Faculty of Business, Finance & Information Technology
FINANCIAL ACCOUNTING II_BAA1253
Chapter 7 – Manufacturing Accounts
Prepared by: Dr Nurliyana Haji Khalid
If its important to you, you will find a way. If its not, you’ll find an excuse.
1
Learning Objectives
1) Define production costs and distinguish between prime cost (direct) and production
overheads (indirect costs).
2) Describe cost accounting terms: Direct material, direct labour, prime cost and
production overheads.
3) Calculate factory cost of production.
4) Prepare adjustments for work in progress
5) Prepare manufacturing accounts, income statements and the statements of financial
position of a manufacturing business.
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Accounting for Manufacturing companies
• A manufacturing company produces the finished goods
themselves. They buy raw materials and convert them
into finished goods for resale. Hence they are involved in
production activities besides the normal selling and
administrative activities. They need to determine the
production cost in arriving at their cost of goods sold.
• This production cost is presented in an account called the
manufacturing account that needs to be prepared in
addition to the income statement.
• Specialized accounting concepts and techniques required
to record, report, and control the operations of a
manufacturing company.
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Production costs (Direct and Indirect Costs)
PRIME COST
PRODUCTION OVERHEADS
• Human labour & various tools and machines are
used to convert raw materials into finished
goods. The production costs measures the cost
of goods manufactured.
• The total costs of direct materials, direct labour
and direct expenses is known as PRIME COST.
• PRODUCTION OVERHEADS are costs that are
not directly related to the actual to the actual
production of goods.
EXAMPLE OF PRIME COST IN BREAD MANUFACTURING
Finished goods
Raw materials
Direct Labour
Cost accounting term (1/2)
DIRECT MATERIALS
• Are materials which the manufacturing business converts into the
finished goods. For eg. flour, eggs yeast and butter are the direct
materials used to make breads, cakes and pastries.
• The cost of these materials can be directly allocated to the finished
goods.
DIRECT LABOUR
• Refers to wages paid to employees who are directly involved in the
actual production. The wages paid to workers who operate machines
that are used to produce the product or those who work on the final
products, are classified as direct labour.
• The wages paid to these workers can be directly allocated to the
finished goods.
DIRECT EXPENSES /
MANUFACTURING SUPPLIES
• Are expenses other than material and labour that can be directly
related to a specific product. The cost of hiring a special machine to
produce a particular product and royalties paid for the right to
produce the finished products are among the common examples of
direct expenses.
PRIME COST
• The total of cost of direct materials, direct labour and direct
expenses.
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Cost accounting term (2/2)
PRODUCTION OVERHEADS
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• Are costs that are not directly related to the actual production of
goods.
• These costs do not vary with output and are normally fixed.
• Eg: wages paid to factory supervisor, factory cleaner and factory
manager, repairs and maintenance of plant and machinery,
depreciation of plant and machinery, utilities, rental and insurance.
• These production overheads only include costs associated with the
running of the factory.
Flow of Manufacturing Costs
Raw
Materials
Applied
Work-inProcess
Indirect
Factory
Overhead
Labor
Direct
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Accounting: A Practical Approach, 11e by Slater
Finished
Goods
Cost of
Goods
Sold
Cost of Goods Sold
•
•
•
Different from a merchandise co.
Purpose is to properly match manufacturing costs with sales
Must include beginning & ending finished goods
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Cost of Goods Manufactured
Raw materials
used
Direct
labor
Finished
Goods
Inventory
Work-inProcess
inventory
Cost of
goods sold
Production
overhead
© 2010 Prentice Hall Business Publishing, College
Accounting: A Practical Approach, 11e by Slater
MANUFACTURING ACCOUNTS
- 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
MANUFACTURING ACCOUNT
Production costs for the period:
RM
Direct materials
XX
Direct labour
XX
Direct expenses
XX
Prime cost
XX
Indirect manufacturing costs
XX
PRODUCTION COST OF GOODS
XX
The format of a manufacturing account
5B1
Total manufacturing costs
Work-in-process Inventory, 7-31
Work-in-process Inventory, 7-31
Total Cost of Goods Manufactured
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Activity
Details of production costs for the year ended 31 December 2010:
RM
1 January 2010, inventory of raw materials
5,000
31 December 2010, inventory of raw materials
7,000
Raw materials purchased
80,000
Manufacturing (direct) wages
210,000
Royalties
1,500
Indirect wages
90,000
Rent of factory – excluding administration and
selling and distribution
4,400
Depreciation of plant and machinery in factory
4,000
General indirect expenses
3,100
PREPARE MANUFACTURING ACCOUNT FOR THE YEAR ENDING 31 DECEMBER 2010
Manufacturing Account for the year ending 31 December 2010
RM
RM
Inventory of raw materials (1.1.20210)
5,000
Add: Raw materials purchased
80,000
85,000
Less: Inventory of raw materials (31.12.2010)
(7,000)
Cost of raw materials consumed
78,000
Manufacturing (direct) wages
210,000
Royalties
1,500
Prime cost
289,500
Rent of factory
4,400
Indirect wages
90,000
General expenses
3,100
Depreciation of plant and machinery
4,000
Production cost of goods
101,500
391,000
Work in progress (WIP)
• The production cost to be carried out is the production cost of goods completed during
the period. If items have not been completed, they cannot be sold. Therefore, they
should not appear in the trading account.
• The calculation for WIP is:
Total production costs expended this year
xxxxx
Add: Costs from last year, in respect of goods completed
this year (WIP)
xxxxx
xxxxx
Less: Costs in this year, for goods to be completed next
year (WIP)
(xxxx)
Production costs expended on goods completed this
year
xxxxx
MANUFACTURING ACCOUNT FOR THE YEAR ENDING 31 DECEMBER 2010
Inventory of raw materials 1.1.2010
8,000
Add: Purchases
87,000
Carriage inwards
2,000
97,000
Less: Inventory of raw materials 31.12.2010
-10,500
Cost of raw materials consumed
86,500
Direct wages
39,600
Direct expenses
1,400
Prime cost
127,500
Indirect manufacturing costs:
Fuel and power
9,900
Indirect wages
25,500
Lubricants
3,000
Rent
7,200
Deprectiation of plant and machinery
4,200
Internal transport expenses
1,800
Insurance
1,500
General factory expenses
3,300
56,400
183,900
Add: Work in progress 1.1.2010
3,500
187,400
Less: Work in progress 31.12.2010
(4,200)
PRODUCTION COST OF GOODS
183,200
INCOME STATEMENT FOR THE YEAR ENDING 31 DECEMBER 2010
RM
RM
Sales
250,000
Less: Cost of goods sold
Inventory of finished goods 1.1.2010
3,500
Add: Production cost of goods
183,200
186,700
Less: Inventory of finished goods 31.12.2010
(4,400)
182,300
Gross profit
67,700
BALANCE SHEET AS AT 31 DECEMBER XXX (Extract)
Current assets
RM
Inventory
XXX
Raw materials
XXX
Finished goods
XXX
Work in progress
XXX
Accounts receivable
XXX
Bank
XXX
Cash
XXX
Total current assets
XXXX
• Balance Sheet
SAMOLIS MANUFACTURING
B A L A N C E SHEET
M A R C H 31, 20XX
ASSETS
Current A ssets
Cash
A c c ount s R e c e i va bl e
Less: A l l o w a n c e fo r D o ubt ful A c c o unt s
Inventories
R a w Materials
W o rk - in - P ro ce ss
Finished Goods
$
$
P r ep aid E x p e n s e s
Factory S u p p l i e s
P re pa i d Factory Insurance
Total C urre nt A s s e t s
Plant an d E q u i p m ent:
Factory M a c hi ne ry
Less: A c c um . D e pre c . , Factory M a c hi ne ry
Total A ssets
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$
$
350,000
245,000
130,000 $
115,000
96,000
18,000
28,000 $
142,000
2,500
3,000 $
$
5,500
612,500
78,000
19,500 $
$
58,500
671,000
THANK YOU