MANUFACTURING

OPERATIONS

MODULE 7 PART 2

1
 COMPARATIVE COST FLOW
M E R C H A N D IS IN G M AN U FA C T U R I NG
Inventory Beginning Pxxx DIRECT MATERIALS:
Add (Ded): Costs of Purchase: Raw Materials Inventory, Beg. P xxx
Purchases xxx Add (Ded): Costs of Purchase:
Purchase Discounts (xx) Raw Materials Purchases xxx
Purchase Returns & Allow (xx) Purchase Discounts (xx)
Freight In xxx xxx Purchase Returns & Allow (xx)
Total Goods Available for Sale xxx Freight In xx xxx
Less: Inventory End (unsold merchandise) xxx Total Raw Materials Available for use xxx
Raw Materials Inventory , End (xxx)
COST OF GOODS SOLD Pxxx Direct materials used xxx
DIRECT LABOR xxx
MOH/FOH xxx
TOTAL MANUFACTURING COSTS xxx
Add: Work-in process Inventory, Beg. xxx
 For Merchandising, the Cost of Sales is Total Cost of Goods Placed in Process xxx
described as Cost of Goods Sold since the Less: Work-in process Inventory, End xxx
COST OF GOODS MANUFACTURED xxx
items purchased are already the final product xxx
Add: Finished Goods Inventory, Beg
sold . Good Available for Sale xxx
Less: Finished Goods Inventory, End xxx
COST OF GOODS MANUFACTURED & SOLD xxx
 For Manufacturing firms, it is described as
Cost of Goods Manufactured and Sold
because the items purchased are converted
into finished product before they are sold.
PRO-FORMA JOURNAL ENTRIES (JOB ORDER COSTING)
 To record purchase of raw materials (direct and Indirect)
Raw Materials xxx
A/P or Voucher Payable xxx

 To record issuance of direct materials

Work-in process xxx
Raw Materials xxx

 To record issuance of indirect materials

Factory OH xxx
Raw Materials xxx

 To record incurrence of direct labor cost

Payroll xxx
Accrued Payroll xxx

 To distribute payroll to direct and Indirect labor

Work-in process xxx
Factory OH xxx
Payroll xxx

 To record payment of Plant salaries

Accrued Payroll xxx
Cash xxx

 To record application of pre-determined OH where separate Applied Factory Overhead account is used (normal cost only)
Work-in Process xxx
Applied Factory OH xxx

 In case, no separate Applied Factory OH is used, a credit is made directly to Factory OH control account.
Work-in process xxx
Factory OH xxx

 To record completion of products

Finished Goods xxx
Work-in process xxx

 To record sale of Finished Goods

ILLUSTRATION 1:
JOB ORDER COSTING (Actual Cost System)
On March 1, 2018, Jhope Manufacturing Co. has the following inventories:
Raw Materials P120,000
Work-in process 150,000
Finished Goods 90,000

During the month, the following transactions occurred:

1. Acquired raw materials on account, P320,000
2. Issued materials to the production line: DM P250,000 ; Indirect Materials 15,000
3. Accrual and payment of payroll P90,000
4. Payroll distributed as follows:
DL 50,000; Indirect Labor 10,000; Selling Exp. 18,000: Admin Exp 12,000
5. Other Factory overhead costs incurred: Depreciation-Plant machinery 5,000: Expired plant insurance 2,000; payment of plant utilities 4,000.
6. Cost accumulated in Factory overhead control transferred to Work-in process , 36,000
7. Cost of completed goods amounted to P250,000.
8. Sales on account for the period, P300,000 ; COGS is 75%.

REQUIRED:
5. Journalize transactions.
6. Post to T-Accts of the following: Raw Materials, Work-in process, Finished Goods, Factory OH.
7. Determine the ending inventory costs.
1. JOURNAL ENTRIES
DATE PARTICULARS DEBIT CREDIT DATE PARTICULARS DEBIT CREDIT

1 Raw Materials 320,000 6 Work-in process 36,000

Accounts Payable 320,000 Factory OH 36,000
To record purchase of raw To transfer accumulated cost in
materials on account the Factory OH account

2 Work –in process 250,000 7 Finished Goods 250,000

Factory Overhead 15,000 Work –in process 250,000
Raw Materials 265,000
to record issuance of DM and IM 8 A/R 300,000
Sales 300,000
3 Payroll 90,000
Accrued payroll 90,000 Cost of Goods Sold 225,000
To record accrual of payroll. Finished Goods 225,000

Accrued payroll 90,000

Cash 90,000
To record payment of payroll 2. POST TO SELECTED T-ACCOUNTS
4 Work-in process 50,000 Raw Materials Work – in process Factory OH
Factory OH 10,000 Beg.120,000 2) 265,000 1) 15,000 6) 36,000
Beg.150,000 7) 250,000
Selling expenses 18,000 1) 320,000 2) 250,000 4) 10,000
Administrative expenses 12,000 4) 50,000 5) 11,000
Payroll 90,000 440,000 265,000 6) 36,000
To record distribution of payroll ( 265,000)
486,000 250,000 36,000 36,000
costs 3/31 175,000 ( 250,000)

5 Factory Overhead 11,000 3/31 236,000

Accumulated depr-factory 5,000 Finished Goods
Prepaid insurance 2,000 Beg.90,000 8) 225,000
Cash 4,000 7)250,000
To record factory OH costs
340,000 225,000
incurred (225,000)

3/31 115,000
3. DETERMINE ENDING INVENTORY COSTS:

Factory Overhead Control – is a temporary account which summarizes all overhead costs charge to
the production..
Balances at the end of accounting period:
1. Raw Materials P175,000
2. Work in Process 236,000
3. Finished goods 115,000

These amounts shall serve as the beginning balances on the next production period
ILLUSTRATION 2:
JOB ORDER COSTING ( Normal Cost System)
Chang-Wook Manufacturing, Inc, uses job order costing and applies factory overhead at 70% of direct labor costs. A separate account is used for
applied factory overhead . The inventories in January 1, 2019 were as follows:
Raw Materials P230,000
Work-in process 180,000
Finished Goods 120,000
The following transactions during the month of January:
1. Purchased raw materials on account, P420,000 and made a 20% downpayment.
2. Materials requisition from the production line during the month: DM 460,000; Indirect factory requirements, 18,000.
3. Incurrence and payment of payroll, P380,000
4. Returned of excess materials to warehouse: DM 10,000 and Indirect 1,000.
5. Payroll distribution is as follows: DL 210,000; Indirect labor 25,000; Admin costs 80,000 ans selling exp 65,000
6. Applied Factory OH to the cost of production.
7. Other types of factory OH incurred during the period:
-depreciation of plant machinery, P20,000
-depreciation of factory building, 35,000
-unpaid utilities, 32,000
-factory supplies, 15,000
8. Cost of completed units, P653,000
9. Sales for the period: Cash sales, P200,000; On account 420,000; COGS is 80%.
REQUIRED:
1. Journalize in 2-column journal
2. Post to T-Accounts of selected ledger accounts: Raw Materials, Work-in process; Finished Goods; Applied Factory OH and Factory OH
Control
3. Compute for the costs of Ending Inventories, Prime costs and Conversion costs.
1. JOURNAL ENTRIES
DATE PARTICULARS DEBIT CREDIT DATE PARTICULARS DEBIT CREDIT

1 Raw Materials 420,000 7 Factory OH 102,000

Accounts Payable 336,000 Accum depreciation-Machinery 20,000
Cash 84,000 Accum. Depreciation- factory Bldg. 35,000
To record purchase of raw Utilities Payable 32,000
materials on account with down Factory Supplies 15,000
payment To record other factory costs incurred.
2 Work –in process 460,000
Factory Overhead 18,000 8 Finished Goods 653,000
Raw Materials 478,000 Work –in process 653,000
to record issuance of DMand IM To record cost of completed units.

3 Payroll 380,000 9 A/R 420,000

Cash 380,000 Cash 200,000
To record payment of payroll. Sales 620,000
To record cash sales and on account.
4 Raw Materials 11,000
Work-in Process 10,000 Cost of Goods Sold (620,000 x 80%) 496,000
Factory OH 1,000 Finished Goods 496,000

5 Work-in process 210,000

Factory OH 25,000
Selling expenses 65,000
Administrative expenses 80,000
Payroll 380,000
To record distribution of payroll
costs

6 Work-in Process (210,000 x 70%) 147,000

Applied Factory OH 147,000
To record application of factory
OH costs at 70% of DL costs.
 2. POST TO SELECTED T-ACCOUNTS
Raw Materials Work-in Process Finished Goods Factory Overhead Applied Factory Overhead
Beg,230,000 2) 478,000 Beg,180,000 4) 10,000 Beg, 120,000 9) 496,000 2) 18,000 4) 1,000
1)420,000 2)460,000 8)653,000 5) 25,000 6) 147,000
8)653,000
4) 11,000 5) 210,000 7)102,000
6) 147,000 773,000 496,000
661,000 478,000 145,000 1/31 147,000
(496,000)
(478,000) 997,000 663,000 ( 1,000)
( 663,000) 1/31 277,000
1/31 183,000 1/31 144,000
1/31 334,000

Under the normal cost system and the company maintains a separate “Applied Factory OH “account, the
actual and the applied usually do not tally. These two accounts should always be closed to the overhead cost
monthly or at the end of accounting period. The difference, if the amount is not significant , could be charged
to COGS. The closing entry would be:
Applied Factory OH P 147,000
Factory overhead P144,000
Cost of Goods Sold 3,000
IF the difference is material, it could be allocated to WIP, FG and COGS based on their ending balances.

3. COMPUTE FOR ENDING INVENTORY COSTS:

Balances at the end of accounting period: Prime Costs : P450,000 + 210,000 = 660,000
1. Raw Materials P183,000 Conversion Costs: 210,000 + 144,000=354,000
2. Work in Process 334,000
3. Finished goods 277,000
 COMPREHENSIVE APPLICATION (NON-COST SYSTEM)

1. The opening account balances of PSY Manufacturing, Inc. are as Data for adjustments:
follows: a. Accrued Payroll
Cash P1,000,000 -Direct labor P250,000
Beginning Inventories: -Indirect labor 100,000
Raw Materials 200,000 b. Factory depreciation, 25,000
Work-in process 100,000 c. Ending inventory of direct materials, 245,000
Finished Goods 500,000 d. Inventory of work-in process
Factory Plant & Equipment 1,000,000 100% complete 5,000 units
Mortgage Payable (Long-Term) 1,000,000 50% complete 1,000 “
PSY, Capital 1,800,000 25% complete 250 “
2. Transactions that transpired during the period: e. Finished goods inventory at the end, 250,000.
a. Purchase of materials on acct. 1,000,000
b. Purchase of materials on cash 500,000 Required: 1. Journal entries
c. Payment of freight-in 50,000 2. Adjusting entries
d. Payment of 600,000, A/P granted with 5,000 discount. 3. Working Paper
e. Payment of payroll: DL 750,000 and Indirect labor 4. Schedule of Cost of Goods Manufactured & Sold
250,000 5. Statement of Comprehensive Income
f. Payment of factory Light and Water 50,000 6. Statement of Financial Position
g. Payment of factory taxes and licenses 75,000 7. Closing Entries.
h. Purchase of factory supplies (exp. Method) 25,000 8. Compute for Prime Costs
i. Total Sales 4,500,000 of which 70% is on Cash and balance 9. Compute for Conversion Costs
on account.
j. Selling Exp, P700,000 and administrative expenses
300,000 paid in Cash
1. GENERAL JOURNAL
DATE PARTICULARS DEBIT CREDIT

a) Purchases – Raw Materials 1,000,000

Accounts Payable 1,000,000
To record purchase of raw 2. ADJUSTING ENTRIES
materials on account
DATE PARTICULARS DEBIT CREDIT
b) Purchases – Raw Materials 500,000
Cash 500,000
a) Indirect labor 100,000
c) Freight-in 50,000 Direct Labor 250,000
Cash 50,000 Accrued Payroll 350,000
d) Accounts Payable 600,000
Purchase discounts 5,000
Cash 595,000 b) Depreciation Exp. factory 25,000
Accum. Depreciation -Factory 25,000
e) Direct Labor 750,000
Indirect Labor 250,000
Cash 1,000,000
Note:
f) Factory Utilities 50,000
Cash 50,000 Adjusments C, D and E data will be taken-up as we do
g) Factory Taxes & Licenses 75,000 the closing entries.
Cash 75,000
h) Factory supplies 25,000
Cash 25,000
i) Cash (4,500,000 x 70%) 3,150,000
Accts. Receivable (4,500,00 x 30%) 1,350,000
Sales 4,500,000
j) Selling Expenses 700,000
Administrative Expenses 300,000
Cash 1,000,000
 3
The amounts reflected in the Adjustments column and
PSY Manufacturing , Inc. Manufacturing Summary were taken from the Adjusting and Closing
Working Paper Entries in relation to manufacturing costs only.
Account Titles Unadjusted Trial Balance Adjustments Manufacturing Summary Income Statement Statement Of
Financial Position

Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
Cash 855,000 855,000
Accounts Receivable 1,350,000 1,350,000
Raw Materials Inventory, Beg. 200,000 b) 200,000
Work-in-process Inventory, Beg. 100,000 b)100,000
Finished Goods Inventory, Beg 500,000 500,000
Factory Plant & Equipment 1,000,000 1,000,000
Accounts Payable 400,000 400,000
Mortgage Payable 1,000,000 1,000,000
Psy, Capital 1,800,000 1,800,000
Sales 4,500,000 4,500,000
Purchases 1,500,000 b)1,500,000
Purchase Discounts 5,000 a) 5,000
Freight-in 50,000 b) 50,000
Direct Labor 750,000 1)250,000 b)1,000,000
Indirect Labor 250,000 1)100,000 b) 350,000
Factory Utilities 50,000 b) 50,000
Factory Taxes & Licenses 75,000 b) 75,000
Factory Supplies 25,000 b) 25,000
Factory Depreciation 2) 25,000 b) 25,000
Selling Expenses 700,000 700,000
Administrative Expenses 300,000 300,000
Accrued Payroll 1)350,000 350,000
Accumulated depreciation 2) 25,000 25,000
Raw Materials Inventory , End a)245,000 245,000
Work-in process End a)625,000 625,000
Finished Goods Inventory, End 250,000
Income Summary 250,000

Totals 7,705,000 7,705,000 375,000 375,000 875,000 3,375,000

2,500,000 2,500,000
Cost of Goods Manufactured
3,375,000 3,375,000 4,000,000 4,750,000 4,325,000 3,575,000

Net Income 750,000 750,000

4,750,000 4,750,000 4,325,000 4,325,000

All costs before the

completion of the product are
summarized
 PSY Manufacturing, Inc.
4 Statement of Cost of Goods Manufactured & Sold
For the Year Ended December 31, 2019
Direct Materials:
Raw Materials Beginning P 200,000
Add: Net Purchases:
Purchases-Raw Materials P 1,500,000
Less : Purchase Returns & Allowances P 0
Purchase Discounts 5,000 5,000
Net Purchases 1,495,000
Add: Freight-in 50,000
Total Cost of Purchase 1,545,000
Raw Materials Available for Use 1,745,000
Less: Raw Materials Inventory End 245,000
Direct Materials Used 1,500,000

Direct Labor 1,000,000

Manufacturing Overhead:
Indirect Labor 350,000
Factory Supplies 25,000
Depreciation-Factory 25,000
Utilities Expense-Factory 50,000
Factory Taxes & Licenses 75,000
Total Overhead Costs 525,000
Total Manufacturing Costs P 3,025,000

Add: Work in Process, Beginning 100,000

Total Cost of Goods Placed in Process 3,125,000
Less: Work-in –Process , End 625,000
COST OF GOODS MANUFACTURED P 2,500,000
Add: Finished Goods Beg. 500,000
Cost of Goods Available for Sale 3,000,000
Less: Finished Goods, End 250,000
Cost of Goods Manufactured and Sold 2,750,000
5 PSY Manufacturing, Inc.
Statement of Comprehensive Income
For the month Ended December 31, 2019
Sales P 4,500,000
Less: Cost of Goods Manufactured and Sold 2,750,000

Gross Profit 1,750,000

Less: Operating Expenses:

Selling Expenses 700,000
Administrative Expenses 300,000
Total 1,000,000
Net Profit from operations P750,000
 PSY Manufacturing, Inc.
6 Statement of Financial Position
As of December 31, 2019

ASSETS LIABILITIES & OWNER’S EQUITY

Current Assets: LIABILITIES
Cash P 855,000 Current Liabilities:
Accounts Receivable 1,350,000 Accounts Payable P 400,000
Accrued Payroll 350,000
Inventories : 245,000 Total Current Liabilities 750,000
Raw Materials 625,000 Non-Current Liabilities:
Work-in process 250,000 1,120,000 Mortgage Payable 1,000,000
Finished Goods 3,325,000 Total Liabilities 1,750,000
Total Current Assets
Non-Current Assets: OWNER’S EQUITY
Factory Plant & Equipment 1,000,000 PSY, Capital 1,800,000
Accumulated Depreciation-factory ( 25,000) 975,000 Add: Net Profit 750,000
Total Owner’s Equity 2,550,000

4,300,000 Total Liabilities & Owner’s Equity 4,300,000

Total Assets

These totals must be aligned.

The account format is most
recommended to use especially
if the company has numerous
accounts.
7 CLOSING ENTRIES
Steps to follow:
a. Close manufacturing accounts with credit balances and record ending inventory of Raw Materials and Work-in Process to Manufacturing
Summary account:
Raw Materials Inventory End P 245,000
Work-in process Inventory End 625,000
Purchase Returns 0
Purchase Discounts 5,000 Manufacturing Summary
Manufacturing Summary 875,000
b. Close the manufacturing accounts with debit balances to Manufacturing Summary account b) 3,375,000 a) 875,000
Manufacturing Summary account 3,375,000
Raw Materials Beg 200,000 1/31 2,500,000
Work-in Process Beg 100,000 c) 2,500,000
Purchases 1,500,000
Freight-in 50,000
Direct Labor 1,000,000
Indirect Labor 350,000
Factory-Utilities 50,000
Factory Taxes & Licenses 75,000
Factory supplies 25,000
Factory Depreciation 25,000

c. Close the Manufacturing Summary account and Finished Goods Inventory Beginning to Income Summary account :
Income Summary 3,000,000
Manufacturing Summary 2,500,000
Finished Goods Inventory, Beg 500,000

NOTE: After posting to T-Accounts or general ledger , the manufacturing Summary account has a debit balance which represents the Cost of Goods
Manufactured, so to close it must be credited.

16
 CLOSING...
d. To establish the ending Finished Goods Inventory. This will be the amount to be reflected in your Inventory account in the Balance
Sheet.

Finished Goods Inventory End..................................P 250,000

Income Summary.......................................................................250,000 Income Summary
c)3,000,000 d) 250,000
The rest of the closing entries are the same as in Merchandising business.
f) 1,000,000 e) 4,500,000
e. To close the Revenue accounts to Income Summary:
4,000,000 4,750,000
Sales 4,500,000 ( 4,000,000)
Income Summary 4,500,000
750,000
f. To close the Operating Expenses account:
Income Summary 1,000,000
Selling Expenses 700,000
Administrative Expenses 300,000

g. To close Income Summary account to Capital Account

Income Summary 750,000
PSY, Capital 750,000
8
COMPUTE FOR THE PRIME COSTS:
Direct Labor P 1,000,000
Direct Materials 1,500,000
Prime Costs P 2,500,000

9 COMPUTE FOR THE CONVERSION COSTS:

Direct Labor 1,000,000
Manufacturing Overhead 525,000
Conversion Costs P 1,525,000
 SAMPLE JOURNAL ENTRIES USING JOB ORDER
1. To record purchase of raw materials and indirect materials on account
Assume BSA Inc. purchased P 200,000 worth of fabric to be used in the production of face masks and P1000 worth of needles,
garter and thread on terms FOB Destination , freight prepaid , 2/10 ; n/30 on March 1, 2019.
Mar 1 Purchases-Raw Materials.......................................P 200,000
Purchases-Indirect Materials................................ 1,000
Voucher Payable...............................................................P 201,000

2. To record cost of defective materials returned to vendors

On March 5, BSA returned P5,000 worth of worn out fabric.
Mar 5 Voucher Payable......................................................5,000
Purchase Returns and Allowances..... ...........................5,000

3. To record payment of account within the discount period.

On March 10, BSA paid the account in full.
Mar 10 Voucher Payable......................................................196,000 (201,000 – returns 5,000)
Purchase Discounts............................................................3,920 (196,000 x 2%)
Cash in Bank....................................................................192,080
SAMPLE...
4. To record freight and handling of raw materials
Based on our example in No. 1, assume the shipping terms is FOB Shipping point, freight collect of
P1,000 therefore the entry for the freight charges will be
Transportation – in....................P1,000
Voucher Payable.....................................P1,000
5. To record payroll of factory and office employees
Assume BSA Inc payroll of factory and employees for the month of March were as follows:
FACTORY – FACTORY- SALES OFFICE TOTAL
Direct Indirect Personnel Personnel
Salaries and Wages P 38,800 P 9,000 P 26,000 P 50,000 P123,800

Deductions: (assumed)

Withholding tax 3,300 385 1,950 1,950 7,585

SSS Premium 1,500 150 900 900 3,450
Philhealth Premium 550 100 300 300 1.250
Pag-ibig Premium 200 100 200 200 700
TOTAL DEDUCTIONS 5,550 735 3,350 3.350 12,985
Net Pay P33,250 P 8,265 P 22,650 P 46,650 P110,815
SAMPLE...
No. 5 Journal Entries
Mar 31
Direct Labor.........................................................P 38,800
Indirect Labor....................................................... 9,000
Salaries & Wages-Selling..................................... 26,000
Salaries & Wages-Office..................................... 50,000
Withholding Tax Payable....................................................P 7,585
SSS Premium Payable.......................................................... 3,450
Philhealth Premium Payable................................................ 1,250
Pag-ibig Premium Payable................................................... 700
Voucher Payable................................................................... 110,815
6. To record employer’s payroll expenses
Employer’s Payroll Contribution-Factory................................... P 2,600
Employer’s Payroll Contribution-Selling ................................... 1,400
Employer’s Payroll Contribution-Administrative...................... 1,400
SSS Premium Payable................................................................................P3,450
Philhealth Premium Payable.................................................................... 1,250
Pag-ibig Premium Payable........................................................................ 700
7. To record distribution of payroll
Vouchers Payable...........................................................................P110,815
Cash in Bank...............................................................................................P110,815

NOTE: Journalizing is the same as in the merchandising business except for the use of factory
accounts because this is a manufacturing business.
FINANCIAL REPORTS
The financial statements for Manufacturing type of business is basically the same as in
Merchandising business.

 The only difference in the preparation of the Statement of Comprehensive Income lies in the COST OF GOODS
SOLD section in which the Statement of Cost of Goods Manufactured is prepared wherein Finished Goods
inventory account is reflected called Merchandise Inventory account in Merchandising.

COST OF GOODS MANUFACTURED- the manufacturing cost of the goods completed during a production
period. It is the sum of the total manufacturing costs plus beginning Work-in process minus the Work-in process
ending. It is not a financial statement but it serves as a supporting schedule of the Cost of Goods Sold in the
Statement of Comprehensive Income.
STATEMENT OF FINANCIAL POSITION – similar to merchandising except for the inventory accounts detailed
as follows: Raw Materials Inventory, Work-in Process Inventory, Finished Goods Inventory and Factory
Supplies Inventory.
The End of Introduction to Manufacturing
Operations

u c h
e ry m
o u v
nk y
Tha
Ma’am Wennie