Manufacturing costs refer to the expenses incurred in the

production of goods in a manufacturing firm. They can be

classified into three main categories:
1. Direct materials: These are the raw materials that are used
in the production of goods. Direct materials are those that
can be easily traced to a specific product, such as lumber
used to make furniture or steel used to manufacture cars.
2. Direct labor: These are the wages and salaries paid to
employees who are directly involved in the production of
goods. Direct labor costs can be easily traced to a specific
product, such as wages paid to assembly line workers who
build cars.
3. Manufacturing overhead: These are the indirect costs
associated with the production of goods. They include
expenses such as rent, utilities, depreciation of machinery,
and indirect labor costs (e.g. salaries of supervisors,
maintenance personnel, etc.). Manufacturing overhead costs
cannot be easily traced to a specific product and are
allocated across all products produced by the manufacturing
firm.

Examples of non-manufacturing costs include:

1. Selling and distribution costs: These are the expenses
incurred in marketing and selling the company's products,
such as advertising, sales commissions, and shipping costs.
2. Administrative expenses: These are the expenses
associated with managing the business, such as salaries of
executives and administrative staff, office supplies, and rent
for office space.
 3. Research and development costs: These are the expenses
incurred in researching and developing new products or
improving existing products.
4. Interest and financing costs: These are the expenses
associated with borrowing money, such as interest payments
on loans and other forms of financing.
5. Legal and accounting expenses: These are the expenses
incurred for legal and accounting services, such as fees paid
to lawyers, accountants, and consultants.

Indirect labor costs refer to the costs associated with employees

who are not directly involved in the production process, but who
still contribute to the operation of the business. These costs are
typically included in the manufacturing overhead and are
allocated across all products produced by the manufacturing firm.

Examples of indirect labor costs include:

1. Supervisors and managers: These employees oversee the
production process and provide guidance and support to
direct labor workers.
2. Maintenance personnel: These employees are responsible
for maintaining and repairing machinery and equipment used
in the production process.
3. Quality control inspectors: These employees ensure that
the products meet the company's quality standards and
specifications.
 4. Material handlers: These employees are responsible for
moving raw materials and finished products throughout the
production process.
5. Cleaning and sanitation personnel: These employees
maintain a clean and safe working environment for the
production workers.
6. Administrative and support staff: These employees
perform various administrative and support functions, such
as human resources, accounting, and information
technology.
Indirect labor costs can vary depending on the size and
complexity of the production process. They are important to
consider when calculating the total cost of producing goods and
can impact the company's profitability and financial performance.

Here are examples of journal entries for accounting for materials

under perpetual and periodic inventory systems:
Perpetual inventory system:
Assume that a manufacturing company purchased $5,000 of raw
materials on credit from a supplier.
1. Journal entry to record the purchase of raw materials: Debit
Raw materials inventory $5,000 Credit Accounts payable
$5,000
2. Journal entry to record the use of direct materials in
production: Debit Work in process inventory $4,000 Credit
Raw materials inventory $4,000
 3. Journal entry to record the use of indirect materials in
production: Debit Manufacturing overhead $500 Credit Raw
materials inventory $500
4. Journal entry to record the payment to the supplier: Debit
Accounts payable $5,000 Credit Cash $5,000
Periodic inventory system:
Assume that a manufacturing company purchased $10,000 of raw
materials on credit from a supplier.
1. Journal entry to record the purchase of raw materials: Debit
Purchases $10,000 Credit Accounts payable $10,000
2. Journal entry to record the use of direct materials in
production: Debit Work in process inventory $8,000 Credit
Purchases $8,000
3. Journal entry to record the use of indirect materials in
production: Debit Manufacturing overhead $1,000 Credit
Purchases $1,000
4. Journal entry to record the payment to the supplier: Debit
Accounts payable $10,000 Credit Cash $10,000
In a periodic inventory system, the cost of materials used in
production is determined at the end of the accounting period by
taking a physical inventory count and applying the appropriate
cost of goods sold formula. In a perpetual inventory system, the
cost of materials used in production is constantly updated in real-
time as goods are manufactured and materials are consumed.

Sure, here are examples of accounting for labor journal entries:

1. Journal entry to record direct labor costs: Debit Work in
process inventory $X Credit Wages payable $X
This journal entry records the direct labor costs incurred in the
production process. The debit is to Work in process inventory,
which is an asset account that represents the cost of the
materials, labor, and overhead used to produce the goods. The
credit is to Wages payable, which is a liability account that
represents the amount owed to the employees for their labor.
2. Journal entry to record indirect labor costs: Debit
Manufacturing overhead $X Credit Wages payable $X
This journal entry records the indirect labor costs incurred in the
production process. The debit is to Manufacturing overhead,
which is an expense account that represents the indirect costs of
producing goods, such as supervision and maintenance. The
credit is to Wages payable, which is a liability account that
represents the amount owed to the employees for their labor.
3. Journal entry to record payment of wages: Debit Wages
payable $X Credit Cash $X
This journal entry records the payment of wages to employees.
The debit is to Wages payable, which decreases the liability
account as the amount owed to the employees is paid. The credit
is to Cash, which is an asset account that represents the amount
of money paid to the employees.
4. Journal entry to record payroll taxes and other deductions:
Debit Payroll taxes and deductions $X Credit Cash $X
This journal entry records the amount of payroll taxes and other
deductions withheld from employee wages. The debt is to Payroll
taxes and deductions, which is an expense account that
represents the amount of money withheld from employee wages
for payroll taxes, benefits, and other deductions. The credit is to
Cash, which is an asset account that represents the amount of
money paid to the government and other third-party entities.
Proper accounting for labor costs is important for companies to
accurately determine the cost of producing their products and to
make informed decisions regarding pricing and profitability.

some sample manufacturing accounting transactions for

both periodic and perpetual inventory systems:
Periodic Inventory System:
1. Purchased raw materials on credit.
2. Issued raw materials to production.
3. Incurred labor costs and manufacturing overhead.
4. Completed production of finished goods.
5. Sold finished goods on credit.
6. Recorded cost of goods sold at the end of the period.
Perpetual Inventory System:
1. Purchased raw materials on credit and recorded them in the
raw materials inventory account.
2. Issued raw materials to production and recorded the cost in
the work in process inventory account.
3. Incurred labor costs and manufacturing overhead and
recorded them in the work in process inventory account.
4. Completed production of finished goods and recorded the
cost in the finished goods inventory account.
5. Sold finished goods on credit and recorded the revenue in
the sales revenue account and the cost in the cost of goods
sold account.
Here are the journal entries for the above transactions using
both periodic and perpetual inventory systems:
Periodic Inventory System:
1. Debit Raw materials purchases, credit Accounts payable.
2. Debit Work in process inventory, credit Raw materials
inventory.
3. Debit Work in process inventory for direct labor costs, debit
Manufacturing overhead for indirect labor and overhead
costs, credit Wages payable for direct labor, credit Accounts
payable for indirect labor and overhead costs.
4. Debit Finished goods inventory, credit Work in process
inventory.
5. Debit Accounts receivable, credit Sales revenue.
6. Debit Cost of goods sold, credit Finished goods inventory.

Perpetual Inventory System:

1. Debit Raw materials inventory, credit Accounts payable.
2. Debit Work in process inventory, credit Raw materials
inventory.
3. Debit Work in process inventory for direct labor costs, debit
Manufacturing overhead for indirect labor and overhead
costs, credit Wages payable for direct labor, credit Accounts
payable for indirect labor and overhead costs.
4. Debit Finished goods inventory, credit Work in process
inventory.
5. Debit Accounts receivable, credit Sales revenue. Debit Cost
of goods sold, credit Finished goods inventory.
SSS premiums for factory workers are considered part of direct labor costs
because they are directly tied to the cost of employing and compensating
the workers who are directly involved in the production process. Direct
labor costs are expenses that can be traced back to the specific production
of a product, such as wages, salaries, and benefits of employees who work
directly on the production line.

The SSS premiums are paid by the employer on behalf of the employees
and are considered part of the employee compensation package. Since
these premiums are directly associated with the cost of employing workers
who are directly involved in the production process, they are considered as
part of the direct labor costs.

In short, SSS premiums for factory workers are considered as part of direct
labor because they are directly related to the cost of compensating workers
who are directly involved in the production process.

Direct materials:
1. Wood - used to make the frame of the furniture
2. Fabric - used to cover the cushions
3. Foam - used to make the cushions
Direct labor:
1. Wages of carpenters - who make the furniture frames
2. Wages of upholsterers - who cover the frames with fabric
and foam
3. Wages of finishers - who apply the finishing touches to the
furniture
Manufacturing overhead:
1. Rent on the factory building - which houses the production
line
2. Depreciation on machinery - used to manufacture the
furniture
3. Electricity and water used in the factory
4. Indirect labor costs, such as salaries of production
supervisors and quality control inspectors
5. Insurance and property taxes on the factory building and
equipment
6. Repairs and maintenance of machinery and equipment used
in the production process
These are just a few examples of the types of costs that a
manufacturing company would incur in producing furniture. It's
important for companies to properly classify these costs as either
direct or indirect, and to accurately allocate them to the products
being produced in order to calculate the total cost of goods sold
and make informed decisions about pricing and profitability.

Indirect materials:
1. Cleaning supplies - used to keep the factory floor clean and
tidy
2. Lubricants - used to keep machinery operating smoothly
3. Office supplies - such as pens, paper, and staplers used by
administrative staff
Indirect labor:
1. Janitorial staff - responsible for cleaning the factory floor and
facilities
2. Maintenance staff - responsible for repairing and maintaining
machinery and equipment
3. Security staff - responsible for ensuring the safety and
security of the factory and its workers
4. Administrative staff - such as human resources personnel
and accounting staff who support the manufacturing
operations, but are not directly involved in production.
Indirect materials and indirect labor costs are expenses that
cannot be directly traced to a specific product or production
process. They are necessary to keep the factory operating
smoothly and to support the production process, but are not
directly involved in the creation of the final product.

Prime cost is the sum of direct materials cost and direct

labor cost that are required to produce a product. In other
words, prime cost refers to the direct costs that are directly
related to the manufacturing of a product and do not include any
indirect costs such as manufacturing overhead.
For example, let's say a company is manufacturing wooden
chairs. The direct materials cost would include the cost of wood,
screws, glue, and other materials used to manufacture the chairs.
The direct labor cost would include the wages of the carpenters
who are directly involved in the production process of the chairs.
The sum of these two costs is the prime cost of producing the
wooden chairs.
So, if the cost of wood and other direct materials is $100 and the
cost of direct labor is $50, the prime cost of producing the wooden
chairs is $150. The prime cost is an important figure for
manufacturing companies to determine the total cost of producing
a product and to make decisions related to pricing and
profitability.

Manufacturing cost, also known as product cost, is the total

cost of producing a product, including direct materials, direct
labor, and manufacturing overhead costs. These costs are
necessary to create and manufacture a product and are directly
tied to the production process.
Here is an example of manufacturing cost for a company that
produces bicycles:
Direct materials:
 Aluminum frame
 Gears
 Chains
 Tires
Direct labor:
 Wages for assemblers who put together the bicycle
Manufacturing overhead:
 Rent for the factory building
 Electricity and water used in the factory
 Depreciation on manufacturing equipment
 Salaries for quality control inspectors
  Indirect labor, such as cleaning staff and security personnel
If the direct materials cost for the bicycle is $200, and the direct
labor cost is $100, and the manufacturing overhead cost is $150,
the total manufacturing cost or product cost of the bicycle is $450.
This figure is important for companies to determine the total cost
of goods sold and to make informed decisions about pricing and
profitability.

Conversion cost is the sum of direct labor cost and

manufacturing overhead cost incurred in converting raw
materials into finished products. It represents the costs
incurred to convert the raw materials into finished products,
excluding the cost of the raw materials themselves.
In other words, conversion cost is the cost of the production
process that directly results in the transformation of raw materials
into finished goods. This includes the cost of the direct labor
required to manufacture the goods, as well as the cost of the
overhead that is required to run the production process.
Here's an example of conversion cost:
Suppose a company produces furniture. The direct materials cost
for producing a piece of furniture is $100. The company incurs
$50 in direct labor costs and $75 in manufacturing overhead
costs. In this case, the conversion cost for the furniture is $125
($50 + $75), as this is the total cost of converting the raw
materials into finished furniture.
Conversion cost is an important figure for manufacturing
companies, as it can be used to calculate the total cost of
production and help to determine the selling price of the final
product.

Raw materials inventory includes all the materials that a

company has purchased and intends to use in the
production process. These materials may be in various stages
of completion, such as being in their original state or partially
processed, but they have not yet been used to create a finished
product.
Examples of raw materials that might be included in raw
materials inventory include:
1. Wood, metal, plastic, or other materials used in
manufacturing
2. Chemicals or other substances used in the creation of
products
3. Electronic components used in the production of electronics
4. Fabric, thread, and other materials used in the creation of
clothing and textiles
5. Seeds, fertilizers, and other agricultural products used in
farming
6. Fuel or energy sources used in manufacturing processes
Raw materials inventory is an important asset for manufacturing
companies, as it represents the materials that will be used to
create the finished product. Proper management of raw materials
inventory is essential to ensure that the company has enough
materials on hand to meet production demands, while avoiding
overstocking, waste, or spoilage of materials.
Work in progress inventory, also known as progress
inventory or WIP inventory, includes all the partially
completed products that are in the process of being
manufactured but have not yet been completed. This inventory
account reflects the value of the materials, labor, and overhead
costs that have been incurred in the production process, but have
not yet been completed or transferred to finished goods inventory.
Examples of items that might be included in work in progress
inventory include:
1. Semi-finished products such as incomplete furniture or
partially assembled electronics
2. Products that are in the process of being manufactured or
assembled but are not yet complete
3. Products that are undergoing repairs or modifications
4. Products that are in the testing or quality control phase
Work in progress inventory is important for manufacturing
companies because it reflects the value of partially completed
products that are in the production process. Proper management
of WIP inventory is important to ensure that the company can
fulfill production demands and deliver finished products on time. It
also helps the company to accurately track the costs associated
with the production process, including the cost of materials, labor,
and overhead.