Manufacturing account

1. 1 Chapter 7: Manufacturing Account

2. TYPES OF INVENTORY Raw materials Work in progress Finished goods/completed goods

3. TYPES OF PRODUCTION COST 3 Prime cost/ Direct cost Overhead cost/ Indirect cost Production cost Cost incurred in the manufacturing process, but they cannot be traced directly to the goods being produced. Direct materials Direct labor Direct expenses Indirect materials Indirect labor Indirect expenses

4. PRIME COST 4 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

5. 5 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

6. 6 Direct expenses They refer to the expenses paid according to each unit of production. Examples: Royalties, hire purchase of special materials

7. 7 1. Indirect materials Lubricants Loose tools 2.Indirect labour wages, salaries, bonus or commission to cleaners, crane drivers, foremen, supervisors and production managers. OVERHEAD COST

8. 8 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

9. FINANCIAL STATEMENT 9 Manufacturing Account Income Statement Balance Sheet

10. 1 ) Manufacturing Account 10 It shows the production cost or transfer price of goods completed during the accounting period. Direct materials Direct labour Direct expenses Factory overhead expenses Work in progress Factory profit

11. 11 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 X Factory 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

12. 12 Add: Opening Work in Progress X Less: Closing Work in Progress X Production Cost of finished goods X Factory profit (% PCFG) X Transfer price of finished goods X

13. 2 ) Income Statement 13 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 Factory profit / loss Administration expenses Selling and distribution expenses Financial expenses Increase / decrease in the provision for unrealized profit

14. 14 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) X less : Closing stock of finished goods (X ) (X) Gross Profit X Add: Factory Profit X Add: Other revenue Discount Received X Reduction in provision for unrealized profit X X Income Statement for the year ended ……

15. 15 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 XXX discount allowed XXX interest XXX increase in provision for unrealized profit XXX XXX Net profit XXX

16. 3 ) Balance Sheet 16 It shows the assets, liabilities and equities of the Whole business on a specific date of the accounting period. Assets (closing inventory : raw materials, WIPs, and finished goods) Liabilities Equities

17. 17 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………….

18. 18 Some expenses are related to both the manufacturing process and the administration of the office such as: Rent, electricity, insurance, depreciation on premises, motor vehicles etc. 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. IMPORTANT !!

19. Production cost Vs. Transfer price 19 Stock of raw materials , work in progress and other finished goods are valued at cost . However, the stock of manufactured goods can be valued at production cost or the transfer price of goods completed. Provision of unrealized profit of on stock should be made if closing stock of manufactured goods is valued at transfer price.

20. Provision of Unrealized Profit 20 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 for Unrealized Profit Dr Provision for Unrealized Profit Cr Profit and Loss

21. 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)

22. Revenue Balance b/d (prepaid) Balance b/d (accrued) Balance c/d (prepaid) Balance c/d (accrued) Cash/Bank Income Statement Acc. Pay (for dis.received ) Adjustment on revenue Income Statement Income statement (admin) Manufacturing account (factory)

23. Accum . depreciation of non-current assets Balance b/d) Balance c/d Income Statement Depreciation for current years 1.Policy given 2.No policy (cost-NB V) Accum . depreciation for previous years 1.Stated in question 2.cost-NBV Adjustment on depreciation