The Following Information Was Taken From The Accounting Records Of The
The following information was taken from the accounting records of the Superior Company: Depreciation of equipment $70,000, direct labor $120,000, factory taxes $2,000, goods in process inventory, December 31, 2013 $250,000, indirect labor $10,000, power $16,000, raw materials inventory, December 31, 2013
$60,000, raw materials purchases for the year $230,000, goods in process inventory, January 1, 2013 $302,000, raw materials inventory, January 1, 2013 $110,000. Please prepare the Manufacturing statement for Superior Manufacturing Company. Provide information about the company, job order cost. Additionally, address the following:
1. Explain the conceptual difference between total manufacturing costs and cost of goods manufactured. What does it mean?
2. The factory overhead account must be adjusted at the end of an accounting period. Explain why this adjustment is needed and the consequences to the financial statements if the adjustment is not made.
Paper For Above instruction
The Superior Manufacturing Company operates using a Job Order Cost system, which necessitates detailed recording of costs associated with specific jobs or batches. Based on the provided data, this paper will prepare the manufacturing statement and explain essential concepts related to manufacturing costs and factory overhead adjustments.
Manufacturing Statement for Superior Manufacturing Company
The manufacturing statement, also known as the Schedule of Cost of Goods Manufactured, summarizes the total manufacturing costs incurred during a period, the beginning and ending inventories of work-in-process, and computes the cost of goods manufactured (COGM). Based on the provided data, the calculations proceed as follows:
Total Raw Materials Used
Beginning raw materials inventory (Jan 1, 2013): $110,000
Add: Raw materials purchased during the year: $230,000
Less: Raw materials inventory, Dec 31, 2013: $60,000
Raw materials available for use: $280,000
Less: Raw materials ending inventory: $60,000
Total raw materials used in production: $220,000
Direct Manufacturing Costs
Direct labor: $120,000
Factory overhead includes items such as factory taxes ($2,000), indirect labor ($10,000), power ($16,000), and depreciation of equipment ($70,000). These total to $98,000.
Total Manufacturing Costs Incurred
Total direct costs: $120,000 (direct labor) + $98,000 (factory overhead) = $218,000
Cost of Goods Manufactured (COGM)
Beginning work-in-process inventory: $302,000
Add: Total manufacturing costs incurred: $218,000
Less: Ending work-in-process inventory: $250,000
Cost of Goods Manufactured: ($302,000 + $218,000) - $250,000 = $270,000
Summary of Manufacturing Statement
Raw Materials Used: $220,000
Direct Labor: $120,000
Factory Overhead: $98,000
Total Manufacturing Costs: $438,000
Beginning Work-in-Process Inventory: $302,000
Ending Work-in-Process Inventory: $250,000
Cost of Goods Manufactured: $270,000
Conceptual Difference Between Total Manufacturing Costs and Cost of Goods Manufactured
Total manufacturing costs encompass all costs incurred during a specific period for producing goods. These include direct materials, direct labor, and factory overhead costs. Essentially, it is the sum of all
expenses related to production during the reporting period.
Conversely, the cost of goods manufactured (COGM) is a calculated figure that represents the total cost of finished goods that are completed and ready for sale during that period. It considers the beginning work-in-process inventory, adds total manufacturing costs incurred during the period, and subtracts ending work-in-process inventory. Therefore, while total manufacturing costs represent expenses incurred, COGM reflects the cost of goods that have moved through the production process into finished goods inventory.
In simpler terms, total manufacturing costs are the expenses accrued during production, whereas COGM is an output measure indicating the total value of goods completed during the period.
Necessity of Factory Overhead Adjustment at Period-End
Factory overhead encompasses indirect manufacturing costs that cannot be traced directly to specific jobs, such as factory taxes, indirect labor, utilities, and depreciation. Usually, companies allocate overhead to jobs based on predetermined rates. However, the actual overhead incurred may differ from the allocated amount due to fluctuations in costs or estimation errors.
At the end of an accounting period, it is essential to adjust the factory overhead account to reconcile allocated overhead with actual costs incurred. This adjustment ensures the accuracy of product costs, inventory valuations, and cost of goods sold (COGS). If the factory overhead is overapplied (allocated more than actually incurred), it can lead to an overstated profit and distorted financial statements. Conversely, underapplied overhead (less than actual costs) results in understated profit and inaccurate inventory valuations.
Failing to adjust factory overhead can cause significant misstatements in financial reports, misleading management and external stakeholders regarding the company's profitability and operational efficiency. Proper adjustments through end-of-period closing entries help maintain the integrity and reliability of financial data, ensure compliance with generally accepted accounting principles (GAAP), and facilitate more accurate managerial decision-making.
In conclusion, period-end adjustment of factory overhead is a critical step in cost accounting that preserves the fidelity of financial statements by aligning incurred costs with allocated amounts.
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