MANUFACTURING ACCOUNT
BA, Msc.AF, PMP Aidan Luvanda
Nature of manufacturing process;
Manufacturing of goods is the transformation of raw materials
into finished or semi finished goods. Some firms have to
manufacture their goods before selling them to the general
public e.g Coca-Cola, Nestle etc., while some merely sell
products which are acquired in finished form.
A manufacturing organization will acquire raw materials, engage
labour, and other inputs necessary to change the raw materials
into finished goods. The main aim of preparing the
manufacturing account is to ascertain the cost of goods
manufactured during the financial year. It is an extension of the
trading account.
PURPOSE OF MANUFACTURING
ACCOUNTS
The purpose of manufacturing accounts are as follows
To ascertain the cost of goods manufactured.
To ascertain the amount of any profit or loss on the
manufacturing process


Components of factory cost of production
In the case of a manufacturing enterprise, the manufacturing costs are
divided into the following types, which are listed below:
i) Direct material costs
These types of costs are those materials which are used directly in the
manufacture of products or goods. They are the materials that can be
identified in the final products. Example; During the manufacturing process
of tables, direct materials consists of timber, nails, glue, paints etc.
ii) Direct labor costs
Direct labor are wages paid to those who are directly involved in the
manufacturing processes of a product. Example: During the manufacturing
processes of tables; direct labor consists of wage paid to those workers
who saw, shape of join the piece of timber into table.
iii) Direct expenses
Direct expenses are expenses that must be incurred in the
manufacture of a product. I.e, they can be directly allocated a
particular unit of a product e.g. live charges for a special
equipment used in the process of manufacture, royalties…
NB: You have to note that the sum of all the direct costs is
known as PRIME COSTS
iv) Indirect manufacturing costs / factory overheads
Indirect manufacturing costs are also known as Factory overheads. They are
any other expenses (apart from the direct costs) for items being produced.
Examples are: cleaners’ wages, factory rents, depreciation of plant and
equipment, factory power and lighting.
Indirect manufacturing costs are all those costs which occur in the factory or
other place where production is being done, but which cannot easily be traced
to the items being manufactured.
Examples are:
•
wages of cleaners
•
wages of crane drivers
•
rent of a factory
•
depreciation of plant and machinery
•
costs of operating forklift trucks
•
factory power
•
factory lighting
Note that: prime cost + indirect manufacturing costs = PRODUCTION COSTS
v) Administrative Expenses
Administrative expenses are expenses that are administrative in nature. I.e,
they are expenses which are incurred in the process of planning, controlling
and directing the business organization. e.g. office rents, office electricity,
depreciation of office machinery, secretarial salaries.
vi) Selling and distribution expenses
Selling and distribution expenses are expenses which are incurred in the
process of selling, promoting and distributing the goods manufactured.
Examples are; advertising expenses, carriage outwards, depreciation of
motor van, salesmen salaries etc.
vii) Finance Costs
These are expenses such as bank charges, discount allowed and every other
monetary expenses
Prepare final accounts for manufacturing
Firms
In Manufacturing accounts, the following statements are
prepared
Manufacturing accounts – The manufacturing account is
prepared to determine the cost of production.
Trading account- The aim of preparing Trading Account is to
determine the gross profit or loss on trading.
Balance sheets- The balance sheet is the statement that
shows the assets and liabilities of a business
1.
2.
3.
Manufacturing accounts
This is debited with the production cost of goods completed
during the accounting period. It contains costs of:
•
Direct materials
•
Direct labour
•
Direct expenses
•
Indirect manufacturing costs
The manufacturing account includes all purchases of raw
materials, including the stock adjustments for raw materials. It
also includes stock adjustments for work in progress (goods that
are part-completed at the end of a period).
Let’s put this into a series of steps:
1. Add opening stock of raw materials to purchases and subtract
the closing stock of raw materials.
2. Add in all the direct costs to get the prime cost.
3. Add in all the indirect manufacturing costs.
4. Add the opening stock of work in progress and subtract the
closing stock of work in progress to get the production cost of
all goods completed in the period.
Thus, when completed, the manufacturing account shows the total of
production cost that relates to those manufactured goods that have been
available for sale during the period. This figure will then be transferred down
to the profit and loss account where it will replace the entry for purchases.
Manufacturing Account
Production costs for the period:
Direct materials
Direct labour
Direct expenses
Prime cost
Indirect manufacturing costs
Production cost of goods completed c/d to trading account
tsh
xxx
xxx
xxx
xxx
xxx
xxx
Trading account and Profit/Loss account.
•This account includes:
•
Production cost brought down from the manufacturing account
•
Opening and closing stocks of finished goods
•
Sales
•When completed this account will disclose the gross profit. This
will then be carried down to the profit and loss account part.
•The manufacturing account and the trading account can be
shown in the form of a diagram:
(A)
(B)
is production costs of goods unsold in previous period.
is production costs of goods unsold at end of the current period.
Profit and loss account part
This is prepared in the way you learnt in earlier chapters in this
book. You know, therefore, that it includes:
•
Gross profit brought down from the trading account
•
All administration expenses
•
All selling and distribution expenses
•
All financial charges
However, some of the items you would normally put in the profit and
loss account part are already included in the manufacturing account,
e.g. depreciation on machines, and canteen wages. When completed,
this account will show the net profit.
•Treatment of Work in progress
•The production cost to be carried down to the trading account is that of 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.
•
•For instance, if we have the following information, we can calculate the transfer to the trading
account:
•Total production costs expended during the year
•Production costs last year on goods not completed last year, but completed in
•this year (work in progress)
•Production costs this year on goods which were not completed by the year end
• (work in progress)
50,000
3,000
4,400
The calculation is:
Total production costs expended this year
Add: Costs from last year, in respect of goods completed in this year (work in progress)
•Less: Costs in this year, for goods to be completed next year (work in progress)
Production costs expended on goods completed this year
50,000
3,000
53,000
( 4,400)
48,600
Illustration 3.1
From the information below prepare a Manufacturing Account and a Trade
Account
1 January 20X7, Stock of raw materials
31 December 20X7, Stock of raw materials
1 January 20X7, Work in progress
31 December 20X7, Work in progress
8,000
10,500
3,500
4,200
Year to 31 December 20X7:
Wages:
Direct 39,600
Indirect 25,500
Purchase of raw materials 87,000
Fuel and power 9,900
Direct expenses 1,400
Lubricants 3,000
Carriage inwards on raw materials 2,000
Rent of factory 7,200
Depreciation of factory plant and machinery 4,200
Internal transport expenses 1,800
Insurance of factory buildings and plant 1,500
General factory expenses 3,300
The trading account is concerned with finished goods. If in the foregoing
exhibit there had been 3,500 stock of finished goods at 1 January 20X7
and 4,400 at 31 December 20X7, and the sales of finished goods
amounted to 250,000 then the trading account would appear