Chapter 7:
Manufacturing Account
1
TYPES OF INVENTORY
Raw materials
Work in progress
Finished goods/completed goods
TYPES OF PRODUCTION COST
Production cost
Prime cost/
Direct cost
3
Overhead cost/
Indirect cost
Direct materials
Indirect materials
Direct labor
Indirect labor
Direct expenses
Indirect expenses
PRIME COST
Direct materials
1.
•
•
•
4
Costs of the materials used during the period.
Include the purchase price of the raw materials and
the acquisition costs related to the purchase.
Examples: Purchase of raw materials,
Carriage inwards / freight charges on raw materials
2.
5
Direct labour
• Wages paid to the people who are directly
involved in the manufacturing process.
• Example: Direct labour, Direct
wages, Factory wages, Production
wages, Manufacturing wages
3.
6
Direct expenses
• They refer to the expenses paid according to
each unit of production.
• Examples: Royalties, hire purchase of
special materials
OVERHEAD COST
1. Indirect materials
Lubricants
Loose tools
2.Indirect labour
wages, salaries, bonus or commission to
cleaners, crane drivers, foremen, supervisors and
production managers.
7
3. Indirect expenses related to the factory,
machinery and vehicles
Rent and rates
Depreciation
Insurance
Repairs and maintenance
Factory power / electricity
Internal transport
Loss on disposal
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FINANCIAL STATEMENT
1. Manufacturing Account
2. Income Statement
3. Balance Sheet
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1) Manufacturing Account
It shows the production cost or transfer price of
goods completed during the accounting period.
Direct materials
Direct labour
Direct expenses
Factory overhead expenses
Work in progress
Factory profit
10
Manufacturing Account for the year ended…….
Opening stock of Raw Materials
Add: Purchases of Raw Materials
Return Outwards (raw materials)
Carriage inwards (raw materials)
Drawings (raw materials)
X
X
(X)
(X)
(X)
X
X
(X)
X
X
X
X
Direct material
Less: Closing stock of Raw Materials
Cost of Raw Materials Consumed
Direct labour
Direct Labor Wages
Royalties
Direct Expenses
Prime Cost
Factory Overhead Expenses:
Production Manager’s salaries
X
Overhead
Factory Power
X
Maintenance of Plant & Machinery
X
Depreciation of Plant & Machinery
X
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X
Add: Opening Work in Progress
Less: Closing Work in Progress
Production Cost of finished goods
Factory profit (% PCFG)
Transfer price of finished goods
X
X
X
X
X
2) Income Statement
Profit or loss of the whole business during the
accounting period.
Includes all the expenses and income related to the
office and the running of the whole business such
as:
Gross profit / loss from the trading account
Factory profit / loss
Administration expenses
Selling and distribution expenses
Financial expenses
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Increase / decrease in the provision for unrealized
profit
Income Statement for the year ended ……
Sales
Less: Returns inwards
Less: Cost of Goods Sold
Opening stock of finished goods
add: Transfer price of Finished goods
Less: Drawings (finished goods)
Returns outwards
less: Closing stock of finished goods
Gross Profit
Add: Factory Profit
Add: Other revenue
Discount Received
Reduction in provision for unrealized profit
X
(X)
X
X
X
(X)
(X)
X
(X)
(X)
X
X
X
X
X
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Less: Other Expenses
Selling expenses
commissions on sales
salesman salaries
carriage outwards
depreciation of delivery van
Administrative expenses
rental
depreciation of office equipment
printing
postage
Financial charges
bad debts
discount allowed
interest
increase in provision for unrealized profit
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Net profit
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
3) Balance Sheet
It shows the assets, liabilities and equities of the
Whole business on a specific date of the accounting
period.
Assets (closing inventory : raw materials, WIPs, and
finished goods)
Liabilities
Equities
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Balance Sheet as at………….
Non-currentAssets
CurrentAsset
Inventory :-raw materials
-work in progress
-finished goods
less: provision for unrealized profit
Total assets
Financed by:
Owner`s capital
Opening capital
Add: net profit
Less: drawings
Non-current liabilities
Current liabilities
17 Total liabilities
and owner`s capital
X
X
X
X
(X)
X
X
X
X
(X)
X
X
X
X
IMPORTANT !!
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Some expenses are related to both the
manufacturing process and the administration of
the
office
such
as:
Rent, electricity, insurance, depreciation on
premises, motor vehicles etc.
These expenses should be allocated to the
factory and office and debited to the
manufacturing account and the profit and loss
account respectively.
The bases of allocation are usually given in the
examination questions.