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MANUFACTURING ACCOUNT
Business can be classified into two types, which are merchandising and manufacturing. Merchandising, this trading firm / business deals with the buying and selling of manufactured goods while manufacturing deals with the processing of Raw – materials into finished goods.
E.g. Food processing, cement making.
Manufacturing firm use labor, plant and equipment to convert Raw – materials to finished goods.
Both mechanizing and manufacturing firms required to prepare final account at the end of trading period to show whether they are making profit or loss.
In manufacturing firm, manufacturing account is prepared in addition to Trading, profit and loss A/C.
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 lost of complete goods | xxxx |
Direct labor | xxxx |  | |
Direct expenses | xxxx | ||
PRIME COST:- | xxxx | ||
Add: Over head exp. | 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:-
Opening stock of Raw materials | xxxx |
Add Purchases of raw materials | xxxx |
xxxx | |
Less material consumed | xxxx |
xxxx | |
DIRECT LABOR
These are the cost 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
FACTORS OVERHEAD EXPENSES (INDIRECT COSTS).
Are those costs which occur in a single factory where production process is being done, but which cannot easily be traced in the manufactured of the product directly.
Example: Rent and Rates of a factory
Depreciation of plant and machinery
Factory power
Factory lighting
Factor 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 PROGRESSIVE (W.I.P PROCESS)
These are party of 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 to 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.
1st Jan; stock of Raw materials………………………………………………8,000/=
31st Dec: Stock of Raw – material…………………………………………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 – material………………………………………….. .. 87,000/=
Direct expenses……………………………………………………………. 1,400/=
Lubricants…………………………………………………………………. 3,000/=
Rent of factory…………………………………………………………….. 7,200/=
Fuel and power…………………………………………………………….. 9,900/=
Depreciation of factory plant + machine…………………………………… 4,200/=
Internal transport expenses…………………………………………………. 1,800/=
Insurance of a factory building + plant………………………………….… 1,500/=
General factory expenses……………………………………………….. 3,300/=
Solution:-
DR MANUFACTURING A/C CR
Opening stock of R.M | 8000 | Production cost | 181,200 |
Add: Purchases of R.M | (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 | |||
PRIME COST | 125,500 | ||
Overhead Expenses;- | |||
Indirect wages 25,500 | |||
Lubricants 3,000 | |||
Rent of factory 7,200 | |||
Fuel + power 9,900 | |||
Dept of plant + Mach. 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;–
(a) ADMIN
ISTRATION EXPENSES
ISTRATION EXPENSES
These consists expenses such as Manager Salaries, legal and accountancy charges, the depreciation of accounting machinery and secretarial salaries.
(b) SELLING AND DISTRIBUTION EXPENSES
They include expenses such as carriage outwards, salesmen salaries and commission, advertising and display expenses.
NOTE:-
1. Prime cost factory overhead expenses are charged to the manufacturing A/C and are collectively known as PRODUCTION COST.
2. Administrative and selling distribution expenses are charged in the trading, profit
And loss A/C .
A portion of expenses into factory overhead and profit and loss expenses.
For example: Rent paid May comprise part of manufacturing and part for office.
Hence you must apportion these expenses into two parts of 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 x 10,000 = 7,500
Office = ¼ x 10,000 = 2,500
EXAMPLE:-
DR CR
Stock of Raw – material 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 in wards of (R.M) 3,500/=
Purchases of Raw – material 370,000/=
Productive machinery (cost 280,000) 230,000/=
Accounting Machinery (cost 20,000) 12,000/=
General factory expenses 31,000/=
Lighting 7,500/=
Factor power 13,700/=
Administrative salaries 44,000/=
Sales men salaries 30,000/=
Commission on Sales 11,500/=
Rent 12,000/=
Insurance 4,200/=
General administration exp. 13,400/=
Bank charges 2,300/=
Discount Allowed 4,800/=
Carriage out wards 5,900/=
Sales 1,000,000/=
Debtors & Creditors 142,300/= 125,000/=
Bank 56,800/=
Cash 1,500/=
Drawings 20,000/=
Capital as at 1st Jan 2007 296,800/=
NOTE: at 31/12/2007
1. Stock of Raw – material 24,000/=
Finished good 40,000/=
Work in progress 15,000/=
2. Lighting, Rent and Insurance are to be appointed:
Factory 5/6, administration 1/6
3. Depreciation on productive and accounting machinery at 10% p.a on cost.
WORKING:–
Lighting = 7500 Insurance = 4,200
Factory 5/6 x 7,500=6,250 Factory 5/6 x 4,200=3,500
Office 1/6 x 7500 = 1250 Office 1/6 x 4,200=700
Rent = 12,000 Depreciation of A/C machinery
Factory 5/6 x 12000 = 10,000 20000 x 10/100 = 2000
Office 1/6 x 12000 = 2,000 Depreciation of productive mach.
280,000 x 10/100 = 28,000
MANUFACTURING TRADING PROFITS &LOSS A/C FOR YEAR ENDED 2007
MANUFACTURING TRADING PROFITS &LOSS A/C FOR YEAR ENDED 2007
Opening Stock of R.M | 21,000 | Production cost | 793,450 |
Add: Purchases of R.M 370,000 | (Transferred to trading A/C) |  | |
Add: carriage in ward 3,500 | 373,500 | ||
394,500 | |||
Less: Closing stock of R.M | 24,000 | ||
370,500 | |||
Direct labor | 180,000 | ||
Royalties | 7,000 | ||
PRIME COST | 557,500 | ||
Overhead Exp: | |||
Lighting 6,250 | |||
Rent 10,000 | |||
Insurance 3,500 | |||
Factory power 13,700 | |||
General factory Exp. 31,000 | |||
Wages 145,000 | |||
Depr: Productive mach. 28,000 | 237,450 | ||
786,950 | |||
Add: W.I. P at start | 13,500 | ||
808,450 | |||
Less: W.I.P at close | 15,000 | ||
793,450 | 793,450 | ||
Opening stock of F.G | 38,900 | Sales | 1,000,000 |
Add: Production cost | 793,450 | ||
832,350 | |||
Less: Closing stock of F.G | 40,000 | ||
Cost of sales | |||
Gross profit c/d | 207,650 | ||
1,000,000 | 1,000,000 | ||
Administration Exp: | Gross profit b/d | 207,650 | |
Lighting 1,250 | |||
Rent 2,000 | |||
Insurance 700 | |||
Depart; A/C of Pro. 2,000 | |||
Admin. Salaries 44,000 | |||
General admin. Exp. 13,400 | 63,350 | ||
Selling + Distribution Exp. | |||
Sales men salary 30,000 | |||
Commission and sales 11,500 | |||
Discount allowed 4,800 | |||
Carriage out ward 5,900 | 52,200 | ||
Financial charge: | |||
Bank charge | 2,300 | ||
Net Profit | 89,800 | ||
207,650 | 207,650 | ||
BALANCE SHEET AS AT 2007
Capital 296,800 | F’ ASSETS | ||
Add: Net profit 89,800 | Productive mach. 230,000 | ||
386,600 | Less: Deprt: 28,000 | 202,000 | |
Less: Drawing 20,000 | 366,600 | Accounting mach. 12,000 | |
Less: Deprt: 2,000 | 10,000 | ||
C’LIABILITIES | C’ASSETS:- | ||
Creditors | 125,000 | Debtors | 142,300 |
Stock: | |||
Raw – material | 24,000 | ||
W.I.P | 1,500 | ||
Finished Good | 40,000 | ||
Bank | 56,800 | ||
Cash | 1,500 | ||
491,600 | 491,600 | ||
MARKET VALUE
Sometime manufacturing form would like to know the gross profit it would get to the goods has been brought in their finished state.
A manufacturing account is subjected to the limitation that the respective amount of gross profit which are distributed to the manufacturing side or selling side of the firm are not known.
Techniques are sometimes used to bring out this addition information.
By this method the cost of which would have been involve if the goods has been bought in their finished state of being manufactured by the firm is brought into A/C.
This is credited to the manufacturing A/C and debited to the Trading A/C so as to throw up two figures of gross profit instead of one. The net profit in profit and loss A/C will remain us affected.
From the previous example:
Prepare final A/C. The marketing value is 950,000
DR. MANUFACTURING A/C CR
Production cost | 793,450 | Market value | 950,000 |
Gross profit | 156,550 | ||
950,000 | 950,000 | ||
DR TRADING A/C CR
Opening stock | Sales | 1,000,000 | |
Market value | 950,000 | ||
988,900 | |||
(-) Closing stock | 40,000 | ||
Cost of sales | 948,900 | ||
Gross profit | 51,100 | ||
1,000,000 | 1,000,000 | ||
DR PROFIT & LOSS A/C CR
Gross profit;- | |||
On manufacturing | 156,550 | ||
On Trading | 51,100 | ||
Exercise.1
Prepare manufacture account and trading account for the year ended 31st Dec1983 from the following balance;
Stock of raw materials 1st January 1983 ———————– 1,000/=
Raw materials purchased —————————————10,000/=
Carriage of purchases of raw materials – ———————-200/=
Stock of raw materials 31st Dec 1980————————–2,000/=
Factory wages————————————————–500/=
Manufacture light and heat ————————————-600/=
Partly finished goods at 1st January 1980———————-7,000/=
Partly of finished goods at 31st Dec 1980————————200
Stock of finished goods at 1st January 1980———————8500/=
Sales —————————————————————9500/=
Purchases ——————————————————–500/=
Stock of finished goods 31st Dec 1980————————-2500/=
Factory rent ——————————————————400/=
The trial balance has been extracted from the books of SAMWELI
NOTES | AT 31ST DEC 1997 |
- Stock
Raw materials ————————2,400/=
Finished goods ———————–4,000/=
Work in progress ——————-1,500/=
- Lighting and heating and rates ,rent and insurances are to be apportioned factory 5/6administrative 1/6
- Depreciation on productive and accounting machinery 10% p.a on cost.
Required
- Manufacturing account
- Trading account
- Balance sheet
Workings
Depreciation 10% per annum for productive machine at cost
(10/100) X 25,000 = 2500
Depreciation 10% per annum for accounting machine at cost
(10/100) x 2000= 200
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