manufacturing-accounts teaching guide

8/11/2019 Manufacturing-Accounts Teaching Guide

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Chapter 7:Manufacturing Account



TYPES OF INVENTORY

Raw materials

Work in progress

Finished goods/completed goods



TYPES OF PRODUCTION COST

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Prime cost/Direct cost

Overheadcost/

Indirect cost

Productioncost

Direct materials

Direct labor

Direct expenses

Indirect materials

Indirect labor

Indirect expenses



PRIME COST

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1. Direct materials

• Costs of the materials used during the period.

• Include the purchase price of the raw materialsand the acquisition costs related to the purchase.

• Examples: Purchase of raw materials,

Carriage inwards / freight charges on rawmaterials



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2. Direct labour

• Wages paid to the people who aredirectly involved in the manufacturingprocess.

• Example: Direct labour, Direct wages,Factory wages, Production wages,Manufacturing wages



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3. Direct expenses

• They refer to the expenses paidaccording to each unit of production.

• Examples: Royalties, hire purchase ofspecial materials



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1. Indirect materials Lubricants Loose tools

2.Indirect labour wages, salaries, bonus or commission to

cleaners, crane drivers, foremen, supervisorsand production managers.

OVERHEAD COST



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3. 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



FINANCIAL STATEMENT

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1. Manufacturing Account

2. Income Statement

3. Balance Sheet



1) Manufacturing Account

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

Direct materials

Direct labour

Direct expenses Factory overhead expenses

Work in progress

Factory profit



Manufacturing Account for the year ended…….

Opening stock of Raw Materials X

Add: Purchases of Raw Materials X

Return Outwards (raw materials) (X)Carriage inwards (raw materials) (X)

Drawings (raw materials) (X)

X

X

Less: Closing stock of Raw Materials (X)Cost of Raw Materials Consumed X

Direct Labor Wages X

Royalties X

Prime Cost XFactory Overhead Expenses:

Production Manager’s salaries X

Factory Power X

Maintenance of Plant & Machinery X

Depreciation of Plant & Machinery X X

Direct material

Direct labour

Direct Expenses

Overhead



Add: Opening Work in Progress X

Less: Closing Work in Progress X

Production Cost of finished goods X

Factory profit (% PCFG) XTransfer price of finished goods X



2) Income Statement

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Profit or loss of the whole business during theaccounting period.

Includes all the expenses and income related tothe office and the running of the whole business

such as: Gross profit / loss from the trading account

Factory profit / loss

Administration expenses

Selling and distribution expenses

Financial expenses

Increase / decrease in the provision for unrealized

profit



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Sales X

Less: Returns inwards (X)

X

Less: Cost of Goods Sold

Opening stock of finished goods X

add: Transfer price of Finished goods X

Less: Drawings (finished goods) (X)

Returns outwards (X)

Xless: Closing stock of finished goods (X)

(X)

Gross Profit X

Add: Factory Profit X

Add: Other revenueDiscount Received X

Reduction in provision for unrealized profit X

X

Income Statement for the year ended ……



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Less: Other Expenses

Selling expenses

commissions on sales XXX

salesman salaries XXX

carriage outwards XXX

depreciation of delivery van XXX

Administrative expenses

rental XXX

depreciation of office equipment XXX printing XXX

postage XXX

Financial charges

bad debts XXXdiscount allowed XXX

interest XXX

increase in provision for unrealized profit XXX

XXX

Net profit XXX



3) Balance Sheet

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It shows the assets, liabilities and equities of theWhole business on a specific date of the accounting

period.

Assets (closing inventory : raw materials, WIPs,

and finished goods)

Liabilities

Equities



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Non-current Assets X

Current Asset

Inventory :-raw materials X-work in progress X

-finished goods X

less: provision for unrealized profit (X) X

Total assets X

Financed by:

Owner`s capital

Opening capital X

Add: net profit X

Less: drawings (X)

X

Non-current liabilities X

Current liabilities X

Total liabilities and owner`s capital X

Balance Sheet as at………….



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Some expenses are related to both themanufacturing process and the administration

of the office such as: Rent, electricity, insurance,depreciation on premises, motor vehicles etc.

These expenses should be allocated to thefactory and office and debited to the

manufacturing account and the profit and lossaccount respectively.

In the event of examinations, the bases ofallocation are usually given.

IMPORTANT TO NOTE



Production cost Vs. Transfer price

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Stock of raw materials, work in progress andother finished goods are valued at cost.

However, the stock of manufactured goodscan be valued at production cost or the

transfer price of goods completed.

Provision of unrealized profit of on stockshould be made if closing stock ofmanufactured goods is valued at transferprice.



Provision of Unrealized Profit

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Mark up%

100%+ Mark up(%)= Stock (at transfer price) x

Increase/ Decreased in Provision of Unrealized

Profit

Increase in Provision

(other expenses)

Reduction in Provision

(other revenues)

Dr Profit and Loss

Cr Provision forUnrealized Profit

Dr Provision for

Unrealized ProfitCr Profit and Loss

Adj



Expenses

Balance b/d (prepaid) Balance b/d (accrued)

Balance c/d (prepaid)Balance c/d (accrued)

Cash/Bank Income Statement

Drawings (expenses)Acc. Rec. ( for dis.

allowed)

Adjustment on expenses

Income Statement Income statement (admin)

Manufacturing account (factory)



Revenue

Balance b/d (prepaid)Balance b/d (accrued)

Balance c/d (prepaid) Balance c/d (accrued)

Cash/BankIncome Statement

Acc. Pay (fordis.received)

Adjustment on revenue

Income Statement Income statement (admin)

Manufacturing account (factory)



Accum. depreciation of non-current assets

Balance b/d)Balance c/d

Income Statement

Depreciation for current years1.Policy given2.No policy (cost-NBV)

Accum. depreciation for previous years1.Stated in question2.cost-NBV

Adjustment on depreciation



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A company manufactures and sells it own products.

It also purchases and sells other finished goods.

Production 100 units $1@ $100

Sales 80 units $2@ $160Closing stock 20 units $1@ $20

Expenses for this period $50

Prepare manufacturing, trading and profit and loss

account for the following 2 situations would be

shown:

1. The factory output is transferred to the tradingaccount at factory cost.

2. The factory output is transferred to the tradingaccount at factory cost plus 20% factory profit, andthe stock of manufactured goods is valued at

transfer price.



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1.

$ $

Production cost of Gd completed (100 units*$1) 100

Sales (80 units*$2) 160

Less: COGS

Production cost of Gd completed 100

Less: Closing stock (at cost) (20 units*$1) 20 80

Gross Profit 80

Less: Expenses

Expenses 50

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Manufacturing, trading and profit and loss account (extract)



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2.

$ $

Production cost of Gd completed (100 units*$1) 100

Add: Manufacturing profit (100*0.2) 20

Transfer price of Gds completed 120

Sales (80 units*$2) 160

Less: Cost of goods sold

Transfer price of Gd completed 120Less: Closing stock (at transfer price) (20+20*0.2) 24 96

Gross Profit 64

Add: Manufacturing profit 20

84Less: Expenses

Expenses 50

Provision for unrealized profit (24*20/120) 4 54

Net Profit 30

Cost + profit

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