MANUFACTURING ACCOUNTS

A firm that manufactures its own products for sale will normally prepare a manufacturing
account to determine its production costs for cach accounting period. Production costs are sub
divided into two main groups: direct costs and indirect costs. Direct costs are traceable to each
unit (or batch of units) being manufactured. Indirect costs, on the other hand, are not traceable to
cach unit being manufactured, though they occur in the factory.

DIRECT COSTS

These include direct materials, direct labor and direct expenses.

1. Direct (raw) materials involve:
> Stocks (opening and closing)
> Purchases
carriage and freight charges
> Import duties
> Returns

2. Direct labour: wages paid to workers who are directly involved in the actual production
process (i.e. Wages paid to production workers), Direct labour may be shown as:
Direct wages
º Production wages
> Manufacturing wages
> Factory wages
> Wages of machine operators

3. Direct expenses include:

> Hire of special plant and machinery
Royalties payable (to investors of aparticular brand, patent or trade-mark being
used by the firm).
> License fees (e.g. manufactured under license by X. Co. Ltd)
 INDIRECT COSTS FACTORY QVERHEADS)
These are costs which occur in the factory, but are not traceable to each unit (or batch
of units) being manufactured. They include:
> Indirect materials

> Indirect labour (wages and salaries paid to factory cleaners, crane drivers, fork-ift
truck drivers, factory foreman, factory supervisors , factory managers)
> Rent, rates, insurance, etc., of factory
> Light, heat , gas, fuel, petrol, oil and lubricants (of factory)
> General factory expenses
> Depreciation of plant, machinery and factory equipment
Repairs and maintenance of factory buildings and equipment

PARTLY MANUFACTURED GOODSWORK IN PROGRESS

These are products on which production is currently being carricd out (started but
not yet completed). As a result, the term work-in-process is commonly used to
refer to such products. Work-in-progress at the beginning of the period should be
added to manufacturing costs, while that at the end should be subtracted, in order
to arrive at the production costs of goods completed within the period.
Tutorial Notes:
1. The manufacturing account should ONLY contain costs relating to the
FACTORY.
2. Production Cost Per Unit = Production Cost
Number of Units Produced

TRADING ACCOUNT

This deals exclusively with finished goods. The production cost of goods completed, when
determined, should be transferred to the trading account, where it will replace purchases. Since
the firm will be manufacturing its own products, there will not normally be purchases of finished
goods. However, where enough units are not produced, the firm might decide to purchase
additional finished goods, rather than try to make them, since production will take some time to
be completed. In this case, the trading account will contain a figure for production cost and
another for purchases of finished goods.
 PROFITAND LOSS ACCOUNT

Here, the expenses are normally classified under three headings:

Selling and distribution, administrative and financial charges.
1. Selling and Distribution Expenses relate to sales, advertising, promotion and distribution
costs, such as:
Carriage outwards/carriage on sales
> Delivery expenses
Advertising and display cost
> Salesmen's salaries and commissions
> Depreciation of delivery vehicles and display cquipment
> Bad debts and provision for doubtful debts

2. Administrative Expenses include:

Rent, rates, insurance, etc. (of office)
> Light, heat, air-conditioning, etc. (of office)
> Wages and salaries of office managers and other office workers
Depreciation of office equipment, office buildings and office furniture
> General office expenses/ sundry expenses

3. Financial Charges Include:

> Discounts allowed
> Bank charges
> Loan interest and interest on overdraft
 FORMAT
John Brown
Manufacturing Account for period ended
RAW MATERIALS:
Opening stock XX

Purchases
Add: Carriage and Freight Charges XXX
Import Duties
XX
Less Return Outwards/Purchases Returns
Net Purchases XX
Cost of raw material available for use XX

Less Closing Stock XX

Cost of Raw Material Consumed/ Used-up
DIRECT LABOUR:
Manufacturing (factory) Wages XX
DIRECT EXPENSES (if given)
Hire of Plant and Machinery
Royalties XX
License Fees

PRIMSE COST XX

FACTORY OVERHEADS:
Rent, Rates and Insurance XX
Light, Heat, Fuel XX

Depreciation of Plant and Machinery

Indirect Materials XX
Indirect Labour XX

Other Indirect Factory Expenses

TOTAL FACTORY OVERHEAD XX
XX

Add Opening Work-in progress

XX

Less Closing Work-in-progress XX

PRODUCTION COSTS (Cost of goods Manufactured)

TutorialNotes:
1. The manufacturing account is also called a Schedule of Cost of Goods Manufactured.
2. Where the manufacturing account is prepared HORIZONTALLY, all the above items
would simple be shown on the DEBIT SIDE.
3. Prime Cost sometime involves only Raw Materials Consumed and Direct Labour.
 4. Where necessary, adjustments should be made for accruals and prepayments (whether in
the manufacturing account or the trading and profit and loss account).

John Brown

Trading and Profit and Loss Account for period ended..

Finished Goods:

TURNOVER:

Sales XX

Less Returns Inward / Sales Returns XX

XX

LESS COST OF SALES/COST OF GOODS SOLD:

Opening Sock XX

Production Cost XX

Purchases (of finished goods -if any) XX

Add carriage Inwards (on finished goods) XX

Less Purchases Returns (finished goods) (X)

Net Purchases (of finished goods) XX

Cost of Goods Available for sale XX

Less Closing stock

Cost of Goods Sold

GROSS PROFIT/(LOSS) XX

ADD OTHER REVENUES

XX

LESS EXPENSES

Selling and Distribution:

Advertising and Display Costs XX
 Salesmen's Salaries and Commissions XX

Delivery Expenses XX

Bad Debts and Provision for Bad Debts XX

Depreciation of Delivery Vehicles and

Display Equipment XX XX

Administration:

Rent, Rates and Insurance XX

Office Salaries XX

General Ofice Expenses XX

Depreciation of Office Buildings

and Equipment XX XX

Financial Charges:
Loan Interest/ Interest on Overdraft XX

Bank Charges XX

Discounts Allowed XX XX

XX

NET PROFIT/ (LOSS) XX

 MANUFACTURING ACCOUNTS, CONTINUED
EXERCISE

The following details were extracted from the books of Horizon Enterprise, a block
manufacturer, on September 30, 2013:

Book Value of Plant and Machinery 15 000

Stocks at October 1, 2012
Raw Materials 2350
Work in progress 1480
Finished Goods 1500
Purchase of Raw Materials 8 500
Purchase of Finished Goods 1600
Carriage Inwards on Materials 270
Wages 7 000
Factory Manager's Salary 3 000
Factory Power 950
Lighting 750
Rent and Rates 1900
Carriage Outwards 250
Trade Expenses 350
Sales 35 000
Stock at September 30, 2013
Raw Materials 2 500
Work in progress 1250
Finished Goods 1200

NOTE: The following should be taken into consideration:

1. Wages owing $500.
2. Rates prpaid $ 100.
3. Only 4/5 of the wages is for factory workers.
4. 2/3 of the rent, rates and lighting must be charged to the factory.
5. Plant and Machinery are to be depreciated by 10%.
You are required to:
a) Prepare the manufacturing account.
b) Prepare the trading and profit and loss account for the year ended September 30,
2013.
c) Calculate the production cost per block, assuming that I 250 blocks were
manufactured for the year.
SOLUTION (a)
Horizon Enterprises
ManufacturingAccount for year ended September 30,2013
Raw Materials:
Opening Stock 2350
Purchases 8 500
Add Carriage Inwards 270
Net Purchases 8 770
Cost of Materials Available for Use 11 120
Less Closing Stock 2500
Cost of Materials Consumed (used up) 8620

Direct Labour:

Wages (S7,000+$500) * 4/5 6.000

PRIME COST 14 620

Factory Overheads:

Factory Manager's Salary 3 000

Factory Power 950
Lighting (2/3 * $750) 500
Rent and Rates (2/3 * $1,800) 1200
Depreciation of Plant and Machinery
(10% of 15,000) 1500
Total factory overheads 150
Manufacturing Cost 21 770
Add Opening work in Progress 1 480
23 250
Less Closing Work in Progress 1250
PRODUCTION COST (Cost of Goods Manufactured) 22 000
(b) Horizon Enterprise
Trading and Profit and Loss Account for year ended September 30, 2013
Finished Goods :

Sales 35 000

Less Cost of Goods Sold:

Opening Stock I500
Production Cost 22 000
Purchases T600
Cost of Goods Available for Sale 25 100
Less Closing Stock L200
Cost of goods sold 23. 900
Gross Profit 11 100
Less Expenses
Carriage Outwards 250
Trade Expenses 350
Wages (1/5 * 7,500) 1500
Lighting (1/3 * 750) 250
Rent and Rates (1/3 * 1,800) 600
2950
Net Profit 8150

(C)
Production Cost per Unit = Total Production Cost
Number of Units Produced

=$22 000
1250
=$17.60 per block.
Tutorial Notes:
1. A manufacturing fim willrarely buy finished goods, since it is making its
own products. As such, questions may not necessarily contain purchases of
finished goods.
2. Itis only necessary to categorize the expenses if the question requires this.
3. There may be other income (additional revenues) to be added with gross
profit before the net profit (or loss) is calculated.
 PRACTICE EXECERCISE

Innovations Ltd. Sells cellular phoncs, some of which they produce themselves and some
of which they buy for resale. The following information was taken from their records for
the year ended December 31, 2013.

RAW WORK IN FINSIHED

MATERIAL PROGRESS GOODS

Stocks: at Jan. 1, 2013 20,000 14,000 8,000

at Dec. 31, 2013 16,000 1,000 6,000

Purchases 60,000 24,300

Carriage inwards 15,000 400
Purchases Returns 500 700
Sales 182,500
Sales Returns 2,500

OTHER INFORMATION:

Production Wages 10 000

Factory Power 1200
Trade Expenses 850
Royalties Paid 4 500
Lighting 2 400
Depreciation of Plant and Machinery 4 000
Carriage Outwards 350
Office Salaries 2 700
Discounts Allowed (selling expense) 200
Rent, Rates and Insurance 3 600
Factory Manager's Salary 2 500
Other Delivery Expense 500

You are required to:

a) Prepare a Manufacturing Account for the year ended December 3 1, 2013

b) Prepare a Trading and Profit and Loss Account for the year.
c) Assuming that 200 cellular phones were produced during the ycar, calculate the cost of
producing a single phone
d) Calculate the percentage net profit on sales.
NOTE: Lighting, rent, rates and insurance should be apportioned among the factory,
general office and sales department in the ratio [Link], respectively.