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Manufacturing Account

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Intro

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Business which buy raw materials and convert these into finished products which then sold

Manufacturing Business

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Example

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Elements of Manufacture Cost

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1. Direct materials • Costs of the materials used during the

period.• Include the purchase price of the raw

materials and the acquisition costs related to the purchase.

• Examples: Purchase of raw materials Carriage inwards / freight

charges on raw materials

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2. Direct labour• Wages paid to the people who are directly

involved in the manufacturing process.• Example: Direct labour, Direct wages, Factory

wages, Production wages, Manufacturing wages

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3. Direct expenses• They refer to the expenses paid according to

each unit of production.• Examples: Royalties

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Cost incurred in the manufacturing process, but they cannot be traced directly to the goods being produced.

Include indirect materials, indirect labour and indirect expenses.

Examples:◦ Indirect materials

Lubricants Loose tools

◦ Indirect labour wages, salaries, bonus or commission to cleaners,

crane drivers, foremen, supervisors and production managers.

4) Factory Overhead Expenses / Indirect Costs

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◦ Indirect expenses related to the factory, machinery and vehicles Rent and rates Depreciation Insurance Repairs and maintenance Factory power / electricity Internal transport Loss on disposal

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Production cost = Prime cost / Direct cost + Factory overhead

expenses / Indirect cost

Production Cost

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It refers to the semi-finished goods, which should be included in the cost of goods manufactured.

Work in Progress

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It shows the production cost or transfer price of goods completed during the accounting period.

1. Direct materials2. Direct labour3. Direct expenses4. Factory overhead expenses5. Work in progress6. Manufacturing profit / loss

Manufacturing Account

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This account shows the gross profit or loss resulted from the trading of manufactured and other purchased goods.

The account includes:◦ Sales◦ Cost of goods sold

Manufactured goods Other goods

Trading Account

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Profit or loss of the whole business during the accounting period.

Includes all the expenses and income related to the office and the running of the whole business such as:◦ Gross profit / loss from the trading account◦ Manufacturing profit / loss

Profit and Loss Account

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◦ Administration expenses

◦ Selling and distribution expenses

◦ Financial expenses

◦ Increase / decrease in the provision for unrealized profit

◦ Net abnormal loss cash misappropriated losses of raw materials losses of finished goods

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Some expenses are related to both the manufacturing process and the administration of the office such as:◦ Rent and rates◦ Electricity◦ Insurance◦ Depreciation on premises◦ Motor vehicles◦ Motor vehicles expenses

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These expenses should be allocated to the factory and office and debited to the manufacturing account and the profit and loss account respectively.

The bases of allocation are usually given in the examination questions.

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Format of Manufacturing & Trading Account

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Manufacturing Accountfor the year ended 31 Dec XXXX

$ $Opening stock of Raw Materials XAdd: Purchases of Raw Materials X Carriage inwards XLess: Closing stock of Raw Materials (X)Cost of Raw Materials Consumed XDirect Wages XDirect Expenses: Royalties XPrime Cost XFactory Overhead Expenses:

Loose Tools (opening bal. + purchases –closing bal.) XRent (e.g. 25%) XProduction Manager’s salaries XFactory Power XMaintenance of plant & Machinery X

Depreciation of Plant & Machinery X X X

Direct material

Direct labour

Direct Expenses

Overhead

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Add: Opening Work in Progress XLess: Closing Work in Progress XProduction Cost of Goods Completed X

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Trading Accountfor the year ended 31 Dec XXXX

Sales XLess: Returns inwards (X) XLess: Cost of Sales

Opening stock of finished goods X Production cost of Goods completed X

Purchases of finished goods XLess: Returns outwards (X )Less: Closing stock of finished goods (X) X

Gross Profit X

The goods are transferredto trading a/c at productioncost

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$ $

Profit & Loss Account

Gross Profit XAdd: Revenues Discount Received X X Less: Expenses

Carriage Outwards XRent (e.g. 75%) XDiscount allowed XAdministration Expenses XDistribution Expenses XSelling Expenses XDepreciation of Delivery Van X X

Net Profit X

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The End