Production cost = Prime cost / Direct cost + Factory overhead expenses / Indirect cost
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
Wages paid to the people who are directly involved in the manufacturing process. Example: Direct labour, Direct wages, Factory wages, Production wages, Manufacturing wages
They refer to the expenses paid according to each unit of production. Examples: Royalties
crane drivers. but they cannot be traced directly to the goods being produced. supervisors and production managers. bonus or commission to cleaners. foremen.
. salaries.Factory Overhead Expenses / Indirect Costs
Cost incurred in the manufacturing process. Include indirect materials. Examples:
Indirect materials ² Lubricants ² Loose tools (opening balance + purchase ± closing balance) Indirect labour ² wages. indirect labour and indirect expenses.
Indirect expenses related to the factory. machinery and vehicles
² Rent and rates ² Depreciation ² Insurance ² Repairs and maintenance ² Factory power / electricity ² Internal transport ² Loss on disposal
which should be included in the cost of goods manufactured.
.Work in Progress
It refers to the semi-finished goods.
3. 2. 5.Manufacturing Account
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 Manufacturing profit / loss
This account shows the gross profit or loss resulted from the trading of manufactured and other purchased goods. The account includes:
Sales Cost of goods sold
² Manufactured goods ² Other goods
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 Manufacturing profit / loss
.Profit and Loss Account
Profit or loss of the whole business during the accounting period.
Administration expenses Selling and distribution expenses Financial expenses Increase / decrease in the provision for unrealized profit Net abnormal loss
² cash misappropriated ² losses of raw materials ² losses of finished goods
Some expenses are related to both the manufacturing process and the administration of the office such as:
Rent and rates Electricity Insurance Depreciation on premises Motor vehicles Motor vehicles expenses
.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.
Format of Manufacturing. Trading and Profit and loss account
g. Trading and Profit and Loss Account for the year ended 31 Dec XXXX $ $ Opening stock of Raw Materials X Add: Purchases of Raw Materials X Carriage inwards X Less: Closing stock of Raw Materials (X) Cost of Raw Materials Consumed X Direct material Direct Labour X Direct labour Royalties X Prime Cost X Direct Expenses Factory Overhead Expenses: Loose Tools (opening bal.) X Rent (e. + purchases ±closing bal. 25%) X Production Manager¶s salaries X Factory Power X Overhead Maintenance of plant & Machinery X Depreciation of Plant & Machinery X X 16 X
Add: Opening Work in Progress Less: Closing Work in Progress Production Cost of Goods Completed Factory profit/(loss) Transfer price of Goods Completed Sales The goods are transferred Less: Returns inwards
Less: COGS Opening stock of finished goods Production cost/Transfer price of Gds completed Less: Returns outwards Fire Loss Less: Closing stock of finished goods Gross Profit Add: Factory Profit Add: Discount Received
to trading a/c at production cost/ transfer price
$ X X X X X X (X) X
X X (X) (X) (X)
X X X X 17 X
Less: Expenses Carriage Outwards Rent (e. 75%) Discount allowed Administration Expenses Distribution Expenses Selling Expenses Depreciation of Delivery Van Provision for Unrealized Profit Fire Loss Net Profit
$ X X X X X X X X X
Transfer Price of Goods Completed
.Production Cost Vs.
However. the stock of manufactured goods can be valued at production cost or the transfer price of goods completed.
. Transfer price
Stock of raw materials.Production cost Vs. Provision of unrealized profit of on stock should be made if closing stock of manufactured goods is valued at transfer price. work in progress and other finished goods are valued at cost.
Provision of Unrealized Profit
Be made on the closing stock valued at production cost plus a percentage of factory profit. Provision for unrealized profit = Stock (at transfer price) x Mark up% 100%+ Mark up(%)
The factory output is transferred to the trading account at factory cost plus 20% factory profit. It also purchases and sells other finished goods. and the stock of manufactured goods is valued at transfer price.A company manufactures and sells it own products. trading and profit and loss account for the following 2 situations would be shown:
The factory output is transferred to the trading account at factory cost.
Production 100 units Sales 80 units Closing stock 20 units Expenses for this period $50 $1@ $2@ $1@ $100 $160 $20
Prepare manufacturing. 2.
Manufacturing. trading and profit and loss account (extract) $ $ 100 160
Production cost of Gd completed (100 units*$1) Sales (80 units*$2) Less: COGS Production cost of Gd completed Less: Closing stock(at cost) (20 units*$1) Gross Profit Less: Expenses Expenses 100 20
2) Transfer price of Gds completed Sales (80 units*$2) Less: Cost of goods sold Transfer price of Gd completed 120 Less: Closing stock(at transfer price) (20+20*0.
$ Production cost of Gd completed (100 units*$1) Add: Manufacturing profit (100*0.2) 24 Gross Profit Cost + profit Add: Manufacturing profit Less: Expenses Expenses Provision for unrealized profit (24*20/120) Net Profit $ 100 20 120 160
96 64 20 84
Increase/ Decreased in Provision of Unrealized Profit
Increase in Provision
Decrease in Provision Dr Provision for Unrealized Profit Cr Profit and Loss
Dr Profit and Loss Cr Provision for Unrealized Profit
Goods manufactured are to be transferred to sales department at factory cost plus 20%. profit and loss account and balance sheet respectively for
.000 Prepare the provision for unrealized profit account.400 3.600 3.
1994 1995 1996 $ $ $ Stock at 1 Jan (at transfer price) 2.400 3.600 Stock at 31 Dec (at transfer price)2.
Provision for unrealized profit 1994 $ 1994 Dec 31 Bal c/d (2400*20/120) 400 Dec 31 P/L Profit and Loss account (extract) 94 $ $ X
Gross Profit Less: Expenses Increase in provision for unrealized profit
Provision for unrealized profit 1994 $ 1994 Dec 31 Bal c/d (2400*20/120) 400 Dec 31 P/L 1995 Dec 31 Bal c/d (3600*20/120) 1995 Jan 1 Bal b/d Dec 31 P/L
$ 400 400 200 600 95 94 $ $ $ $ X X
600 600 Profit and Loss account (extract)
Gross Profit Less: Expenses Increase in provision for unrealized profit
Provision for unrealized profit 1994 $ 1994 Dec 31 Bal c/d (2400*20/120) 400 Dec 31 P/L 1995 Dec 31 Bal c/d (3600*20/120) 1996 Dec 31 1995 Jan 1 Bal b/d Dec 31 P/L 1996 Jan 1 bal b/d
$ 400 400 200 600 600
600 600 100 500 600
Dec 31 Bal c/d (3000*20/120)
Profit and Loss account (extract) 94 95 96 $ $ $ $ $ $ X X X 100
Gross Profit Add: Decrease in provision for unrealized profit Less: Expenses Increase in provision for unrealized profit
Normal losses refer to losses related to the ordinary activities of the business/ Examples: damaged / spoiled stock. obsolete stock No entry is required for normal loss
Abnormal losses refer to losses not related to the ordinary activities of the business. burglary loss
. Examples: fire loss.ii.
Accounting entries Loss of raw materials without an insurance claim Dr Profit and Loss With the total loss Cr Manufacturing Loss of finished goods without an insurance claim Dr Profit and Loss Cr Trading With the total loss
Loss of raw materials with an insurance claim
Dr Bank/Insurance Company Dr Profit and Loss Cr Manufacturing Dr Bank/Insurance Company Dr Profit and Loss Cr Trading With the insurance claim With the net loss With the total loss With the insurance claim With the net loss With the total loss
Loss of finished goods with an insurance claim
640. Trading and Profit and Loss Account for the year ended 30 April 2004 Cost of raw materials consumed Opening stock Purchase 160.000 1.800.000 800.000
Closing stock Manufacturing wages Prime cost
.000 2.000 1.400.000 1.000 200.Cheung Kong Enterprises Manufacturing.600.
.000 192.008.000 3.000 120.014.000
608.Prime cost Factory overheads Manufacturing expenses Depreciation Opening work in progress Closing work in progress Cost of goods completed 416.000 3.000
Depreciation Total 2.000 Manufacturing 80% = 192.000
10% = 24.000
.400.000 x 10% = 240.000
Selling and distribution
10% = 24.