WEEK 6
MANUFACTURING ACCOUNTS
INTRODUCTION
The manufacturing account is an account that is prepared so as to identity all the manufacturing costs incurred in bringing the product to a marketable state.
Manufacturing is the process of making goods by hand or by machine. The costs involved in manufacturing process are principally in two main divisions.
- The cost of raw materials; and
- The cost of coverting raw materials into finished goods and this cost is in two main categories
- Manufacturing costs and
- Non – manufacturing costs
MANUFACTURING COSTS: Manufacturing costs are of two main types
- Direct costs; and
- Indirect costs (also called factory overheads)
Direct costs applies to these costs which can be readily tractor to the products and is further broken down into:
- Direct material cost
- Direct labour cost
- Direct expenses
DIRECT MATERIAL COST: Direct materials are basic substances or raw materials form which a product is made. Examples Soya beans for vegetable oil, palm oil for soaps, animals skin for shoe etc.
Cost that are directly associated with these raw materials in the finished product is called the direct material cost.
DIRECT LABOUR COST: It will take human effort to change the form on direct materials into finished goods. the wages of those employees (factory workers who perform this task is considered as a direct labour cost). Example of a direct labour cost is the wage of a machine operator.
DIRECT EXPENSES: There are expenses other than direct materials cost and direct labour cost that are incurred solely in producing the goods. They include the cost of special designs and line of specialised equipment for a particular job.
INDIRECT COSTS: These are costs which cannot be traced directly to the product but which all the same are part of the cost of the product. In determining which costs to treat as direct costs materiality of such items must be taken into cognisance.
Manufacturing overhead cost include indirect material costs such as give used in furniture making, lubricate and supplies of materials for repairs and maintenance. Indirect labour costs such as the wages of factory foremen and supervisors.
NON – MANUFACTURING COSTS: These are administrative and marketing costs and are not included in the cost of manufacturing the product. These costs are not relevant in the manufacturing section of the account but are approximately treated in the profit and loss section.
TERMINOLOGIES USED IN MANUFACTURING ACCOUNTS
- PRIME COST: This is the total cost of direct materials direct wages and direct expenses.
- Total factory cost (cost of production): This represent prime cost plus indirect factory costs (manufacturing overheads)
- Inventory: This refers to stock. A manufacturing concern has three categories of inventories:
- Stock of raw materials: This is the quantity of unused portion of raw materials bought.
- Stock of work-in-progress: These are partly finished goods, semi-manufactured goods and incomplete work at the end of a financial period. They are goods that have not been completed in the factory at the time of preparing the final accounts. there could be opening work-in-progress and or closing work-in-progress. This is valued at start and at the end of the trading period
- Stock of finished goods: This is the quality of completed goods. it is also valued at the beginning and at the end of the trading period.
- Consumables: These are supplies and components purchased for incorporation into the final products and maintenance of machines.
- Financial charges: These are expenses and interest incurred in servicing loans e.g. interest on overdraft, discount allowed and interest on loan
- Total cost: This represents all the costs involved in bringing the finished goods down to the consumers which include prime costs, factory overheads, administrative, selling and distribution expenses and financial charges.
NOTE
The costs involved can be summarised as follows:
Direct materials
Direct labour Prime cost Total cost
Direct expenses
PLUS
Factory overheads
PLUS
Administrative expenses
Selling and distribution expenses
Financial charges
NOTE
The following items are included in manufacturing or factory overheads
- Indirect wages
- Heat and power
- Lubricants
- General factory expenses
- Rent and rates on factory
- Depreciation of plant and machinery
- Depreciation of factory buildings and tools
- First and expenses
- Factory consumable or supplies
- Indirect materials
- Small tools used
- Grease and oil
- Other utilities
PREPARATION OF THE MANUFACTURING ACCOUNT
The accounting divisions of manufacturing concerns are in three main segments which are:
- Manufacturing account or production account section: Under this section the three main components of cost of goods manufactured can be seen at a glance. It is therefore used in ascertaining the cost of production for the period.
- Trading account section: This is principally used for determining the gross profit resulting from trading operations during the period.
- Profit and loss account section: This is prepared mainly for ascertaining the net profit of the enterprises for the given period.
FORMAT
A B C
Manufacturing, trading, profit and loss account for the year ended 31st March
Raw materials (RM) Cost of production b/d xx
Opening stock xx
Add: Purchases xx
Carriage inwards xx
xx
Less: returns outwards (xx)
xx
Rm available for used xx
Less closing stock RM xx
Cost of R.M consumed xx
Direct wages xx
Royalties xx
Direct expenses xx
PRIME COST xx
Factory overheads (Nite) xx
xx
Add: Opening in. I. P xx
Cost of production xx xx
Finished goods Sales xx
Opening stock xx les: Returns inwards xx
Add cost of production xx xx
Goods available for sale xx
Less closing stock xx
Cost of sales xx
Gross profit c/d xx
xx xx
Gross profit b/d xx
Administrative Expenses
Admin salaries xx
Maintenance of building xx
Depreciation of accounting machine xx
Manager salaries xx
Legal charges xx
Accounting charges xx
xx
Selling and distribution expenses
Commission on sales xx
Advertising xx
Salaries of salesmen xx
Depreciation on delivery van xx
Carriage outwards xx
Bad debts xx
Provision for doubtful debts xx
Financial charges xx
Interest on loan xx
Bank charges xx
Discount allowed xx xx
Net profit xx
xx xx
Illustration 1: The following shows the figures extracted from the books of Ojolo, a manufacturer for the year ended 31st December, 1999.
Stock of finished goods #
January 1st 2,532
December 31st 3,569
Stock of raw materials
January 1st 1,608
December 31st 1,432
Sales 92,800
Office rent 525
Office rates 200
Purchases of raw materials 19,000
Carriage inward on raw materials 471
Manufacturing wages 26,430
Factory expenses 1,828
Depreciation
Plant and machinery 3250
Delivery vans 625
Stock of work in progress
January 1st 874
December 31st 947
Factory fuel 1,835
Advertising 517
Van running expenses 2,315
Sales men’s commission 713
Maintenance of factory equipment 10,800
Lighting (3/5 factory)
(2/5 office) 8,000
Salaries (factory 1,500) 5,000
Insurance (factory 3,200) 4,480
You are required to prepare the manufacturing, trading, profit and loss account for the year ended 31st December 1999.
TRANSFER PRICING MARKET VALUE OF GOODS MANUFACTURED
The usual practice is to transfer the goods produced to the trading account at cost price. But the firms may decide to transfer to the trading account at current market price irrespective of cost. The manufacturing account will show a balance (profit or loss) which will be transferred to profit and loss account. The goods may also be transferred to trading account at cost price plus a fixed percentage.
Illustration 2
BODMAS LTD is a manufacturing firm of kitchen furniture. The following information was extracted from the books of the company for the year ended 31st Dec., 1998.
DR CR
Plant and Machinery 72,000
Capital 148,800
Motor vehicle 36,000
Loose tools at cost (office) 10,800
Sales 204,000
Purchases of raw materials 51,000
Factory wages 48,800
Light and power 6,000
Machinery repairs 9,120
Motor vehicles running expenses 14,400
Rent and insurance 13,920
Administrative expenses 10,800
Debtors 19,800
Creditors 13,440
Distribution staff salaries 15, 600
Cash in hand 15,000
Drawings 7,200
Stock of raw materials 600
366,240 366,240
Additional information
- Light and power charges accrued at 31st Dec., 1998 amounted to #1000 and insurance prepared at the same date totalled #960.
- Stocks were valued at cost on 31st Dec., 1998 as follows
Raw materials #8,400
Finished goods #12,000 - Goods manufactured during the year are to be transferred to the trading account at #114,000
- Motor vehicle expenses are to be allocated equally to factory expenses and general and general administrative expenses.
- Plant and machinery and motor vehicle are to be depreciated at the rate of 10% and 25% respectively
You are to prepare:
- Manufacturing, trading, profit and loss account for the year ended 31st Dec., 1998
- Balance sheet as at that date
Solution
BODMAS LTD
Manufacturing, trading, profit and loss account for the year ended 31st Dec. 1998
Opening stock of R.M 600 Goods transferred to trading 114000
Add: purchases of R.M 51,000
51,600
Less: closing stock R.M 8,400
Cost of RM consumed 43,200
Add: Factory wages 46,800
PRIME COST 90,000
Factory Overhead
Machine repairs 9,120
Motor running exp. 7,200
Depreciation
Plant and machinery 7,200
23,520
Cost of production 113,520
Profits on goods manufactured 480
114,000 114000
Goods transferred sales 204,000
Less: closing stock F.G 12,000
Cost of goods sold 102,000
Gross profit 102,000
204,000 204000
Expenses Gross profit b/d 102000
Light & power 7000 Profit on manufacture 480
Motor running expenses 7200 Net loss 2080
Rent and insurance 12,960
Administrative staff salaries 37,200
Administrative expenses 10,800
Distributive staff salaries 15,600
Depreciation
Motor vehicle 9,000
Loose tools 4,800
104,500 104500
BODMAS LTD
Balance sheet as at 31st December, 1998
Capital 148,800 Fixed Assets
Less: Net loss 2080 Motor Vehicle (36,000 – 7,200) 27,000
146,720
Less: drawings 7,200 P & M (72,000 – 7,200) 64800
139,520
Current liabilities
Creditors 13,440 Loose tools (10,800 – 4,800 6000 97800
Light and power accrued 1,000
Current Assets
Stocks: R.M 8400 , Furnished goods 12000 Debtors 19800 Cash in hand 15000 Insurance 960
153,960 153960
Workings
- Light and power = 6000 + 1000 = #7000
- Insurance = 13,920 – 960 = #12,760
- Motor expenses = factory = ½ x 14440 = #7,200
General Administrative expenses
½ x 14,440 = #7,200 - Loose tools cost 10,800
Depreciation 4,800
Loose tools in hand 6,000 - Depreciation: plant and machinery = 10% x 72,000 = 7,200
- Motor vehicle = 25% x 36,000 = #9000
ASSINGNMENT
Page 310 question 2x
Loose tools in hand 6,000
PARTNERSHIP ACCOUNTS
Under the partnership Act of 1890, partnership is defined as the relationship which exists between persons carrying on a business in common with a view of profit.
It is an association between two and twenty persons who have agreed to share the profits who have agreed to share the profits of a business carrying on by all or any of them for benefit of all of them.
TYPES OF PARTNERS
There are three principal types of partners namely:
- Active partner: This type of partner participates actively in management of the partnership’s business
- Sleeping or Dormant partner: this type of partner does not take any active part in the management of the partnership business. All he does is to contribute money into the partnership and then wait to receive his share of profit
- Nominal partner: This is a partner that has not capital contribution into the business but partners in the share of the profit. This is because, he has allowed his name to be used by other partners as a result of his good image,
REASONS FOR THE FORMATION OF PARTNERSHIP
There are several reasons that make people opt for partnership business and some of them are:
- Where the capital need of the business cannot be adequately supplied or make available by a person.
- Where the experience and knowledge needed to carry on the business cannot be provided by an individual singlehandedly
- Where people are afraid of bearing all the risks associated with the business alone
- Where they want to make it a family business.
FEATURES OF PARTNERSHIP
- Capital is from members contribution
- Unlimited liabilities for partners
- Not a legal entity
- Limited membership
- Motive is profit
- Common participation in management
- Each partner is an agent of the business
- No special formalities in formation.
DEEDS OF PARTNERSHIP
This is a document drawn up by the partners which will clarify the respective positions and duties of the partners in a business.
CONTENTS OF DEED OF PARTNERSHIP
- Name of the partners and other particulars
- Name of the business
- Signatories to the account
- Duration of the partnership
- Amount of capital to be contributed
- Right of each partner
- Duties of each partner
- Amount of salary to be paid
- The nature of the business
- Method of admission of a new partner
- Dissolution of partnership
- Registered office
- Partnership account procedures
- Terms and conditions
- Profit and loss sharing ratio
- Rate of interest on capital
- Rate of interest on drawings
- Valuation of goodwill
PARTNERSHIP ACCOUNTS
CAPITAL ACCOUNT: The amount contributed by each partner into the business will be credited to his capital account. The firm can maintain or use either a fixed capital or fluctuating capital.
(i) FLUCTUATING CAPITAL ACCOUNT: The partners can maintain a fluctuating capital account, profit, interest on capital and salaries will be credited to the capital account and drawings and interest on drawings debited. In short, the balance of this account will change each year.
A B C
Drawings x x x Bal b/f x x x
Int. on drawings x x x Current bal x x x
Share of profit x x x
Int on capital x x x
Bal c/d x x x Salary x x x
x x x x x x
Bal b/d x x x
(ii) Fixed Capital account and current account: The balance of capital will remain at the same figure during the partnership profit, interest on capital and salaries will be credited to a separate current account. Drawings and interest on drawings are debited.
NOTE: Examiners often ask for separate current and capital account.
Capital Account
A B C A B C
Bala b/f x x x
A B C A B C
Drawings x x x Bal b/f x x x
Int. on drawings x x x Int. on capital x x x
Bal c/d x x x Int. on salary x x x
Share of profit x x x
xx xx xx xx xx xx
Partners Loan: A partner may introduce cash by way of loan to the partnership. Any cash introduced will be credited to a loan account,
Partners Salaries: The agreement may provide that any of the partners who devote his time to the running of the business shall receive a fixed salary in addition to a share in the profits. Salary will be credited to the current account.
Interest on Capital: The partner may be paid interest on capital when they have contributed unequal amount. This is debited to profit and loss appropriation account and credited to current account.
Drawings: This is the amount withdrawn or taken out of the business by partners during the year. The drawings can be in cash or kind. It must be debited to the current account.
Interest on Drawings: Interest on drawings is introduced to prevent the partners from withdrawing cash unnecessarily from the business. This is calculated from the date of withdrawal to the end of the financial year. This is debited to the current account.
FINAL ACCOUNTS OF PARTNERSHIP
The trading, profit and loss account are exactly the same as that of a Sole trader. But a partnership would have an extra section called “Appropriation account”
Partnership, Trading, Profit and loss account for the year ended 31st Dec. 1967
Sales x
Opening stock x less: Sales returns x
Add: purchases x
x x
less: closing stock x
cost of goods sold x
Gross profit x
xx xx
Gross profit b/d x
Discount received x
Expenses
Rent x
Salaries and wages x
Depreciation x
Motor expenses x
Stationery x
Bad debts x
Interest on loans x
Sundry expenses x
Net Profit x
xx xx
Profit and loss appropriation account
Interest on capital Net profit b/d x
Ojo x Interest on drawings
Ajayi x x Ojo x
Salary Ajayi x
Ojo x
Ajayi x x
Share of profit
Ojo 2/3 x
Ajayi 1/3 x
xx xx
Balance sheet
Fixed Assets
Capital Motor van x
Ojo x sF & F x
Ajayi x x Land & building x
Premises x x
Current Account Current Assets
Ojo x Stock x
Ajayi x x Debtors x
Current Liabilities Bills receivable x
Bills payable x
Loan x x Bank x
Creditors x Cash in hand x
Income in advance x Income in arrears x
Expenses accrued x Expenses are paid x x
xx xx