INTRODUCTION TO MANUFACTURING ACCOUNT

Manufacturing accounts are prepared by manufacturing companies to show the cost of

goods produced. The activities of such organizations go beyond buying and selling into the
production of certain goods. The manufacturing account is prepared before the trading and
profit and loss account. The combination of all the accounts is referred to as manufacturing,
trading, and profit and loss account. The purpose of manufacturing account
a) It is prepared to show the cost of production
b) To monitor the production process at a low cost
c) To monitor the raw materials, stock and work –in-progress stocks
d) To accumulate all direct costs and indirect costs separately
e) It shows separately prime cost, factory cost and direct wages on manufacturing.

DEFINITION OF TERMS IN MANUFACTURING ACCOUNT

Cost of production
This is the total expenditure incurred in the production of output. This is obtained by taking
into account the total expenses which relate to manufacturing process. It includes prime cost
and factory overheads.
Prime cost
These are costs that can be traced to a particular production unit. They are directly related to
the manufacturing process. These are:
i. Direct materials
ii. Direct labour
iii. Direct expenses
iv. Other direct expenditure
Direct materials: This is the expenditure incurred on raw materials which can be traced to a
particular production unit e.g. orange in fanta making
Direct labour: This refers to the wages of employees who are directly engaged in the
production process e.g. wages of machine operators
Direct expenses: These are expenses which have direct identification with production e.g.
royalties.
Factory overheads: These relate to expenditure incurred in running the factory which cannot
be trace to a particular production unit. They are indirect costs consumed during production
process e.g.
i. factory rent and rates
ii. depreciation of plant and machinery
iii. indirect wages
iv. upkeep of factory building etc.
Work in progress: This can be defined as the partly finished goods or incomplete work.
Cost of raw materials consumed: This is the cost of raw materials which have been used up
in the manufacturing process. This will be found by:
i. taking opening stock of raw materials
ii. adding purchases of raw materials
iii. deducting closing stock of raw materials
Non-manufacturing cost
These are selling, distribution and administrative expenses which are used up in the
production process. The expenses will appear in the debit side of profit and loss account for
the period.

EVALUATION:
1. Define manufacturing account
2. Outline four purposes of manufacturing account
3. Mention four elements of prime cost

Sub-topic 2: LAYOUT OF MANUFACTURING ACCOUNTS

Dr Manufacturing, trading, profit and loss account for the year ended 31 Dec, yyyy
Cr
N N
Opening stock of raw materials xx Production cost c/d
xx
Add purchases of raw materials xx
Add carriage inward of R/M xx xx
xx
Less closing stock of R/M xx
Cost of raw materials consumed xx
Add direct wages xx
Royalties xx
Direct expenses xx
Prime cost xx
Factory overheads:
Factory power xx
Factory rent and rate xx
Indirect wages xx
Factory insurance xx
Depreciation of P&M xx
Fuel and power xx
Lubricants xx xx
xx
Add opening WIP xx
xx
Less closing stock of WIP xx
Cost of production xx xx

Opening stock of finished goods xx Sales xx

Add cost of production xx
xx
Less closing stock of finished goods xx
xx
Gross profit xx
xx xx
Expenses
Selling and distribution
Carriage outwards xx Gross profit b/d
xx xx
Commission on sales xx Discounts received
xx xx
Sales men salaries xx xx
Administration
Admin salaries xx
Office rent xx
Office insurance xx
Office lighting xx
Office machine depreciation xx xx
Net profit xx
xx xx

Illustration 1
Leonard Nigeria Limited is a manufacturer and the following balances were taken from
the books of the company for the year ended on 31st December, 2007 N
Sundry debtors 12,650
Sundry creditors 9,820
Purchase of raw materials 29,470
Factory lighting and cooling 2,885
Bank balance 71,316
Stocks on 1/1/2007:
Raw materials 5,360
Work in progress 4,972
 Finished goods 16,295
Factory insurance 1,820
Rent 21,600
Cash in hand 3,751
Capital 296,180
Office insurance 550
Sales of finished goods 141,661
Drawings 2,500
Returns on raw materials 1,373
Bad debts 729
Stationery 1,586
Plant and machinery 225,066
Returns of finished goods 1,493
Provision for bad debts 308
Factory wages 13,582
st
Stock on 31 Dec 2007:
Raw materials 8,619
Work in progress 3,664
Finished goods 11,570
Furniture 38,420
Selling and admin expenses 2,174
Office electricity 1,569
Bank loan 75,000
Office salaries 9,629
Delivery vans 56,925
The following additional information is given:
i. interest is due on the bank loan at cost 5%
ii. one third of the rent is to be allocated to the factory
iii. provision for bad debts is to be 2% of the debtors
iv. depreciation is to be written off the plant and machinery at 2% and at 5% on
delivery vans and furniture.
You are required to prepare:
i. The manufacturing, trading, profit and loss account for the year ended 31 st December,
2007.
ii. The balance sheet as at that date

SOLUTION
Leonard Nigeria Limited
Dr Manufacturing, trading, profit and loss account for the year ended 31 Dec, 2007 Cr
Opening stock of raw materials 5,360 Cost of production b/d
57,260
Add purchase of raw materials 29,470
Less returns of raw materials 1,373 28,097
33,457
Less closing stock of raw materials 8,619
Cost of raw materials consumed 24,838
Factory wages 13,582
Prime cost 38,420
Add factory overheads
Factory lighting and cooling 2,885
Factory insurance 1,820
Factory rent 7,200
Depreciation of plant and machine 5,627 17,532
55,952
Add opening work in progress 4,972
60,924
Less closing work in progress 3,664
Cost of production 57,260
57,260

Opening stock of finished goods 16,295 sales 141,661

Add cost of production 57,260
73,555 less sales returns 1,493
40,168
Less closing stock of finished goods 11,570
61,985
Gross profit 78,183
140,168
140,168
Expenses
Selling and admin 2,174 Gross profit b/d
78,183
Office rent 14,400 provision for bad debt
55
Bad debts 729
78,238
Stationery 1,586
Office electricity 1,569
Interest on loan 3,750
Office salaries 9,629
Office insurance 550
Depreciation:
Delivery van 2,846
Furniture 1,921
Net profit 39,084
78,238
78,238
 Leonard Nigeria Limited Balance sheet as at 31st December, 2007
N Fixed assets N
Capital 296,180 plant and machinery 225,066
Add net profit 39,084 less depreciation 5,627
335,264 219,439
Less drawings 2,500 Delivery van 56,925
332,764 Less depreciation 2,846
54,079
Current liabilities Furniture 38,420
Bank loan 75,000 Less depreciation 1,921
Accrued interest on loan 3,750 36,499
Creditors 9,820 88,570 310,0
17

Current assets
Stock of raw materials 8,619
Stock of work in progress 3,664
Stock of finished goods 11,570
Bank balance 71,316
Cash balance 3,751
421,334 Debtors 12,650
Less provision 253 12,397 111,317

421,334

WORKINGS: N
1. Rent 21,600 4. Depreciation
Factory (1/3 x21, 600) 7,200 plant and machinery = 2 ½ % x225,
066=N5, 627
Profit and loss a/c 14,400 5. Delivery van=5%x56, 925=N2,
846
2. Interest on bank loan= 5% x75, 000=3,750 6.Furniture =5% x38, 420 =N1, 921
3. Provision for bad debts=2% x12, 650 =253
Old provision 308
Reduction to p&l (55)