Back to: FINANCIAL ACCOUNTING SS2
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In today’s class, we will be talking about manufacturing accounts. Enjoy the class!
Manufacturing Accounts
MEANING OF MANUFACTURING ACCOUNTS
Manufacturing can simply be described as the transformation of raw materials into finished goods e.g. manufacturing companies like Nestle, Cadbury, PZ e.tc. These manufacturing firms do manufacture their goods or product before they are sold to their customer. They do not buy to sell but produce what they sell.
The manufacturing companies prepare final accounts called Manufacturing Account.
PURPOSE OF MANUFACTURING ACCOUNTS
Manufacturing Account is prepared to ascertain the cost of goods manufactured during the financial year. Therefore manufacturing accounts have the following purposes.
- To ascertain the cost of production
- To determine the profit of the manufacturing process.
ELEMENTS OF COST OF PRODUCTION
- Cost of production: This is the total expenditure incurred in the production of goods. Production costs include PRIME COST + FACTORY OVERHEADS
- Prime cost: These are cost directly related to the production process. It is also called Direct Cost which includes: Direct materials, direct labour, direct expenses and any other direct expenditure.
- Direct materials cost: These are the cost of raw materials
- Direct labour cost: These are the cost of labour wages paid
- Direct expenses: These are the cost of other expenditure incurred in the production process.
- Factory overheads: These are cost incurred in the running of the factory but not directly related to the production process. It is also called INDIRECT COST. They include; factory rent and rates, depreciation of plant and machinery. Indirect wages, upkeep of factory building.
Format of Manufacturing Trading Profit and Loss Account
N N N
Opening stock of raw material x Cost of production x
Add purchases of raw material x
Carriage inward of raw material x x
X
Loss closing stock or raw material net (x)
Cost of raw material consumed x
Add direct wages x
Royalties x
Direct expenses x
Prime cost x
Factory overheads: x
Factory power x
Factory rent & rates x
Indirect wages x
Factory insurance x
Depreciation of P & M x
Fuel and power x
Lubricants x x
X
Add opening stock W.I.P X
X
Less closing stock W.IP X
Cost of production x x
Manufacturing Trading, Profit and loss Account contd
N N N N
Opening stock of finished goods x sales x
Add the cost of production x
Cost of good available for sale x
Less closing stock of finished goods (x)
Cost of goods sold x
Gross profit c/d X
X x
Expenses Gross profit b/d x
Selling & distribution Discount received x
Carriage outward x x
Commission sales x
Salesmen salaries x x
Administration exp
Admin salaries x
Office rent x
Office insurance x
Office lighting x
Depreciation of
Office machinery x x
X
Net profit c/d x
X x
TRANSFER PRICING
In the trading account, the cost of production is charged to determine profit on sales. The changing of cost of production of goods may be done in two ways.
- Actual factory cost
- Current market values
When goods manufactured are charged at the current market value to the trading account, the main objective is to obtain a profit on the manufacturing process. The manufacturing accounts will then have to show a balance which represents a profit or loss on production and this is transferred to profit and loss account.
PRACTICAL ILLUSTRATIONS
The following information was extracted from the books of Tasty Enterprises for the year ended 31st December 1991
N
Manufactured goods 9,740
Raw materials 3,000
Discount allowed 3,740
Depreciation on plant and machinery 13,000
Printing and stationery 930
Purchases: Manufactured goods 12,740
Carriage inwards 500
Debtors 21,740
Cash at bank 1,710
Purchases of raw material 87,260
Office rent and rates 6,500
Repairs to machinery 2,500
Plant and machinery 75,200
Factory electricity 5,790
Carriage inwards (raw materials) 3,410
Office salaries 9,400
Carriage outwards 2,330
Factory rent and rates 22,710
Cash in hand 570
Manufacturing wages 110,290
Sales 299,420
Capital 77,820
Creditors 21,790
Additional
(a) Stock on 31st Dec 1991
Manufactured goods N27,940
Raw material N 2,000
(b) Goods manufactured to be posted to the sales department at the net realizable value of N271,500
You are required to prepare manufacturing trading profit and loss account for the year ended 31st Dec. 1991.
SOLUTION
TASTY ENTERPRISES
Manufacturing Trading Profit and Loss Account for the year ended 31st December 1991.
Dr N N N N
Opening stock of r.m 3,000 Transfer cost 271,500
Add. Purchases of r.m 87,260
Carriage of the raw mat. 3,410 90,670
93,670
Less closing stock of r.m 2,000
91,670
Manufacturing wages 110,290
Prime cost 201,960
Factory overheads
Depreciation p&m 13,000
Repair to machinery 2,500
Electricity 5,790
Factory rent and rates 22,710 44,000
Production cost 245,960
Gross profit on production 25,540
271,500 271,500
Opening stock of finished goods 9,740 Sales 299,470
Add: Transfer cost 271,500
Purchases of finished goods 12,740
Carriage inwards 500 284,740
Cost of goods available 294,480
for sales
TASTY ENTERPRISES
Manufacturing Trading Profit and Loss Account for the year ended 31st December 1991.
N N N N
Cost of goods available 294,480 Sales b/f 299,420
for sale b/f
Less closing stock 27,940
Cost of goods sold 266,540
Gross profit c/d 32,880
299,420 299,420
Expenses Gross profit b/d 32,880
Discount allowed 3,740 Profit on manufacture 25,540
Office rent & rates 6,500
Office salaries 9,400
Carriage outward 2,330
Printing & stationary 930
Net profit 35,520
58,420 58,420
GENERAL EVALUATION
- Explain three differences between a trial balance and a balance sheet
- State four reasons for disagreement between a bank statement balance and cash book balance
- List five methods of providing for depreciation
- State five reasons for making provision for depreciation
- List six factors to be considered in computing the depreciation on fixed assets
In our next class, we will be talking about Capital and Revenue Expenditure. We hope you enjoyed the class.
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