Chapter 7: Manufacturing Account
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TYPES OF INVENTORY Raw materials Work in progress
Finished goods/completed goods
TYPES OF PRODUCTION COSTProduction cost Prime cost/ Direct cost
Overhead cost/ Indirect cost Indirect materials Indirect labor
Indirect expenses
Direct materials Direct labor Direct expenses3
PRIME COST1.
Direct materials
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
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2.
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
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3.
Direct expenses They refer to the expenses paid according to
each unit of production. Examples: Royalties, hire purchase of
special materials
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OVERHEAD COST1. Indirect materials Lubricants Loose tools
2.Indirect labour wages, salaries, bonus or commission to cleaners,
crane drivers, foremen, supervisors and production managers.
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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 STATEMENTManufacturing Account 2. Income Statement 3.
Balance Sheet1.
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1) Manufacturing AccountIt 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
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Manufacturing Account for the year ended. Opening stock of Raw
Materials Add: Purchases of Raw Materials X Return Outwards (raw
materials) (X) Carriage inwards (raw materials) (X) Drawings (raw
materials) (X)Direct material Wages Less: Closing stock of Raw
Materials Cost of Raw Materials Consumed Direct labour Direct Labor
Royalties Direct Expenses Prime Cost Factory Overhead Expenses:
Production Managers salaries Overhead Factory Power Maintenance of
Plant & Machinery Depreciation of Plant & Machinery
X
X X (X) X X X X X X X 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 Increase / decrease in the provision for unrealized13
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 14 X (X)
XX X (X) (X) X (X)
(X) X X X XX
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 profit15
XXX XXX XXX XXX XXX XXX XXX XXX
XXX XXX XXX XXX XXX XXX
Net profit
3) Balance SheetIt 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-current Assets Current Asset 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: drawingsNon-current
liabilities Current liabilities 17 Total liabilities and owner`s
capital
XX X
X (X)
X X
X X (X) X X X X
IMPORTANT !! 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.18
Production cost Vs. Transfer price Stock of raw materials, work
in progress and
other finished goods are valued at cost. However, the stock of
manufactured goods can be valued at production cost or the transfer
price of goods completed. Provision of unrealized profit of on
stock should be made if closing stock of manufactured goods is
valued at transfer price.
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Provision of Unrealized ProfitMark up% = Stock (at transfer
price) x 100%+ Mark up(%)
Increase/ Decreased in Provision of Unrealized ProfitIncrease in
Provision (other expenses) Dr Profit and Loss Cr Provision for
Unrealized Profit20
Reduction in Provision (other revenues) Dr Provision for
Unrealized Profit Cr Profit and Loss
Adjustment on expenses ExpensesBalance b/d (prepaid) Cash/Bank
Acc. Rec ( for dis. allowed) Balance c/d (accrued) Balance b/d
(accrued) Income Statement
Drawings (expenses)Balance c/d (prepaid)
Income Statement
Income statement (admin)Manufacturing account (factory)
Adjustment on revenue RevenueBalance b/d (accrued) Balance b/d
(prepaid) Income Statement Cash/Bank Acc. Pay (for dis .received)
Balance c/d (prepaid) Balance c/d (accrued)
Income Statement
Income statement (admin) Manufacturing account (factory)
Adjustment on depreciationAccum.depreciation of non-current
assetsBalance c/d Balance b/d) Income Statement
Accum.depreciation for previous years 1.Stated in question
Depreciation for current years 2.cost-NBV 1.Policy given 2.No
policy (cost-NBV)
