hi and welcome to my channel again this video is dedicated to those students who are studying cost accounting and reporting if you are new to this channel please subscribe like and share this channel today we are going to discuss about the .
Accounting and income statement of manufacturing entities as well as the job order cost system this lecture has five parts the first is the comparison of service merchandising and manufacturing entities in their operations types of inventories and costs of their product .
I will not lie though the income statement for manufacturing entities is a lot more complicated than that of service and merchandising entities so this first part is a preparation for the next parts of this video lecture next is we will be comparing the income statements of service merchandising and manufacturing companies .
Because they really differ significantly in this type of fs and number three is we will have to study the journal entries for transactions unique to manufacturing entities i'm also going to give you illustrative problems with requirements or questions and give the solutions and explanations .
As well as the computations and lastly we're going to talk about the job order costing system if you finished and understood this video until the end then you have already finished a lot of chapters in the host accounting subject so stay tuned so let's have the first topic .
You already know that the business entities can be classified as service merchandising and manufacturing so how do they differ in the operations of course the service entities provide service to clients like a salon or a barber shop or a massage center and others for a fee whereas the .
Merchandising entities like sarisari stores grocery stores and most of the wholesalers and retailers will sell finished goods for a markup while the manufacturing entities operation deals with the buying of the raw materials and converting them into finished products and selling them for a profit .
So that's it for their operations sir how about their inventories the service entities don't have any inventories that will be reflected on its financial statements unlike the merchandising which is goods known as merchandise inventory the manufacturing companies on the other hand have three types of inventories .
We have the finished goods or the completed goods we also have the work in process or partially completed units and the raw materials which are yet to be converted the raw materials can be classified into direct and indirect direct materials are those that are .
Really part of the finished product let's say for example your product is a chair the wood nails paint or varnish that are found on the chair are the direct materials the indirect materials are inputs although not directly traceable to the output .
Are necessary to the production process let's say for example the scraps of wood or the sawdusts or the oil and other machine lubricants if you are using machine in the production of goods and other production supplies so that's it for their inventories now let's talk about their product costs .
The service entities has what do we call the custom services and the merchandising entities has to pay for the product's purchase price plus 18. the freight in or the transportation in is the cost incurred to transfer the merchandise inventory from the supplier to the place of business .
Examples of this are the labor cost paid to lift your products from one place to the other and the cost paid to delivery companies the manufacturing entities have three product costs the first one is the direct material cost which was already discussed earlier the other one is the direct labor for .
The salaries of the employees actually transforming the raw materials into the final output examples are the salary payments to workers in the plant designers construction workers carpenters and the like sir if there is direct labor there is also indirect labor right yes .
Of course but we will discuss that on the third prada cost the third product cost is known as the factory overhead and under these are the indirect materials which are already discussed earlier again and the indirect labor so what is .
Indirect labor in direct labor are salaries paid to employees related to the production process or area but are not really the ones transforming the raw materials into finished products examples are the salaries of the supervisors and managers of the plant with this .
You can conclude that the salaries incurred by the manufacturing entities are of three types if related to production process we have two direct labor and indirect labor direct labor is for the ones actually making the product and the indirect labor is for employees .
Whose efforts although not traceable to the output but their efforts are still necessary to the production area or the production process the third one is the salaries expense in the operating expenses for administrative personnel who are not directly or indirectly .
Deleted in the actual production of the entity examples are the salaries of administrative personnel like accountants president of the company hr and the others so that's it for the product costs but there is a twist here in the manufacturing entity side when it comes .
To factory overhead but before that let's answer the question why do we need to determine the product costs it is because the pricing of the products depends on it the business needs to know the cost of the product to determine if the price they are setting is right .
Now let's go to the twist there are two types of factory overhead that we are going to study here one is the actual factory overhead the actual factory overhead is composed of the actual cost of indirect materials and indirect labor which are difficult to trace because there are a lot of items .
To be considered and included in here unlike the actual direct materials and the actual direct labor what do you mean sir to get the actual factory overhead the company needs to trace items like electricity used by the plant the maintenance supplies of the production machinery .
Cost of repairs of the machinery rent of the plant depreciation of the plant and other machineries oil and lubricants salaries of the plant manager or the security guard of the plant or the maintenance personnel who maintains the production area .
And many more so the actual factory overhead amounts are only confirmed at the year end and if we are going to wait for it we will not be able to determine the total product cost before year end so temporarily before the year end manufacturing entities use the second type of factory overhead .
Which is the applied factory overhead however you need to note that even if it is not yet the year end the company will still record and accumulate the actual indirect cost incurred and temporarily record it in the factory overhead control account .
Which is an optics account sir what is this applied factory overhead this is in the form of percentage of direct labor cost or rate per direct labor are example is 120 percent of direct labor or six pesos per direct labor are sir it seems like it's unreliable well guys let me tell you that these .
Rates have been computed based on the historical experience in the past years of the company let's say it's now 2020. the company compared the direct labor and the actual factory overhead in the past years like 2019 2018 2017 .
And so on to arrive at those rates so even if it is not exact it can be a close estimate but what will happen in the year end when the actual factory overhead is already available the actual and applied factory overhead will be reconciled as to how we will illustrate that in the .
Later slides but for now we can summarize that the product costs for service entities are the cost of services and we have purchase price plus freight in for the merchandising and we have three costs for the manufacturing entities the actual direct material used the .
Actual direct labor used and the applied factory overhead now we are ready to compare the income statements of the three at this point we will be comparing the income statements of the three so the income statement for service entities is just service revenues and other revenues .
Minus expenses equals the net income it's as simple as that but when we're going to talk about merchandising entities it starts with the sales and of course expenses however these expenses are already subdivided into two which are the cost of sales .
And the other operating expenses sales minus cost of sales though is the gross profit and the gross profit minus expenses equals the net income but how about the computation for the cost of sales if i am a merchandising entity and i wanted to compute the cost of codes that i have sold .
Then i'm going to ask do i have merchandise inventory beginning those are merchandise inventories in the past that were not yet sold do i have recent purchases of this merchandise inventory so we have net purchases so you have the inventories and sold in the past .
Plus your recent purchases if you're going to add them the sum is the total goods available for sale or you can sell them both now let's discuss on the net purchases why is it called net purchases it is because it is not just composed of the acquisition cost you're going to add also the freight in .
And then you are going to deduct the purchase returns and allowances for the damage units and the purchase discounts if you are if you are given purchase discounts so are the available for sale also naturally no so we have merchandise invent to the end .
So the available for sale minus the unsold currently then you are going to get the cost of sales so how about manufacturing entities manufacturing entities are similar with merchandising entities because they also start with sales and you're going to deduct the cost of sales .
In order to get the gross profit also and then from the gross profit you deduct the expenses the general and administrative expenses and the operating expenses then you are going to get also the net income so where are they different they are different .
In the competition of the cost of sales if you're a manufacturing entity and you wanted to get your cost of sales then first you need to get the direct materials used by getting first the direct materials beginning those are the direct materials in the past that you have not used and then you ask yourself do you have recent .
Purchases for those direct materials then you add that in order to get the total raw materials or direct materials available for use the unused in the past plus the recent purchases equals the direct materials available for use and of course these direct materials available for use will not all be used .
So we have the direct materials end so you deduct it then you are going to get the direct materials used so it's based on logic the available for use minus the unused of course the answer should be the materials used now is this the only cost needed for the .
Raw materials to become finished product the answer is no you need to have the actual direct labor cost also and the factory overhead which is applied again this is applied so these three are what do we call as the total manufacturing cost so maybe you have also some units .
That have been started in the past but are not yet finished you need to get the cost of that because that is what do we consider as work in process beginning that is supposed to be added with the total manufacturing cost to get the total goods placed in process so in order to understand the logic .
Think of the total manufacturing cost as the started units now and the work in process beginning is started in the past but still unfinished so these two that started now plus the unfinished units will be placed in process and their costs the two of them is what .
Do we call as cost of goods placed in process now you are going to ask are the goods placed in process all finished normally no so we have the work in process ending or the cost of the unfinished now so you're going to deduct that and you're going to get of course the .
Cost of the finished now or cost of goods manufactured or the finished now as a shortcut so you are going to ask yourself maybe i have some finished units also in the past but were yet to be sold then the finished now plus finished in the past .
Equals the total goods that i can sell or total goods available for sale now is this available for sale sold not all so if not all then we have finished goods ending so the available for sale minus the unsold of course that is already the cost of sales so that's it for the .
Cost of sales of manufacturing entities but before we finish this part i would like to tell you that if ever you are going to add the direct materials and the direct labor you are going to get the prime costs because they are the primary costs and then if you're going to add .
The labor cost and the factory overhead you're gonna get the conversion costs so that's it for this particular part let's go to another part so we are now on the third part let's have the journal entries for manufacturing entities for direct materials upon purchase the entry should be raw materials or .
Direct materials you can use raw materials to indicate that it includes also the indirect materials but if the indirect materials is repairable from direct materials then use the direct materials account so the credit for this one is accounts payable under the perpetual .
Method upon payment of course you debit the accounts payable and then you credit the cash and upon usage you debit work in process and then you credit direct materials or raw materials sir how about the indirect materials so in the indirect materials they are .
Similar on the acquisition and the payments of accounts payable with the direct materials so what do you mean sir so on acquisition you are to debit indirect materials instead of direct materials of course and then you are going to credit the same account with the direct .
Materials which is accounts payable now on the payment of accounts payable they are very the same they bid accounts payable and credit cash also so on the usage they are a little bit different because when we use the indirect materials we need to debate the factory .
Overhead control instead of work in process and we are going to credit the indirect materials account now let's go to direct label so upon incurrence of the direct labor we have to debate work in process and we have to credit salaries payable now let's assume that there will be no .
Field health bug ebay sss contribution to simplify our discussion so in incurrence again working process debit and salaries payable credit now upon payment we just have to debit the salaries payable account and then credit the cash so on the indirect labor also .
They are similar but instead of debiting in the working process account the indirect labor upon incurrence will be debited to factor the overhead control account and the salaries payable on the payment of salaries payable they are exactly the same debit salaries payable and then credit .
Cash sir where is the applied factory overhead in this story so the fact of the overhead that we're going to use if it's still before your end is the applied factory overhead so if you have the details on the rates based on the direct labor cost or direct labor are .
Then compute the applied factory overhead and if you have computed that one then the amount will be debited to work in process and will be credited also on the applied factory overhead account now we are ready already on how to .
Reconcile the applied factory overhead and the factory overhead control so on your end you need to close these two so what are you going to do you debit the applied factory overhead because its normal balance here is credit so we need to debit it to close it .
And the factory overhead control which is the representative of the actual indirect labor and indirect material cost will be credited to close it so of course that will not be balanced so if the debit is lacking you debit the account under applied factory overhead and if the credit is lacking you have .
The overhead applied factory overhead account now these are temporary accounts so you need to close it so these two will be closed in either number one custom sales finished goods end and wip end or cost of sales and finished goods only or .
You can close it to cost of sales only now if the problem is island you use the cost of sales only now i know at this point you're a little bit confused on the closing of the under applied factory overhead and over applied factory overhead in these three options so i've made an .
Illustration to clear that confusion so here is the illustrative problem so at the end of year one the following costs are incurred by abc company so the direct labor cost is three hundred thousand the actual indirect materials is two hundred seventy thousand and the actual indirect labor cost incurred is .
One hundred forty thousand so the fact of the overhead application rate is hundred fifty percent of the attack label since the deck labor is already 300 000 times 150 percent that is about 450 000. aside from that the company has sold units of 100 .
000 the work in process units or the unfinished is 15 000 and it is yet to be converted by 70 because it's only 30 percent converted and the finished goods ending is 25 000. so let's apply what we have learned a while ago so in the direct labor incurrence of three hundred thousand .
Debate working process of three hundred thousand and then credit the salary is payable of three hundred thousand upon usage of the indirect materials also we are going to debit the factory overhead control which is 270 000 and then the credit the indirect materials account for the same amount .
We have also in currents for indirect labor again they beat it and the fact of the overhead control account and then credit it on the payable so that's it for the recording of one two and three so let's record the applied factory overhead .
So debit work in process again that's 450 000 coming from 300 000 times 150 and then credit the account applied factory overhead now on the year end we need to reconcile so we need to close the applied factory overhead by debiting it because the normal balance .
Is credit so you have 450 000 and then you need to credit also the factory overhead control in order to close it now the fact of the overhead control here is 410 000 which is the sum of 270 000 plus 140 000 and as you can see the .
Applied factory overhead is greater than the factory overhead control so meaning there is over applied factory overhead of forty thousand so again that over applied factory overhead account the 40 000 is a temporary account so we need to close it .
So we have the methods here so let's start with method one we're going to close it in the first of says finish goods end and work in process inventory so we need to debit the over applied factory overhead of 40 000 and then we need to clean it the three working process finished goods as well as the cost of .
Sales the question is how do we allocate this 40 000 to these three so the answer is we need to use the date of conversion times number of units so what do you mean sir let's say for example the work in process according to the problem there is 15 000 work in process units which are thirty .
Percent converted so what we do is thirty percent times fifteen thousand equals four thousand five hundred how about the finished goods since they're already finished then their conversion rate is hundred percent times twenty five thousand equals twenty five thousand .
And the sold units represented by the cost of sales is hundred thousand and it's also hundred percent completed already so we have one hundred thousand you add them all up then we're going to get the one two nine five hundred which will become our denominator .
Because the allocation will use some fractions so what do you mean again sir so let's allocate the forty thousand so when it comes to wip we are going to use the fraction 4.5 over 129.5 the 129.5 is coming from here 1 129 500 and the 4.5 is coming from here .
So we have 40 000 times 4.5 divided by 129.5 it's 1 390 and for the finished goods we are going to use the 25 over 129.5 the 25 is coming from here so we're going to get 7722 and lastly for the cost of sales that's 100 over 129.5 times 40 000 we have 30 .
888 this amounts will then be carried here so you will have a balanced entry already now let's go to the method two the method two is we are going to close the over applied that is 40 000 to accounts cost of sales .
And finished goods only so we need to ignore the working process so what will happen so we're going to allocate the 40 000 into the two so we're going to use the 25 over one two five so the 25 is coming from here and the one two five is the sum of the twenty .
Five thousand and the one hundred thousand because again we're going to ignore the four five which is the work in process and then we have eight thousand on the cost of sales we are going to use the 100 over 125 and the amount that will be allocated to .
Cost of sales is 32 000 so that's it for the method two and the last method which is the default if ever the problem is island the over applied factory overhead 40 000 will automatically be close to cost of sales account 40 000. there is no need to allocate and then .
I'm going to emphasize again that the number three method is commonly used in answering problems and if the problem is silent please use the method number three oh we're already through with the theories the entries for manufacturing entities and the comparison of service manufacturing and .
Merchandising entities as to their operations their inventories as well as their product costs and their income statements so we are ready to answer the comprehensive problem now here's the comprehensive problem glass incorporated is a job order manufacturing company .
Let's just stop right there so it means that that's incorporated are selling customized products based on customer specifications so the direct materials direct labor and factory overhead costs are accumulated per job let's say for example you have two customers so you have two jobs for .
Example the direct materials used by job a the direct label and the factory overhead incurred will be separated from the direct materials used direct labor and factory overhead of another job for example job b so .
Let's continue the company uses a predetermined overhead rate based on the direct labor arts to apply overhead to individual jobs the fact of the overhead rate is 6.10 per direct labor r the following information is for december 2016. job a was completed during december but .
Job b was started but not finished so these are the other details as two direct materials used job a used 45 000 and job b used 33 500. the direct labor rs used by job a is 4 200 rs while job b has 3 500 rs used the direct labor rate .
Is 5.5 per hour aside from that there are other information for example the inventory is beginning we have the direct materials at 7 5 and we have the work in process all job a 31200 that means job a has already been started in the past period .
And will just be finished now now we have other amounts the deck material purchases is 104 thousand and then the indirect labor is thirteen thousand five hundred aside from which the company incurred supervisor salaries of six .
Thousand a factory rent of seven thousand administrative office rent of 1 8 indirect materials of 12 000 depreciation for factory 7500 admin office 1-6 the requirements are the cost of sales before adjustment for actual factory overhead .
The second requirement is the cost of sales after adjustment the third is the direct materials end and the fourth one is the work in process in now upon analyzing this problem there are two important points the first one is the details with the red funds are .
All actual factory overhead which will be considered at year end the totals of those are 46 000 that means this actual factory overhead should be stored in the factory overhead control account these red ones sir .
What about admin office rent again this is administrative office this is not related in the production process or related on the production area so this cost will become part of the operating expenses and will not be considered as factory overhead as well as the .
Duplication for the admin office you need to ignore that because on the requirements there is no mention about operating expenses so only the dead are considered as indirect materials and indirect labor or factory overhead specifically actual factory overhead .
Aside from which we have the second one job a was already started in the prior period but is finished only now only on this period job b was started currently but was not finished so these are very important in solving the problem .
So based on our knowledge earlier we said in order to compute the cost of sales we start with the direct materials beginning and there's no problem because the direct materials beginning has already been given which is seven five you add the direct material purchases and again there is no problem .
Because it's already given in the problem that is hundred four thousand so you add them and you're going to get the direct material available for use which is one hundred eleven thousand five hundred now we have to deduct the direct .
Materials end is there a given on the direct materials end there's none however the direct materials used is given so that is seventy eight thousand five hundred how did we get the seventy 78 500 that is 45 000 plus 33 500 here the usage of job a and job b .
So if we have this we can just deduct 78 500 from 111 500 in order to get the direct materials end which is 33 000 so that's it for the direct material used now the next is we're going to add the direct label of course so on the direct labor although .
It has not been directly given you have been given details let's say for example the direct labor ares used by job a and job b and the raid so we're gonna use those things in order to compute the amount for direct labor so how do we do that so we have our computation right here .
We have the direct labor hours used by both job a and job b is four two plus three five equals seven thousand seven hundred rs so you just need to multiply it with five point five which is the weight per direct labor are used so we have .
Forty two thousand three hundred fifty so you can already put here forty two thousand three hundred fifty and next is we need to find the applied factory overhead which is easy why because the direct labor hours is already here and of course the rate has already been .
Given so you just have to multiply 7 700 rs times 6.1 then you have 46 970 and you can put it right here now these three if you are going to add them all up you're gonna get the total manufacturing cost of 167 820 now based on our knowledge .
Earlier we need to add the wip beginning which is according to the problem is job a now it's already given that is 31 200 so no need to compute so 167 820 plus 31 200 then you have the goods placed in process 199 0 20. now you deduct .
The unfinished and we all know that job b is the unfinished however the wip end cost or the job b's cost was not given so you need to compute that so how do we compute the cost for job b first let's talk about the direct material used by the job .
According to the problem job b used 33 500 direct materials and we go to the direct labor it used 3500 rs times 5.5 that's 19250 and the applied factory overhead is easy because you just have to multiply the 3 500 rs times 6.1 then you have 21 350 .
And then we have 74 100 so the cost of job b which is the wipn because it isn't finished is 74 100 so you record that and then you're gonna get the cost of goods manufactured or the cost of the finished or job a because it's specific in the problem that job a was finished .
So we have one two four nine twenty sir we do not believe that the cost of job a is one two four nine twenty based on this we wanted to have a specific computation like this one on the job b so let's prove that job a's cost is really one two four nine twenty how do we do that so first let's put .
Here the cost of job a in the prior period 31 200 and then it used direct materials worth 45 000 and then it used direct labor in number of hours that's 4 200 times 5.5 the direct labor rate so we have 23 100 and the applied factor the overhead .
Of course is 42 times 6.1 so 25 620 you add them all up and i'm pretty sure that is still one two four nine twenty so no need to be confused on what is this one two four nine 20 because we have already our proof now aside from that you need to add the .
Finished goods beginning but since there is no mention with the finished goods beginning we put their zero so meaning we have the goods available for sale of 124 920 also there is no mention again with the finished goods ending so we put here zero so we have our cost .
Of sales before the adjustment for actual factory overhead of 124 920 but since we need to deconcile the actual fact of the overhead or the factory overhead control account and the applied factory overhead let's make an entry let's close the .
Applied factory overhead by debiting it the applied factory overhead again is 46 970 and then the factory overhead control which is i've mentioned in the analysis is 46 000 then there is an over application of 970 and since there is no mention on how to allocate .
This or how to close the over applied factory overhead then we're going to use the method three that i have said on the last slide so the over applied factory overhead will be debited to close it and then you close it on the account which is the cost of sales .
917 now this 970 will be deducted on the cost of sales why because the cost of sales normal balance is debit and according to here it should be credited so since they don't have the same normal balance you deduct 970 from one two four nine twenty .
And then we have the cost of sales adjusted one two three nine fifty so if we're going to go back to the requirements the cost of sales before adjustment for actual factory overhead is one two four nine twenty the cost of sales after adjustment is one two three nine fifty the direct .
Materials end is thirty three thousand and the work in process end is seventy four thousand one hundred so we are now on the part five part five is all about job order cost system so what is this job order cost system as mentioned a while ago is a cost accumulation system used by companies who manufacture made to order .
Or customized products based on customers specifications like made to order furniture and others the costs raw materials the labor and factory overhead in this system are accumulated per job let us say for example your company has two departments one and .
Two each of those departments will make a job cost sheet per job and list all the direct material cost direct labor cost and applied factory overhead incurred by a particular job so we have an example here of a job cost sheet .
So we have the milling department and it is working on the job number 2b47 in here the department listed the direct materials the direct labor and factory overhead used by job 2b47 there is also a cost summary and as well as the date it started the work and the .
Date it was completed so for example if the good still needs further processing from other departments the other departments will also prepare a job cost cheat for job number 2b47 and if it is 100 complete already all the job cost sheets by the different departments .
Will be summarized to get the total cost of the job to be 47 so that's the end of our content for this video you're welcome to play pause and replay this video until you are satisfied and if it helped help me also by subscribing liking and sharing this video to other .
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