BOOK KEEPING O LEVEL(FORM THREE) NOTES – MANUFACTURING ACCOUNT

MANUFACTURING ACCOUNT

Business can be classified into two types: merchandising and manufacturing. Merchandising firms deal with buying and selling manufactured goods, while manufacturing firms process raw materials into finished goods.

Examples include food processing and cement making.

Manufacturing firms use labor, plant, and equipment to convert raw materials into finished goods.

Both merchandising and manufacturing firms are required to prepare final accounts at the end of the trading period to show whether they are making a profit or loss.

In manufacturing firms, a manufacturing account is prepared in addition to the Trading, Profit and Loss Account.

This account shows the cost of manufacturing goods (cost of production of completed goods).

THE FORMAT OF MANUFACTURING A/C

DR MANUFACTURING A/C CR

Direct material	xxxx	Production cost of completed goods	xxxx
Direct labor	xxxx
Direct expenses	xxxx
PRIME COST	xxxx
Add: Overhead expenses	xxxx
Production cost	xxxx
Add: Work in progress at start	xxxx
	xxxx
Less: Work in progress at close	xxxx
	xxxx		xxxx

DIRECT MATERIALS

These are all materials which can be traced (seen) in a single unit of a product.

Direct materials:

DIRECT LABOR

These are the costs of production which can be traced (seen) in a single unit of a product.

Example: Wages for a machine operator making a particular item.

DIRECT EXPENSES

These are the expenses which can be traced in a single unit of a product.

Example: Royalty, Patent, Trade mark etc.

FACTORY OVERHEAD EXPENSES (INDIRECT COSTS)

These are costs which occur in a factory where the production process is done, but which cannot easily be traced directly to the manufacture of the product.

Example: Rent and rates of a factory, depreciation of plant and machinery, factory power, factory lighting, factory maintenance, depreciation of factory building, and other expenses associated with manufacturing.

• Direct material + Direct labor + Direct expenses = PRIME COST
• Prime cost + Overhead expenses = PRODUCTION COST

WORK IN PROGRESS (W.I.P PROCESS)

These are partly finished goods of the production process continuing. We shall have:

• Opening work in progress
• Closing work in progress

Hence, Opening work in progress is added to the total cost while Closing work in progress is deducted from the total cost in order to get TOTAL PRODUCTION COST.

EXAMPLE

From the following information, prepare manufacturing A/C for the year ended 31 Dec 2008.

1^st Jan: Stock of Raw materials ………………………………………… 8,000/=

31^st Dec: Stock of Raw materials ……………………………………. 10,500/=

Jan: Work in progress ……………………………………………………… 3,500/=

Dec: Work in progress ……………………………………………………… 4,200/=

During the year:

Wages: Direct ………………………………………………………… 39,600/=

Indirect ………………………………………………………….. 35,500/=

Purchases of Raw materials ………………………………………….. 87,000/=

Direct expenses ………………………………………………………. 1,400/=

Lubricants ……………………………………………………………… 3,000/=

Rent of factory ………………………………………………………… 7,200/=

Fuel and power ………………………………………………………. 9,900/=

Depreciation of factory plant and machine ………………………. 4,200/=

Internal transport expenses …………………………………………… 1,800/=

Insurance of factory building and plant ……………………………. 1,500/=

General factory expenses ……………………………………………. 3,300/=

Solution:

DR MANUFACTURING A/C CR

Opening stock of R.M	8,000	Production cost	181,200
Add: Purchases of R.M	87,000	(Transferred to Trading)
	95,000
Less: Closing stock of R.M	10,500
Cost of Raw material used	84,500
Direct wages	39,600
Direct expenses	1,400
PRIME COST	125,500
Overhead Expenses
Indirect wages 25,500
Lubricants 3,000
Rent of factory 7,200
Fuel + power 9,900
Depreciation of plant + machine 4,200
Internal transport 1,800
Insurance 1,500
General factory expenses 3,300	56,400
	181,900
Add: W.I.P at start	3,500
	185,400
Less: W.I.P at close	4,200
	181,200		181,200

After the manufacturing account, you are required to prepare Trading, Profit and Loss Account.

EXPENSES

ADMINISTRATION EXPENSES
These consist of expenses such as Manager Salaries, legal and accountancy charges, depreciation of accounting machinery, and secretarial salaries.

SELLING AND DISTRIBUTION EXPENSES
They include expenses such as carriage outwards, salesmen salaries and commission, advertising, and display expenses.

NOTE:

• Prime cost and factory overhead expenses are charged to the manufacturing A/C and are collectively known as PRODUCTION COST.
• Administrative and selling distribution expenses are charged in the trading, profit and loss A/C.
• A portion of expenses is apportioned into factory overhead and profit and loss expenses. For example, rent paid may comprise part for manufacturing and part for office.

Hence, you must apportion these expenses into two parts: Manufacturing and Office.

Example: Rent paid 10,000; ¾ of building is used for factory, ¼ is used for office.

Thus can be calculated as:
Manufacturing = ¾ × 10,000 = 7,500
Office = ¼ × 10,000 = 2,500

EXAMPLE

DR CR

Stock of Raw materials 1/1/2007 21,000/=
Stock of Finished goods 1/1/2007 38,900/=
Work in progress 1/1/2007 13,500/=
Wages (Direct 180,000 factory indirect 145,000) 325,000/=
Royalties 3,500/=
Carriage inwards of (R.M) 3,500/=
Purchases of Raw materials 370,000/=
Productive machinery (cost 280,000) 230,000/=
Accounting Machinery (cost 20,000) 12,000/=
General factory expenses 31,000/=
Lighting 7,500/=
Factory power 13,700/=
Administrative salaries 44,000/=
Salesmen salaries 30,000/=
Commission on Sales 11,500/=
Rent 12,000/=
Insurance 4,200/=
General administration expenses 13,400/=
Bank charges 2,300/=
Discount Allowed 4,800/=
Carriage outwards 5,900/=
Sales 1,000,000/=
Debtors & Creditors 142,300/= 125,000/=
Bank 56,800/=
Cash 1,500/=
Drawings 20,000/=
Capital as at 1^st Jan 2007 296,800/=

NOTE: at 31/12/2007

• Stock of Raw materials 24,000/=
• Finished goods 40,000/=
• Work in progress 15,000/=
• Lighting, Rent and Insurance are to be apportioned: Factory 5/6, Administration 1/6
• Depreciation on productive and accounting machinery at 10% p.a on cost.

WORKING:

Lighting = 7,500; Insurance = 4,200
Factory 5/6 × 7,500 = 6,250; Factory 5/6 × 4,200 = 3,500
Office 1/6 × 7,500 = 1,250; Office 1/6 × 4,200 = 700
Rent = 12,000; Depreciation of A/C machinery
Factory 5/6 × 12,000 = 10,000; 20,000 × 10% = 2,000
Office 1/6 × 12,000 = 2,000; Depreciation of productive machinery
280,000 × 10% = 28,000

MANUFACTURING TRADING PROFITS & LOSS A/C FOR YEAR ENDED 2007

After the manufacturing account, prepare the Trading, Profit and Loss Account.

BALANCE SHEET AS AT 2007

MARKET VALUE

Sometimes manufacturing firms would like to know the gross profit they would get if the goods had been bought in their finished state.

A manufacturing account is subject to the limitation that the respective amount of gross profit distributed to the manufacturing side or selling side of the firm is not known.

Techniques are sometimes used to bring out this additional information.

By this method, the cost which would have been involved if the goods had been bought in their finished state instead of being manufactured by the firm is brought into the account.

This is credited to the manufacturing A/C and debited to the Trading A/C so as to show two figures of gross profit instead of one. The net profit in the profit and loss A/C remains unaffected.

From the previous example:

Prepare final A/C. The market value is 950,000.

DR. MANUFACTURING A/C CR

Exercise 1

Prepare manufacturing account and trading account for the year ended 31^st Dec 1983 from the following balance:

• Stock of raw materials 1^st January 1983 – 1,000/=
• Raw materials purchased – 10,000/=
• Carriage of purchases of raw materials – 200/=
• Stock of raw materials 31^st Dec 1983 – 2,000/=
• Factory wages – 500/=
• Manufacture light and heat – 600/=
• Partly finished goods at 1^st January 1983 – 7,000/=
• Partly finished goods at 31^st Dec 1983 – 200/=
• Stock of finished goods at 1^st January 1983 – 8,500/=
• Sales – 9,500/=
• Purchases – 500/=
• Stock of finished goods 31^st Dec 1983 – 2,500/=
• Factory rent – 400/=

The trial balance has been extracted from the books of SAMWELI.

NOTES AT 31^ST DEC 1997

1. Stock

Raw materials ———————— 2,400/=
Finished goods ———————– 4,000/=
Work in progress ——————- 1,500/=

1. Lighting and heating and rates, rent and insurances are to be apportioned factory 5/6, administrative 1/6.
2. Depreciation on productive and accounting machinery 10% p.a on cost.

Required:

1. Manufacturing account
2. Trading account
3. Balance sheet

Workings:

Depreciation 10% per annum for productive machine at cost:
(10/100) × 25,000 = 2,500

Depreciation 10% per annum for accounting machine at cost:
(10/100) × 2,000 = 200