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• Objective of accounting


  Accumulation of financial information that is useful in making economic decisions
• Financial accounting


  Focuses on the gathering of information to be used in the preparation of financial statements that meet the needs of investors, creditors, and other external users of financial information
• Financial statements


  • Balance sheet
  • Income statement
  • Statement of cash flows
• Financial statements are useful to management as well as external users, but additional reports, schedules, and analyses are required for internal use in planning and control
• Cost accounting


  Provides the additional information required by management, and also provides data necessary for the preparation of external financial statement
• Cost accounting procedures are necessary for the determination of cost of goods sold on the income statement and the valuation of inventories on the balance sheet
• Perpetual inventory approach


  A manufacturing company uses this approach unless otherwise indicated
• Manufacturing inventory accounts


  • Materials Inventory
  • Work in Process Inventory
  • Finished Goods Inventory
• Materials Inventory


  Account made up of the balances of materials and supplies on hand, maintained in a similar way to Merchandise Inventory but with the difference that materials are usually not purchased for resale but for use in manufacturing a product
• Work in Process Inventory

  All manufacturing costs incurred and assigned to products being produced are classified as Work in Process Inventory costs
• Work in Process Inventory has no counterpart in merchandise accounting
• Production process


  1. Issuance of materials

  2. Cutting, molding, assembling, or otherwise changing materials into a finished product

  3. Using people, machines, and other factory resources
• Manufacturing cost elements (product costs)

  • Direct materials
  • Direct labor
  • Factory overhead
• Direct labor


  Labor costs of factory employees working on specific products, assigned to those products as part of Work in Process Inventory
• Factory overhead


  Overhead costs that are product costs and must be assigned to specific products, accumulated and accounted for under one account title: Factory Overhead Control
• Transferring costs from Work in Process Inventory to Finished Goods Inventory


  As products are completed, their costs are transferred from the Work in Process Inventory account to the Finished Goods Inventory
• Finished Goods Inventory


  Takes on the characteristics of Merchandise Inventory, with the credit side handled the same way (costs moved to Cost of Goods Sold when goods are sold)
• The accounting procedures affecting the debit side of the Finished Goods Inventory account differ from those for the Merchandise Inventory account, as salable products are produced rather than purchased</b>
• Determining cost of goods sold for a manufacturing firm

  1. Beginning finished goods inventory

  2. Plus: Cost of goods manufactured

  3. Total goods available for sale

  4. Less: Finished goods inventory end

  5. Cost of goods sold
• Cost of Goods Manufactured (CofGM) statement

  Summarizes the manufacturing activity of the period, equivalent to purchases for a merchandising firm
• Elements of manufacturing cost

  • Direct materials
  • Direct labor
  • Factory overhead
• Direct materials


  Cost of material which become part of the product being manufactured and which can be readily identified with a certain product
• Indirect materials


  Materials that cannot be readily identified with any particular item manufactured, or materials that actually become part of the finished product but whose costs are relatively insignificant
• Direct labor


  Cost of labor for those employees who work directly on the product manufactured
• Indirect labor


  Wages and salaries of employees who are required for the manufacturing process but who do not work directly on the units being manufactured
• Factory overhead


  Includes all costs related to the manufacturing of a product except direct materials and direct labor
• Manufacturing cost flow


  1. Costs are incurred and recorded as direct materials, direct labor, or factory overhead

  2. Costs are transferred to Work in Process Inventory

  3. Costs of completed products are transferred to Finished Goods Inventory

  4. Costs of sold products are transferred to Cost of Goods Sold
• Statement of Cost of Goods Manufactured and Sold

  Summarizes the flow of manufacturing costs and provides the basis for determining the cost of goods sold on the income statement
• Preparing the Statement of Cost of Goods Manufactured and Sold


  Compute the cost of materials used

  2. Compute the total manufacturing costs for the year

  3. Compute the cost of goods manufactured

  4. Compute the cost of goods sold
• The accounting for merchandising and manufacturing firms is basically the same, with the main difference being in the accounting for cost of goods sold
• For a merchandising firm, the cost of goods sold is determined by multiplying the number of units sold by the acquisition cost (purchase price)