Manufacturing Concerns Note 1

Manufacturing Concerns
Note 1
Learning Objectives:
1. Compare the activities prevalent to merchandising and manufacturing entities;

2. Identify the elements of manufacturing costs;
List the manufacturing inventory accounts.
Reference:
Fundamentals of Financial Accounting and Reporting by Win Ballada
Comparing Merchandising and Manufacturing Activities
Merchandising and manufacturing entities earn revenues by selling goods. A merchandising

entity normally buys a product that is ready for resale when it is received. A manufacturer
buys raw materials and processes them into finished goods that it sells to customers.
Therefore, the main difference between the two is the way they acquire inventory for resale.
Comparison is helpful for appreciation of our subject matter. Below is the Venn diagram
showing the difference between manufacturing and merchandising activities:
MANUFACTURING BUSINESS – a business that buys raw materials and converts them into
finished goods.
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Note 1
Common examples of manufacturing business in the Philippines
COMPANY PRODUCTS
Nestlé Philippines Maggi, the Orchard Juices, Milo, KLIM,

Nescafé, Carnation, Purina and Nestum
Del Monte Philippines Del Monte Pineapple Juice, Del Monte

Ketchup, Del Monte Sweet Chili Sauce
Procter & Gamble Ariel, Downy, Gillette, Pantene, Head and

Shoulders
To illustrate, PureGold Duty Free, like other merchandisers, buy ready-make inventory to
resale to customers. Determining PureGold’s cost for the shoes is relatively easy. Cost is the
price that the merchandiser paid for the shoes plus incidental costs.
Entities that supply athletic shoes to merchandisers utilize their laborers and factory assets to
convert raw materials into finished goods. Their manufacturing processes begin with materials
such as cloth, rubber and plastics. These materials are cut, glued, stitched, and formed into
athletic rubber plastics. The process of converting materials into finished products makes it
more difficult to measure the inventory cost of a manufacturer.
ELEMENTS OF MANUFACTURING COSTS
Manufacturing costs include all costs related to the production process. They are classified
into three categories:
DIRECT MATERIALS DIRECT LABOR MANUFACTURING OVERHEAD
These materials It is the compensation of This includes all manufacturing costs

become a physical part employees or workers that cannot be classified as direct
of a finished product. who physically convert materials or direct labor. Major
Their cost can raw materials into classifications of this cost follow:
conveniently and finished goods. Direct 1. Indirect material and supplies.
economically traceable labor includes the wages Example: supplies. Glue, thread,
to the finished product. of the machine operators nails, rivets, lubricants and small
and the person who tools.
assemble the shoes. The 2. Indirect labor cost. Salaries of
efforts of these persons plant managers and engineers,
direct traceable to the wages of forklift operators.
finished product. 3. Other indirect manufacturing
costs. Includes building,
machinery and tools
maintenance, real property
taxes, property insurance, rent
expense, utilities expenses and
depreciation on property and
equipment.
PRIME COSTS
CONVERSION COSTS
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Note 1
PRODUCT COSTS VS PERIOD COSTS
Product cost Period Cost
is an inventoriable cost that is subject to is a cost that is charged as fully expense in

allocation between sold units (expense – the period incurred, regardless of sale
Cost of Goods Sold) and unsold units (asset – performance.
Inventory). Example: Administrative and Selling costs
Example: Manufacturing costs and expenses
MANUFACTURING INVENTORY ACCOUNTS
Accounting for inventory differs between merchandisers and manufacturers Merchandisers

need only one category of inventory for finished goods they buy and sell. In contrast
manufacturers have various inventory accounts, as follows:
Finished Goods Work in Process Raw Materials Factory Supplies

Inventory Inventory Inventory Inventory
It is the cost of This account gives This account holds It is the cost of
completed goods the cost of the goods the cost direct unused indirect
that are remained that are in the materials on hand materials at period
unsold at the manufacturing that is intended end.
end of accounting process but are not for use of
period. This yet complete at the manufacturing
inventory is what the end of the process.
manufacturers sell to accounting period.
the merchandisers.
The abovementioned inventory accounts are classified as assets to manufacturers and are
reported as assets in the statement of financial position.
ASSIGNMENT 1.
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Manufacturing Concerns

1. Compare the activities prevalent to merchandising and manufacturing entities;

Comparing Merchandising and Manufacturing Activities

Merchandising and manufacturing entities earn revenues by selling goods. A merchandising

Common examples of manufacturing business in the Philippines

Nestlé Philippines Maggi, the Orchard Juices, Milo, KLIM,

Del Monte Philippines Del Monte Pineapple Juice, Del Monte

Procter & Gamble Ariel, Downy, Gillette, Pantene, Head and

ELEMENTS OF MANUFACTURING COSTS

DIRECT MATERIALS DIRECT LABOR MANUFACTURING OVERHEAD

These materials It is the compensation of This includes all manufacturing costs

PRODUCT COSTS VS PERIOD COSTS

Product cost Period Cost

is an inventoriable cost that is subject to is a cost that is charged as fully expense in

MANUFACTURING INVENTORY ACCOUNTS

Accounting for inventory differs between merchandisers and manufacturers Merchandisers

Finished Goods Work in Process Raw Materials Factory Supplies

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