Manufacturing accounts bursted

MANUFACTURING ACCOUNTS

The businesses which produce and sell the items prepare the following accounts at the end of its accounting year:-

                a. The Manufacturing account (to calculate the total cost of production)

                b. The Trading and profit & loss account (to find out the net profit or loss)

                c. The balance sheet.(to show the financial position of the business)

For manufacturing organizations, manufacturing accounts will be needed in addition to a trading and profit and loss accounts. This will be for internal purposes/ use in the company. In place of purchases we will instead have the cost of manufacturing the goods.

For a manufacturing business the manufacturing costs are divided into the following types:

i)                    Direct material costs

Direct material costs are those materials used directly in the manufacture of products i.e. materials that can be identified in the final products. E.g. in the manufacture of tables, direct materials consists of timber, nails, glue etc.

ii)                  Direct labor costs

These are wages paid to those who are directly involved in the manufacture of a product e.g. in the manufacture of tables; direct labor consists of wage paid to those workers who saw, shape of join the piece of timber into table.

iii)                Direct expenses

These are expenses that must be incurred in the manufacture of a product. That is, they can be directly allocated a particular unit of a product e.g. live charges for a special equipment used in the process of manufacture, royalties

NB: The sum of all the direct costs is known as prime costs

iv)                Indirect manufacturing costs / factory overheads

These are any other expenses (apart from the direct costs) for items being manufactured:

E.g. cleaners’ wages, factory rents, depreciation of plant and equipment, factory power and lighting

NB: prime cost + indirect manufacturing costs = PRODUCTION COSTS

v)                  Administrative Expenses

These are expenses that are administrative in nature, that is, expenses incurred in the process of panning, controlling and directing the organization.

e.g. office rents, office electricity, depreciation of office machinery, secretarial salaries.

vi)                Selling and distribution expenses

These are expenses incurred in the process of selling, promoting and distributing the goods manufactured. E.g. advertising expenses, carriage outwards, depreciation of motor van, salesmen salaries etc.

vii)              Finance Costs

These are expenses such as bank charges, discount allowed.

Format of the financial statements

Manufacturing account part

This is debited with the production cost of goods completed during the accounting period:

It consists of: Direct materials

                        Direct labor

                        Direct expenses

                        Indirect manufacturing costs.

It also includes adjustments for work in progress (goods that are part- completed at the end of a period).

STEPS

1. Add opening stock of raw materials to purchases and subtract the stock of raw materials. This is to get the cost of materials used during the period.
2. Add in all the direct costs to get the prime costs
3. Add all the indirect manufacturing costs.
4. Add the opening stock of WIP and subtract the closing stock WIP to get the production cost of all goods completed in the period. This is because WIP cannot be sold and therefore should not be included in the trading account.
5. The manufacturing account when completed shows the total that is available for sale during the period.

This will be used in trading account in place for purchases.

The total cost of production = Prime cost + Factory overhead

The Prime cost = Direct material + Direct labor + Direct expenses

Direct material cost = Opening stock of raw materials + purchase of raw materials +  carriage inwards – returns outwards – closing stock of raw materials.

Factory overhead expenses = All expenses related to the factory (indirect expenses)

Final accounts of a manufacturer

1)      Manufacturing accounts – used to determine the cost of production.

2)      Trading account- Used to determine the gross profit on trading.

3)      Balance sheets

Treatments of loose materials

The cost of loose tools consumed during the year is considered as a factory overhead in the manufacturing account and is determined as follows:

Opening stock of loose tools               xx

Add purchases of loose tools              xx

                                                            xx

Less closing stock of loose tools     (xx)

Cost of loose tools consumed           xx

THE FORMAT OF A MANUFACTURING ACCOUNT

                Manufacturing account for the year ended . . . . . . . . . . . . . .

Opening stock of raw materials	xxxx
Add purchase of raw materials	xxxxx
Add carriage inwards ( if any )	Xxxx
	Xxxxx
Less Returns outwards (of raw materials)	xxxx
	Xxxxx
Less Goods drawings ( if any )	xxxx
	xxxxx
Less Closing stock of raw materials	xxxx
Cost of Direct Materials		xxxxxxx
Add Direct labor		xxxxxxx
Add Direct expenses (E.g.: royalties)		xxxxxxx
Prime Cost		xxxxxxx
Add Factory overhead expenses
Factory lighting	xxxxxx
Factory heating	xxxxxx
Factory insurance	xxxxxx
Factory rent	xxxxxx
Factory maintenance	xxxxxx
Factory indirect wages	xxxxxx
Factory supervisor’s wages	xxxxxx	( + )
Depreciation on plant & machinery	xxxxxx
Depreciation on factory building	xxxxxx
Depreciation on factory furniture	xxxxxx
Depreciation on factory motor van	xxxxxx
Depreciation on other factory fixed assets	xxxxxx	XXXXXXX
		XXXXXXX
Add Opening stock of work in progress		xxxxxx
		XXXXXXX
Less Closing stock of work in progress		xxxxxx
Cost of production		XXXXXXX

In a manufacturing concern, usually there are three kinds of stocks:

Stock of Raw materials (the materials which are mainly used for production of the item)

Stock of Work in progress (the materials on which some work process have been completed)

Stock of Finished goods (The materials on which all the production processes are completed and ready for sale to the customers)

Manufacturing Accounts ( )
A. Function of a Manufacturing Account
For those businesses which deal with manufacturing products. It is common in today’s business to act both as manufacturer ( ) and retailer ( ).
What is the advantage as being a manufacturer as well as a retailer?
B. Division of Costs
The purpose of a Manufacturing Account is to ascertain Cost of Production ( ).
Cost of Production = Prime Cost + Factory Overheads + Opening Work in Progress – Closing Work in Progress
C. Prime Cost ( )
Prime cost is the DIRECT expenses which can be traced back to each unit of production. It consists of: (1) Direct Materials ( )
     (2) Direct Wages ( )
     (3) Direct Expenses e.g. Royalty ( )
D. Factory Overheads ( )
Indirect expenses in the factory which helps production of goods.
e.g. Indirect wages, rent and rates of the factory, depreciation of plant and
machinery, factory fuel and power, etc.
E. Work in Progress ( )
Where goods have not been completed, they cannot be sold in the year. For
ease of accounts recording, the ‘whole’ of the Work-in-Progress is calculated.
The treatment is the same as in Opening Stock and Closing Stock,
i.e. + Opening WIP – Closing WIP
S5 Manufacturing Account/LWL
F. Format
Company Name
Manufacturing, Trading and Profit and Loss Account for the year ended 31 December 200X
_________________________________________________________________
                                                                                                $ $ $
Raw Materials:
Opening Stock                                                     xxx
Purchases (Raw Materials)                               xxxx
Add : Carriage Inwards                                      xxxx
Less: Return Outwards                                                                        (xxxxxx

Less: Closing Stock (Raw materials                  (xx)
Cost of Raw Materials Consumed                    xxxx
Direct Materials                                                 xxx
Direct Expenses (Royalty)                                 xxx
______
PRIME COST                                                     XXXX
FACTORY OVERHEADS:
Factory rent and rates                                           xxx
Fuel and power                                                     xxx
Indirect wages                                                        xx
Lubricants ( )                                                         xxx
Depreciation of plant and machinery                   xxx
WORK-IN-PROGRESS
Opening Work-in-Progress (1.1.200x )                 xxxx
Less: Closing Work-in-Progress (31.12.200y)      (xxx)
                                                                             
PRODUCTION COST OF GOODS COMPLETED c/d XXXX
Manufacturing Account/LWL(Trading Account)
Finished Goods Sales xxxx
Less: Cost of Goods Sold
Opening Stock xxx
Add: Production Cost of Goods Completed b/d xxxx
Less: Closing Stock                                           (xxx)
GROSS PROFIT                                                    XXX
Less : Expenses
Administrative Expenses (Office expenses)
e.g. Office rent and rates
Administrative salaries
General adminstration expenses
Depreciation of office furniture, office equipment
Selling and Distribution Expenses
e.g. Advertising expenses
Sales Commissions
Carriage Outwards
Financial Expenses
e.g. Discounts allowed
Bad Debts
Provisions for Bad Debts
                                                                        (xxx)
NET PROFIT FOR THE YEAR XXX

Manufacturing Account/LWL Balance Sheet as at 31 December 200X
 
FIXED ASSETS
 Cost Accumulated Net
Depreciation Book
Value
Machinery                                                          xxxxx xxx xxxx
Office Equipment                                               xxxx xxx xxxx

CURRENT ASSETS
Stock : Raw Materials xxx
Work in Progress xx
Finished Goods xxx
Debtors xxx
Less: Provisions for Bad Debts (xxx)
Prepaid Expenses xx
Bank xxx
Cash xxx
Less: CURRENT LIABILITIES
Creditors xxx
Accrued expenses xx
Working Capital xxx

FINANCED BY:
Capital on 1.1.200x xxxx
Add: Net Profit for the year xxx

Less: Drawings (xxx)

The profit & loss account and the balance sheet preparations will be the same as that of a sole trader’s. So the students have to follow the previous method for the preparation of these.

Fixed expenses and Variable expenses

Some expenses will remain constant whether the level of activity increases or falls. These expenses are called fixed expenses E.g. rent of building

The expenses which change with changes in activity are called variable expenses

E.g.: cost of materials.

  Key points:

·         Carriage on raw materials means carriage inwards and it is a part of prime cost.

·         Carriage outwards is shown in the profit & loss account as an expense.

·         Royalties paid are to be treated as direct expense.

·         Depreciation on Plant and Machinery or any other factory asset is to be treated as factory overhead expense.

·         Stocks of raw materials and work-in-progress are taken in the manufacturing account and stock of finished goods is taken in the trading account.

·         Stocks at the end of the year (raw materials, work-in-progress and finished goods) are shown in the balance sheet as current assets.

·         Owner’s raw materials drawings are shown in the manufacturing account while calculating the prime cost.

·         Finished goods drawings are shown in the trading account while calculating the cost of goods sold.

·         The purchase of finished goods is added with cost of production in the trading account.

·         The depreciation of any asset used in the office should be shown as an expense in the profit & loss account.

·         Cost of readymade items bought for the production of items manufactured should be treated as direct expense.

Manufacturing Accounts Formats

Manufacturing Account for the Year ended 31 December xx

                                                                                                            shs                   shs

Stock of raw materials 1.1.20 x 7                                                       xx

Add purchases of raw materials                                                         xx

Carriage inwards of raw materials                                                    xx

                                                                                                            xx

Less closing stock of raw materials                                                   (xx)

Cost of raw materials consumed                                                        xx

Add: Direct Wages                                                                              xx

Direct Expenses                                                                                  xx

Prime Costs                                                                                                                xx

Indirect Manufacturing costs

Factory lighting                                                                                   xx

Factory Rent                                                                                        xx

Depreciation of Factory Machinery                                                   xx

Indirect labour                                                                                                xx

Indirect Materials                                                                               xx

Cost of loose tools consumed                                                             xx

                                                                                                                                    xx

                                                                                                                                    xx

Add work in Progress 1.1.20x7                                                                                   xx

 

                                                                                                                                    xx

Less work in Progress 31.12.20x7                                                                            (xx)

Production costs of goods completed c/d                                                                  xx

 

Trading, Profit and Loss Account for the year ended 31. 12. xx

                                                                                                                        shs             shs

Sales                                                                                                                                  xx

Less cost of goods sold                                                                                   

Add production cost of goods completed b/d                                                            xx

                                                                                                                        xx

Less closing stock of finished goods                                                              (xx)

Cost of Sales                                                                                                                    ( xx)

Gross Profit                                                                                                                       xx

Less Expenses

Office Rent                                                                                          xx

Office Electricity                                                                                 xx

Depreciation of Office Machinery                                                     xx

Selling & distribution expenses                                                          xx

Advertising                                                                                          xx

Delivery Van expenses                                                                        xx

Carriage Outwards                                                                             xx

Salesmen salaries                                                                               xx

 

                                                                                                                                    (xx)

Net Profit / (Loss)                                                                                                         xx / (xx)                                                            

Note:

Expenses should be appointed as follows:

Indirect manufacturing costs – Charged in manufacturing account

Administrative expenses

Selling and distribution expenses                               Charged in the profit & loss account

Financial charges

Treatment of manufacturing Profit.

Manufacturing profit occur where goods manufactured are transferred from factory to the warehouse at a higher value more than the cost of production i.e the market value.

The difference between the market value and the cost of production is the manufacturing profit.

Manufacturing profit should be added to the cost of production in the manufacturing account so as to arrive at the market value of goods manufactured.

The market value of goods manufactured should take the place of purchases in the trading account.

The double entry for the manufacturing profit is:

DR Manufacturing Account

CR Profit and loss account.

Treatment of unrealized Profit

Unrealized Profit occurs where it is the policy of the firm to value stocks of finished goods at market value rather than at cost.

The difference between the market value and the cost of the finished goods is the unrealized profit.

The difference between the unrealized profit on the opening stock of finished goods and the unrealized profit on the closing stock of finished goods should be charged to the profit and loss account.

The provision for unrealized profit on the closing stock by the end of year should be subtracted from the market value of the finished goods in the balance sheet. (i.e closing stock is stated at production cost on the balance sheet)