raw Materials Available for Use.............................. 170,000
Less Raw Materials Inventory, 12/31/15.................. 40,000
Total Manufacturing Costs....................................... 430,000
Add: Work in Process Inventory 1/1/15.................. 50,000
SUPERIOR MANUFACTURING COMPANY
Income Statement
For Year Ended December 31, 2015
Sales $ 600,000
Cost of Goods Sold:
Finished Goods Inventory, 1/1/15............................ $140,000
Cost of Goods Sold................................................... 450,000
Gross Profit................................................................ 150,000
Operating Expenses:................................................
Selling Expenses....................................................... 30,000
Administrative Expenses.......................................... 60,000
Net Income after Taxes............................................. $ 45,000
McGraw-Hill Education.
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