Manufacturing Accounts. Why Prepare this account Manufacturers make goods rather than buy them from suppliers A manufacturing account is required to provide

Manufacturing Accounts

Why Prepare this account

• Manufacturers make goods rather than buy them from suppliers

• A manufacturing account is required to provide a value for the Cost of such production

• A Manufacturing account is made up of ALL of the relevant costs of the finished goods sold and can be split into DIRECT and INDIRECT costs

Manufacturing costs

• Direct costs (can be traced to the manufacture of specific products)• Material• Labour• Expenses (carriage in,

royalties)

• Indirect Costs (must be paid but are of a general benefit to production and so are NOT specifically related to any particular product • Supervisors wages• Factory rent• Factory rates• Factory heat/light• Depreciation of factory

machinery

Basic structure

• COST OF RAW MATERIALS CONSUMED• These are direct costs of raw

materials AND relevant expenses• It is calculated as follows

• Opening stock of raw materialsADD• Purchase of raw materials• Carriage in of raw materialsLESS• Closing stock of raw materials

• PRIME COST OF PRODUCTION• This is the total of ALL DIRECT

COSTS incurred in manufacture of the product

• It is calculated by adding the following

• Cost of raw materials consumed• Direct Labour• Royalties

Basic structure

• FACTORY COST OF PRODUCTION• This is the total of ALL DIRECT AND

ALL INDIRECT COSTS incurred in manufacture of the product

• It is calculated by adding the following

•Prime Cost•Indirect Expenses

Manufacturing Account of John Doe Plc for the year ended 31 December 2010

£ £ £

Opening Stock of Raw Materials 10.000

Add Purchases of raw materials 100,00

Less Returns of raw materials 5,00095,000

Add Carriage In of raw materials 2,000

97,000

Less Closing Stock of raw materials 5,000 92,000

COST OF RAW MATERIALS CONSUMED 102,000

Add Direct Wages 50,000

Add Direct Expenses 2,000 52,000

PRIME COST OF PRODUCTION 154,000

Add Factory Overheads

Maintenance of factory machinery 5,000

Factory Rent and Rates 5,000

Factory Light and |Heat 3,000

Factory Supervision 2,000

Depreciation of Factory machinery 10,000

Factory Overheads 25,000

FACTORY COST OF PRODUCTION 179,000

Exercise 2Manufacturing Account of Woodcraft Plc

£ £ £

Opening Stock of Raw Materials 2.000


Less Returns of raw materials 060,000

Add Carriage In of raw materials 0

60,000




Add Direct Expenses 0 36,000

PRIME COST OF PRODUCTION 95,000


Insurance of factory building 900

Depreciation of FactoryEquipment 2,500

Factory Light and |Heat 800

Factory Rates 520

FACTORY OVERHEADS 4,720


Accruals / Prepayments• Accruals occur when a debt is

outstanding/ still owing when drawing up the final accounts

• Prepayments occur when a debt has been paid in advance/overpaid at the time of creating the final accounts

• The Manufacturing and Trading profit & Loss account must show what SHOULD HAVE been paid for the year therefore

• If an amount is underpaid/accrued – the amount due is added to the figure in the trial balance and the adjusted figure taken to the P&L account.

• The amount due is transferred to the Balance sheet as a Current Liabiity

Accruals / Prepayments

• If an amount is prepaid – the amount due is deducted from the figure in the trial balance and the adjusted figure taken to the P&L account.

• The amount prepaid is then transferred to the balance sheet as a current asset

Depreciation

• This is the amount by which an asset drops in value over a period of time (usually a year), due to wear and tear

• The amount of depreciation for the year is taken to the Manufacturing/Profit & Loss account

• The accumulated depreciation is posted in the company’s balance sheet

Exercise 3Manufacturing Account of Acorn Plc for the year

ended 31 July£ £ £

Opening Stock of Raw Materials 2,300



Cost of Raw Materials consumed 86,650



PRIME COST 134,650


General Expenses 3,450

Lighting & Heating 4,320

Insurance 980

Rent & Rates 1,430


144,830

ADD WIP at beginning 4,500

149,330

Less WIP at end 4,200


Exercise 3Trading Account of Acorn Plc for the

year ended 31 July

£ £ £

Sales 200,000

LESS Cost of Sales

Opening stock of finished goods 6,200

ADD Factory cost of Production 145,130

151,330

Less Closing stock of finished goods 7,500

Cost of Sales 143,830

GROSS PROFIT 56,170

Exercise 4The Vineyard

Notes for the Manufacturing Account

ACCRUALS

Lighting and Heating

Amount paid 3,400

Add Accrual 720 Liability (Balance Sheet)

4,120 Manufacturing Acc

PREPAYMENTS

Insurance

Amount paid 2,400

Less Prepayment 600 Asset (Balance Sheet)


Exercise 4Manufacturing Account of The Vineyard for the y/e

30 Nov£ £ £







PRIME COST 356,560




Insurance 1,800

Rent & Rates 6,000

Depreciation of factory equipment 20,000


402,980


435,440



Exercise 4Trading Account of The Vineyard for the year

ended 31 JulyE £ £

Sales 480,000

LESS Cost of Sales



449,740



GROSS PROFIT 115,600

Exercise5Glenisla Papers Plc for the year ended 31

December


ACCRUALS

Note 1 Wages

Amount paid 180,000

Add Accrual 5,600 Liability (Balance Sheet)


Note 2 Factory Rent and Rates

Amount Paid 34,000


36,570 Manufacturing Account

Note 3 Depreciation

Cost 80,000

Depreciation 25% 20,000 Manufacturing Account

Net Book Value 60,000

Exercise 5Manufacturing Account of Glenisla Papers Plc

for the year ended 31 December£ £



Less Returns of raw materials 6,500 213,500



Add Direct Wages * Note 1 185,600


PRIME COST 401,600


Maintenance of factory machinery 18,000

Factory Rent and Rates *Note 2 36,570

Factory Light and |Heat 2,600

Factory Supervision 25,000

Depreciation of factory machinery *Note3 20,000



Exercise 6Northern Lights


PREPAYMENTS

Rent

Amount paid 16,500

Less Prepayment 3,400 C Asset (Balance Sheet)


Insurance

Amount Paid 4,500

Less Prepayment 1,200 C Asset (Balance Sheet)

3,300 Manufacturing Account

ACCRUAL

Lighting and Heating

Amount paid 4,200

Add Accrual 840 Asset (Balance Sheet)


Exercise 6Manufacturing Account of Northern Lights for

the y/e 28 February

£ £ £



Less Closing Stock of raw materials15,630111,270




PRIME COST 273,130




Insurance 3,300

Rent 13,100

Depreciation of Machinery 40,000


356,070


380,670



Exercise 6Trading Account of Northern Lights for

the year ended 28 February

£ £ £

Sales 600,000

LESS Cost of Sales



386,170




Exercise 7Sunseekers Products Plc

Notes for the Manufacturing /Trading Acc ACCRUAL

Direct Wages

Amount paid 210,800

Add Accrual 41,400 C Liability (Balance Sheet)


PREPAYMENTS

Factory Insurance

Amount paid 12,250

Less Prepayment 3,220 Asset (Balance Sheet)


Office Insurance

Amount Paid 14,520


13,470 Profit & Loss Acc

Exercise 7Sunseekers Products Plc

Notes for the Manufacturing /TPL Acc DEPRECIATION

Factory Machinery

Cost 140,000

Depreciation 20% 28,000 Manufacturing Acc


Office Equipment

Cost 60,000

Depreciation 15% 9,000 Profit & Loss Acc


Exercise 7Manufacturing Account of Sunseekers Products

Plc for the y/e 30 April£ £ £


Add Purchases of Raw Materials 320,000

Less Closing Stock of Raw Materials 32,500 287500




PRIME COST 565,700

ADD FACTORY OVERHEADS

Maintenance and Machinery 48,000

Insurance of Buildings (12250-3220) 9,030

Rent and Rates 43,600




716,760

Add WIP at Beginning 12,500

729,260

Less WIP at End 16,780


Exercise 7Trading Profit & Loss Acc of Sunset Products

Plc for the y/e 30 April £ £ £ Sales

900,000

LESS COST OF GOODS SOLD


Add Factory Cost of Production 712,480

796,480

Less Closing stock of finished goods 98,420 698,060


LESS EXPENSES

Insurance 3,320

Rent and Rates 14,520

Advertising 80,000

Provision for Doubtful Debts 5,000

Provision for Dep Office Equipment 9,000 111,840

NET PROFIT 90,100

BAD DEBTS Bad debts are amounts of money

owed to a business by DEBTORS who WILL NOT pay their debt due to bankruptcy etc

Bad Debts listed as an entry in the trial balance should ONLY be entered as an EXPENSE in the PROFIT AND LOSS Account

PROVISION FOR BAD DEBTS

If you are asked to create this account in the notes:

Profit and Loss Account Calculate the TOTAL value (eg

5% of Debtors, etc). Enter the total value of Provision

as an EXPENSE in the Profit and Loss Account

2. Balance Sheet SUBTRACT the TOTAL value

of provision from the Debtors Figure in the Balance Sheet

INCREASE IN PROVISION FOR BAD DEBT

If after calculating the new Provision for Bad Debts figure it shows an increase - eg from £3,000 to £5,000 then:

Add the difference (ie £2000) as an expense in the Profit and Loss Account

2. Subtract the new amount (ie £5,000) from the Debtors figure in the balance sheet

A DECREASE IN PROVISION FOR BAD DEBT

If after calculating the new Provision for Bad Debts figure it shows a decrease - eg from £6,000 to £4,000 then:

Add the difference (ie £2000) to the Gross Profit figure

2. Subtract the new amount (ie £4,000) from the Debtors figure in the balance sheet

Exercise 8Beachwear Plc

Notes for the Manufacturing /TPL Acc PREPAYMENTS

Factory Rent & Rates

Amount paid 26,700



Office Rent & Rates

Amount paid 4,500



ACCRUALS

Office Salaries

Amount Paid 43,200



Exercise 8Beachwear plc

Notes for the Manufacturing /Trading Acc PROVISION FOR DOUBTFUL DEBTS

Provision so far 2,000

Adjusted to 6,000 Deducted from Debtors B/S

Difference +£4,000 Increase to Man Acc

DEPRECIATION

Factory Machinery

Cost 220,000

Depreciation 25% 55,000 Manufacturing Acc


Office Equipment

Cost 30,000

Depreciation 10% 3,000 Profit & Loss Acc


Exercise 8Manufacturing Account of Beachwear plc for

the y/e 30 June£ £ £


Add Purchases of Raw Materials 235,600

Less Closing Stock of Raw Materials 12,500 223,100



Add Direct Expenses (royalties) 8,000 175,830

PRIME COST 413,430

ADD FACTORY OVERHEADS

Maintenance and Machinery 12,000

Electricity 4,355

Insurance of Buildings 3,500

Rent and Rates (26700-4200) 22,500



510,785

Add WIP at Beginning 23,480

534,265

Less WIP at End 23,560


Exercise 8Manufacturing Account of Beachwear plc for

the y/e 30 June

£ £ £ Sales

620,000

Less Cost of Goods Sold


Add Factory Cost of Production 510,705

575,300

Less Closing stock of finished goods 82,300 493,000


Less Expenses

Electricity 1,420

Insurance of Buildings 985

Rent and Rates (4500-750) 3,750

Office Salaries(43200+4380) 47,580

Provision for Doubtful Debts 4,000

Prov for Depreciation of Equipment 3,000 60,735

NET PROFIT 66,265

Exercise 11Harvey & Nicholl

Notes for the Manufacturing /TPL Acc DEPRECIATION

Factory Machinery

Cost 180

Depreciation 25% 45 Manufacturing Acc

135

Office Equipment

Cost 40

Depreciation 15% 6 Profit & Loss Acc

34

Delivery Van

Cost 76

Depreciation 25% 19 Profit & Loss Acc

57


Notes for the Manufacturing /Trading Acc ACCRUALS

Indirect Wages

Amount Paid 97


101 Profit & Loss Acc

Office Salaries

Amount Paid 54


60 Profit & Loss Acc

PREPAYMENT

Rent and Rates

Amount Paid 30


25


Notes for the Manufacturing /Trading Acc ALLOCATION OF EXPENSES

Rent and Rates

Amended Figure 25

Factory 60% 15 Manufacturing Account

Admin 40% 10 Profit & Loss Account

Insurance of Buildings

Amount Paid 12

Factory 75% 9 Manufacturing Account

Admin 25% 3 Profit & Loss Account

PROVISION FOR DOUBTFUL DEBTS

Debtors 80

Provision 10% 8 Profit & Loss Account

Net Debtors 72 Asset (Balance Sheet)

Exercise 11Manufacturing Account of Harvey Nicholl for

the y/e 31 December

Ledger Balances at 31 December 2004 £000Stocks at 1 January:Raw Materials 75Work in Progress 64Finished Goods 72Direct Factory Wages 682Indirect Factory Wages 97Royalties 23Purchases of Raw Materials 820Returns of Raw Materials 28Carriage on Raw Materials 8Purchases of Finished Goods 107Rent and Rates 30Insurance of Building 12Factory Machinery at cost 180Provision for Depreciation on Factory Machinery 64Office Equipment at cost 40Provision for Depreciation on Office Equipment 26Delivery vans at cost 76Provision for Depreciation on Delivery Vans 28Maintenance of Factory Machinery 23Sales 2,000Office Salaries 54Provision for Doubtful Debts 6Debtors 80Creditors 46NotesStocks at 31 December:Raw Materials 67Work in Progress 59Finished Goods 84

Exercise 11Manufacturing Account of Harvey Nicholl for

the y/e 31December £ £

£ Opening Stock of Raw Materials75

Add Purchases of Raw Materials 820Less Returns of Raw Materials 28 792Add Carriage of Raw Materials 8

800Less Closing Stock of Raw Materials 67 733

COST OF RAW MATERIALS CONSUMED 808 Add Direct Wages 682Add Direct Expenses (royalties) 23 705PRIME COST 1,513 ADD FACTORY OVERHEADSIndirect Wages (97+4) 101Rent and Rates(30 - 5)*60% 15Insurance of building (12* 75%) 9 Provision for Dep of Machinery 45Maintenance of Machinery 23FACTORY OVERHEADS 193

1,706Add WIP at Beginning +64

1,770Less WIP at End -59FACTORY COST OF PRODUCTION 1,711

Exercise 11Trading Profit & Loss Acc of Harvey Nicholl for

the y/e 31 December £ £ £Sales 2,000Less Cost of Goods SoldOpening stock of finished goods (1 Jan) 72Add Factory Cost of Production 1,711Add Purchases of Finished Goods 107

1,890Less Closing stock of finished goods 84 1,806GROSS PROFIT 194Less ExpensesRent and Rates (30-5)*40% 10Insurance of Buildings(12*25%) 3

Provision for Depreciation Of Equip 6Provision for Depreciation Del Vans 19Office Salaries(54+6) 60Provision for Doubtful Debts 2 100NET PROFIT 94

MANUFACTURING PROFIT/LOSS ON MARKET VALUE/PRICE

MARKET VALUE/ PRICE This is the price that the finished goods

could have been purchased for – Instead of the company manufacturing them themselves

MANUFACTURING PROFIT/LOSS A Manufacturing profit is made if the

company can make the goods for less than the market value

A manufacturing loss is made if the cost to make the goods is more than the market value

Therefore:

Market price of Prod – Factory Cost of Prod = Manufacturing profit /loss

Transfer to Trading Account

MARKET VALUE If the MARKET VALUE is known, it

is this amount that is transferred to the TRADING ACCOUNT and NOT the MANUFACTURING COST OF PRODUCTION

MANUFACTURING PROFIT / LOSS A manufacturing PROFIT (calculated

at end of manufacturing account) is ADDED TO the Gross Profit in the trading account

A manufacturing LOSS is DEDUCTED FROM the Gross Profit in the Trading account

Depreciation – Reducing Balance A fixed percentage of Depreciation

is calculated on the NET BOOK VALUE or written down value of the Fixed Asset each year

As the Asset decreases in value the provision for depreciation each year will also reduce

The YEARLY AMOUNT of depreciation is charged to the P&L ACCOUNT

The accumulated depreciation is taken off the Asset’s COST in the BALANCE SHEET

Depreciation – Reducing Balance (Continued)

ExampleOn 1 January Year 1, XYZ plc purchased Fixtures for £30,000 by cheque.

Assets are depreciated by 10% per annum using the reducing balance method.

Year 1 Asset cost 30,000Depreciation = 10% 3,000 P&L AccNBV year 1 27,000 Bal Sheet Year 2NBV from year 1 27,000Depreciation = 10% 2,700 P&L AccNBV year 2 24,300Bal Sheet

Depreciation – Reducing Balance (Continued)

The depreciation shown in the balance sheet will be as follows Year 1Fixed Assets

Cost Dep NBVFixtures 30,000 3,000 27,000 Year 2Fixed Assets

Cost Dep NBVFixtures 30,000 5,700 24,300

Nethermains

Notes for the Manufacturing/ P&L Account

ACCRUAL

Rates

Amount paid 36

Add Accrual 4 Liab (Balance Sheet)

40 Manufacturing Acc/P&L

APPORTIONMENT

Rates 40

Factory 75% 30 Man O/Head

Admin 25% 10 P&L

Management Salaries 50

Factory 80% 40 Man / O’Head

Admin 20% 10 P&L

Nethermains

DEPRECIATION – REDUCED BALANCE METHOD

Factory Machiney

Cost 60

Depreciation to date 20

Current NBV 40

Yearly Depreciation 20% 8 Man O’Head

New NBV 32

Delivery Vehicles

Cost 20

Depreciation to date 5

Current NBV 15

Yearly Depreciation 20% 3 P&L

New NBV 12

Notes for the Manufacturing/ P&L Account

Manufacturing Account of Nethermains for the y/e 31 May £ £

Opening Stock of Raw Materials 8

Add Purchases of raw materials 250

Add Carriage In of raw materials 5

255

Less Closing Stock of raw materials 6 249

Cost of Raw Materials consumed 257

Add Direct Wages 100

Add Direct Expenses (Royalties) 10

PRIME COST 367


Management Salaries 40

Factory Labour 13

Factory Power 10

Repairs to Factory Machinery 5

Rates 30

Heat & Light 24

Dep of Factory Machinery 8

Factory Overheads 130

497

Manufacturing Account of Nethermains for the y/e 31 May

£ £

B/F 497

ADD WIP at beginning 4

501

Less WIP at end 5

FACTORY COST OF PRODUCTION 496

Market value of finished goods 520

Less Factory Cost of Production 496

Manufacturing Profit 24

Trading Account of Nethermains for the year ended 31 May

£ £

Sales 960

LESS Cost of Sales

Opening stock of finished goods 12

Add purchases of finished goods 119

131

Less return of finished goods 2

129

ADD Mkt V of finished goods 520

649

Less Closing stock of finished goods 9

Cost of Sales 640

GROSS PROFIT 320

Add Manufacturing Profit 24

344

Documents

Manufacturing Accounts. Why Prepare this account Manufacturers make goods rather than buy them from suppliers A manufacturing account is required to provide