Accounting for

Manufacturing
Activities
Asst Prof Lovilet C. Molo
Two accounting systems
• Cost system keeps perpetual records of the costs of raw material, work
in process and finished goods inventories. This system provides more
timely information about those inventories and changes in their levels.
It also produces more timely information about manufacturing costs
per unit of product which managers use in their efforts to control costs.
• Non-cost system produces a manufacturing accounting system based
on the periodic inventory system. The costs of raw materials, work in
process and finished goods inventories are based on physical counts of
the quantities on hand at the end of each period. This system does not
provide for a detailed flow of costs in the manufacturing process,
Pro forma journal entries – common transactions
1. To record purchase of raw materials and indirect materials on account:
Purchases- Raw Materials xx
Indirect Materials xx
Accounts Payable xx
2. To record cost of defective raw materials returned to vendor
Accounts Payable xx
Purchases Returns and Allowances xx
3. To record payment of account within the discount period
Accounts Payable xx
Purchase Discounts xx
Cash in bank xx
Pro forma journal entries – common transactions
4. To record freight and handling of raw materials
Transportation In xx
Accounts Payable xx
5. To record payroll for factory employees
Direct labor xx
Indirect labor xx
SSS Contributions Payable xx
Medicare Contributions Payable xx
Pag-ibig Contributions Payable xx
Withholding Taxes Payable xx
Accounts Payable xx
Pro forma journal entries – common transactions
6. To record employer’s payroll expenses
Employer’s Payroll Contributions-Factory xx
SSS Contributions Payable xx
Medicare Contributions Payable xx
EC Contributions Payable xx
Pag-ibig Contributions Payable xx
7. To distribution of payroll
Accounts Payable xx
Cash in bankxx
8. To record accrual of factory payroll
Direct Labor xx
Indirect Labor xx
Accrued Payroll xx
Pro forma journal entries – common transactions
9. To record depreciation of factory building
Depreciation Expense-Factory Bldg xx
Accumulated Depreciation-Factory Bldg xx
10. To record repairs on factory building
Repairs and Maintenance-Factory Bldg xx
Accounts Payable xx
11. To record amortization of patents
Amortization of Patents xx
Patent xx
12. To record real property taxes on factory site
Real Property taxes xx
Accounts Payable xx
Pro forma journal entries – common transactions
13. To record factory utilities incurred
Factory Utilities xx
Accounts Payable xx
14. To record cost of tools used
Tools used xx
Tools xx
15. To record sales of finished goods
Accounts Receivable xx
Sales xx
16. To record sales returns of customers
Sales Returns and Allowances xx
Accounts Receivable xx
Pro forma journal entries – common transactions
a. To close manufacturing accounts with credit balances, and to record
ending inventory for materials and work in process
Raw Materials inventory, end xx
Work in Process Inventory, end xx
Purchases Returns and Allowances xx
Purchase Discounts xx
Manufacturing Summary xx
Pro forma journal entries – common transactions
b. To close manufacturing accounts with debit balances
Manufacturing Summary xx
Raw materials inventory, beg xx
Work in process inventory, beg xx
Purchases-Raw Materials xx
Transportation In xx
Direct labor xx
Indirect labor xx
Indirect materials xx
Depreciation Expenses-Factory Bldg xx
Repairs and Maintenance-Factory Bldg xx
Amortization of Patents xx
Real Property Taxes xx
Factory Utilities xx
Tools used xx
Employer’s Payroll Contributions-Factory xx
Factory Supplies Expense xx
Miscellaneous Factory Expense xx
Pro forma journal entries – common transactions
c. To close manufacturing summary and beginning finished goods
inventory to income summary
Income Summary xx
Manufacturing Summary xx
Finished Goods Inventory-beg xx
The debit balance in the manufacturing summary represents the cost of
goods manufactured
d. To establish the ending finished goods inventory
Finished Goods Inventory-end xx
Income Summary xx
 Illustration
To illustrate, assume that Vera Cruz Furniture Shop presented the following trial balance on January 1, 2017:
Debit Credit
Cash P17,500
Accounts Receivable 2,500
Finished Goods Inventory 9,250
Work in Process Inventory 5,750
Materials Inventory 10,000
Factory Supplies Inventory 250
Offiice Supplies Inventory 150
Prepaid Factory Insurance 1,000
Patent 10,000
Office Equipment 12,000
Store Equipment 7,000
Accounts Payable 15,000
Notes Payable 15,000
Vera Cruz, Capital 45,400
P75,400 P75,400
======== =======
Transactions for 2017:
1. Purchased machines on account, P50,000
2. Purchased materials on account, P15,000 ad paid for freight, P600
3. Returned defective materials worth P2,000.
4. Paid for the account in #2 less discount of P500.
5. Paid for the wages of workers and factory employees as follows:
Cutter, machinists and assemblers P5,000
Clerks and janitors 2,500
SSS, P450, Medicare, P350 and withholding Taxes 600 (1,400)
P6,100
6. Purchased factory supplies for cash, P1,000.
7. Paid for the rent for P3,000, light and power for P1,500, and machine repairs for
P1,500. Allocation basis is 2/3 or manufacturing expenses and equally for selling and
administrative expenses.
Transactions for 2017:
8. Purchased office supplies for cash P500.
9. Cash sales, P27,500 and account sales P22,500.
10. Paid for: Sales salaries and commission P4,500
Office and officer’s salaries 4,000
less SSS Premiums, P500; Medicare Premiums,
P450 and withholding tax P750
11. Paid for advertising, P1,500 and freight out P, 1200
12. Additional information at the end of the year:
a) Depreciation for : Machinery P1,500
Store Equipment 1,200
Office Equipment 700
Transactions for 2017:
b. Accrued wages for direct workers, P1,200 and for indirect workers,
P750.
c. Expired factory insurance, P250
d. Amortization of patents, P750.
e. Factory supplies used, P450. Office supplies used P300
f. Bad debts P2,200
g. Inventories, end: Finished Goods P4,250
Work in Process 17,650
Raw materials 8,000
Entries:
1. Machinery 50,000
Accounts Payable 50,000
Purchased machines on account
2. Raw Materials Purchases 15,000
Accounts Payable 15,000
Freight In 600
Cash 600
3. Accounts Payable 2,000
Purchase Returns and Allowances 2,000
Returned defective materials
4. Accounts Payable 13,000
Purchase Discount 500
Cash 12,500
Payment of account less discount
Entries:
5. Direct Labor 5,000
Indirect Labor 2,500
SSS Premium Payable 450
Medicare Premiums Payable 350
Withholding Taxes Payable 600
Cash 6,100
Paid wages of factory workers and employees
6. Factory Supplies Inventory 1,000
Cash 1,000
Purchased supplies for cash.
7. Rent-Factory 2,000
Rent- Sales 500
Rent-Administrative 500
Cash 3,000
Paid rent
Entries:
Light and Power-Factory 1,000
Light and Power-Sales 250
Light and Power-Administrative 250
Cash 1,500
Paid for electricity
Repairs and Maintenance Expense 1,500
Cash 1,500
Paid for machine repairs
8. Office Supplies Inventory 500
Cash 500
Paid for office supplies
9. Cash 27,500
Accounts Receivable 22,500
Sales 50,000
To record sales
Entries:
10. Salesmen Salaries & Commissions 4,500
Office and Officer Salaries 4,000
SSS Premiums Payable 500
Medicare Premiums Payable 450
Withholding Taxes Payable 750
Cash 6,800
To record salaries paid.
11. Advertising Expense 1,500
Freight out 1,200
Cash 2,700
To record payment made.
12. a. Depreciation Expense-Machinery 1,500
Depreciation Expense-Store Equipment 1,200
Depreciation Expense-Office Equipment 700
Accumulated Depreciation-Machinery 1,500
Accumulated Depreciation-Store Equipment 1,200
Accumulated Depreciation-Office Equipment 700
To provide for depreciation expenses
Entries:
b. Direct Labor 1,200
Indirect Labor 750
Accrued Wages 1,950
c. Factory Insurance Expense 250
Prepaid Factory Insurance 250
To adjust for expired insurance
d. Amortization Expense, Patents 750
Patents 750
To record amortization expense
e. Factory Supplies Expense 450
Office Supplies Expense 300
Factory Supplies Inventory 450
Office Supplies Inventory 300
To adjust for supplies used
f. Bad Debts 2,200
Allowance for Bad Debts 2,200
Entries:
g. Raw Materials Inventory End 8,000
Work In Process Inventory, end 17,650
Manufacturing Summary 25,650
To adjust for ending inventories
Finished Goods Inventory, end 4,250
Income Summary 4,250
To adjust for ending inventory
Closing Entries:
1. Purchase Returns and Allowances 2,000
Purchase Discount 500
Manufacturing Summary 45,750
Material Inventory-Beg. 10,000
Work In Process Inventory, beg 5,750
Raw Materials Purchases 15,000
Freight In 600
Direct Labor 6,200
Indirect Labor 3,250
Factory Rent 2,000
Factory Light, and Power 1,000
Repairs and Maintenance 1,500
Depreciation, Machinery 1,500
Amortization Expense, Patents 750
Factory Insurance Expense 250
Factory Supplies Expense 450
Closing Entries:
2. Income Summary 20,100
Manufacturing Summary 20,100
3. Sales 50,000
Income Summary50,000
4. Income Summary 26,350
Finished Goods 9,250
Rent, Sales 500
Rent, Administrative 500
Salesmen Salaries and Commission 4,500
Office and Officer Salaries 4,000
Light and Power Sales 250
Light and Power Administrative 250
Advertising 1,500
Freight Out 1,200
Depreciation, Store Equipment 1,200
Depreciation, Office Equipment 700
Bad Debts 2,200
Office Supplies Used 300
Closing Entries:
5. Income Tax Expense 2,496
Income Tax Payable 2,496
6. Income Summary 5,304
Vera Cruz, Capital 5,304
Statement of Cost of Goods Sold
Income Statement
Balance Sheet
Thank you and God Bless
Lovilet C. Molo, CPA, MBA