MANUFACTURING ACCOUNTS

The businesses which produce and sell the items prepare the following accounts at the end of its accounting
year:-
                a. The Manufacturing account (to calculate the total cost of production)
                b. The Trading and profit & loss account (to find out the net profit or loss)
                c. The balance sheet.(to show the financial position of the business)

For manufacturing organizations, manufacturing accounts will be needed in addition to a trading and profit and
loss accounts. This will be for internal purposes/ use in the company. In place of purchases we will instead have
the cost of manufacturing the goods.
For a manufacturing business the manufacturing costs are divided into the following types:
i)                    Direct material costs
Direct material costs are those materials used directly in the manufacture of products i.e. materials that can be
identified in the final products. E.g. in the manufacture of tables, direct materials consists of timber, nails, glue
etc.
ii)                  Direct labor costs
These are wages paid to those who are directly involved in the manufacture of a product e.g. in the manufacture
of tables; direct labor consists of wage paid to those workers who saw, shape of join the piece of timber into
table.
iii)                Direct expenses
These are expenses that must be incurred in the manufacture of a product. That is, they can be directly allocated
a particular unit of a product e.g. live charges for a special equipment used in the process of manufacture,
royalties
NB: The sum of all the direct costs is known as prime costs
iv)                Indirect manufacturing costs / factory overheads
These are any other expenses (apart from the direct costs) for items being manufactured:
E.g. cleaners wages, factory rents, depreciation of plant and equipment, factory power and lighting
NB: prime cost + indirect manufacturing costs = PRODUCTION COSTS

v)                  Administrative Expenses

These are expenses that are administrative in nature, that is, expenses incurred in the process of planning,
controlling and directing the organization.
e.g. office rents, office electricity, depreciation of office machinery, secretarial salaries.
vi)                Selling and distribution expenses
These are expenses incurred in the process of selling, promoting and distributing the goods manufactured. E.g.
advertising expenses, carriage outwards, depreciation of motor van, salesmen salaries etc.
vii)              Finance Costs
These are expenses such as bank charges, discount allowed.
Format of the financial statements
Manufacturing account part
This is debited with the production cost of goods completed during the accounting period:
It consists of: Direct materials
                        Direct labor
                        Direct expenses
                        Indirect manufacturing costs.
It also includes adjustments for work in progress (goods that are part- completed at the end of a period).

STEPS
1. Add
to get the opening
cost stock of
of materials rawduring
used materials to purchases and subtract the stock of raw materials. This is
the period.
2. Add in all the direct costs to get the prime costs
3. Add all the indirect manufacturing costs.
4. Add the opening stock of WIP and subtract the closing stock WIP to get the production cost of all
goods completed in the period. This is because WIP cannot be sold and therefore should not be included
in the trading account.
5. The manufacturing account when completed shows the total that is available for sale during the
period.
This will be used in trading account in place for purchases.
The total cost of production = Prime cost + Factory overhead
The Prime cost = Direct material + Direct labor + Direct expenses
Direct material cost = Opening stock of raw materials + purchase of raw materials +  carriage inwards - returns
outwards - closing stock of raw materials.
Factory overhead expenses = All expenses related to the factory (indirect expenses)

Final accounts of a manufacturer

1)      Manufacturing accounts used to determine the cost of production.
2)      Trading account- Used to determine the gross profit on trading.          3)      Balance sheets
Treatments of loose materials
The cost of loose tools consumed during the year is considered as a factory overhead in the manufacturing
account and is determined as follows:
Opening stock of loose tools               xx
Add purchases of loose tools              xx
                                                            xx
Less closing stock of loose tools     (xx)
Cost of loose tools consumed           xx

THE FORMAT OF A MANUFACTURING ACCOUNT

                Manufacturing account for the year ended . . . . . . . . . . . . . .

Particulars $ $
       Opening stock of raw materials xxxxxx
Add purchase of raw materials xxxxxx
Add carriage inwards ( if any ) xxxxxx
xxxxxx
Less Returns outwards (of raw materials) xxxxxx
xxxxxx
Less Goods drawings ( if any ) xxxxxx
xxxxxx
Less Closing stock of raw materials xxxxxx
        Cost of Direct Materials Consumed xxxxxx
        Add Direct labour xxxxxx
        Add Direct expenses (E.g.: royalties) xxxxxx
        Prime Cost xxxxxx
Add Factory overhead expenses
        Factory lighting xxxxxx
       Factory heating xxxxxx
       Factory insurance xxxxxx
       Factory rent xxxxxx
       Factory maintenance xxxxxx
        Factory indirect wages xxxxxx
       Factory supervisor wages xxxxxx (+)
       Depreciation on plant & machinery xxxxxx
       Depreciation on factory building xxxxxx
       Depreciation on factory furniture xxxxxx
       Depreciation on factory motor van xxxxxx
       Depreciation on other factory fixed assets xxxxxx xxxxxx
xxxxxx
Add Opening stock of work in progress xxxxxx
xxxxxx
Less Closing stock of work in progress xxxxxx
        Cost of production xxxxxx
Plus Factory Profit xxxxxx
Total cost of Production transfer to Trading A/c xxxxxx

In a manufacturing concern, usually there are three kinds of stocks:

Stock of Raw materials (the materials which are mainly used for production of the item)
Stock of Work in progress (the materials on which some work process have been completed)
Stock of Finished goods (The materials on which all the production processes are completed and ready for sale
to the customers)
Manufacturing Accounts ( )
A. Function of a Manufacturing Account
For those businesses which deal with manufacturing products. It is common in today business to act both as
manufacturer ( ) and retailer ( ).
What is the advantage as being a manufacturer as well as a retailer?
B. Division of Costs
The purpose of a Manufacturing Account is to ascertain Cost of Production ( ).
Cost of Production = Prime Cost + Factory Overheads + Opening Work in Progress - Closing Work in Progress
C. Prime Cost ( )
Prime cost is the DIRECT expenses which can be traced back to each unit of production. It consists of:
      (1) Direct Materials ( )
     (2) Direct Wages ( )
     (3) Direct Expenses e.g. Royalty ( )
D. Factory Overheads ( )
Indirect expenses in the factory which helps production of goods.
e.g. Indirect wages, rent and rates of the factory, depreciation of plant and
machinery, factory fuel and power, etc.
E. Work in Progress ( )
Where goods have not been completed, they cannot be sold in the year. For ease of accounts recording, the
whole of the Work-in-Progress is calculated.
The treatment is the same as in Opening Stock and Closing Stock,
i.e. + Opening WIP & Closing WIP

F. Format
Company Name
Manufacturing, Trading and Profit and Loss Account for the year ended 31 December 200X
_________________________________________________________________
                                                                                                $ $ $                         
Manufacturing Account/LWL(Trading Account)
Finished Goods Sales xxxx
Less: Cost of Goods Sold
Opening Stock xxx
Add: Production Cost of Goods Completed b/d xxxx
Less: Closing Stock                                           (xxx)
GROSS PROFIT                                                    XXX
Less : Expenses
Administrative Expenses (Office expenses)
e.g. Office rent and rates
Administrative salaries
General adminstration expenses
Depreciation of office furniture, office equipment
Selling and Distribution Expenses
e.g. Advertising expenses
Sales Commissions
Carriage Outwards
Financial Expenses
e.g. Discounts allowed
Bad Debts
Provisions for Bad Debts (xxx)                                                                  
NET PROFIT FOR THE YEAR XXX

Manufacturing Account/LWL Balance Sheet as at 31 December 200X

FIXED ASSETS
                                                                                         Cost                     Accumulated                               Net
                                                                                                                        Depreciation                               Book
                                                                                                                                                                                  Value
Machinery                                                     xxxxx           xxx xxxx
Office Equipment                                          xxxx           xxx xxxx
CURRENT ASSETS
Stock : Raw Materials xxx
Work in Progress xx
Finished Goods xxx
Less: Unrealised Profit
Debtors xxx
Less: Provisions for Bad Debts (xxx)
Prepaid Expenses xx
Bank xxx
Cash xxx
FINANCED BY:
Capital on 1.1.200x xxxx
Add: Net Profit for the year xxx
Less: Drawings (xxx)
CURRENT LIABILITIES
Creditors xxx
Accrued expenses xx
The profit & loss account and the balance sheet preparations will be the same as that of a sole trader. So the
students have to follow the previous method for the preparation of these.
Fixed expenses and Variable expenses
Some expenses will remain constant whether the level of activity increases or falls. These expenses are called
fixed expenses E.g. rent of building
The expenses which change with changes in activity are called variable expenses
E.g.: cost of materials.
  Key points:
·         Carriage on raw materials means carriage inwards and it is a part of prime cost.
·         Carriage outwards is shown in the profit & loss account as an expense.
·         Royalties paid are to be treated as direct expense.
·         Depreciation on Plant and Machinery or any other factory asset is to be treated as factory overhead
expense.
·         Stocks of raw materials and work-in-progress are taken in the manufacturing account and stock of
finished goods is taken in the trading account.
·         Stocks at the end of the year (raw materials, work-in-progress and finished goods) are shown in the
balance sheet as current assets.
·         Owner raw materials drawings are shown in the manufacturing a/c while calculating the prime cost.
·         Finished goods drawings are shown in the trading account while calculating the cost of goods sold.
·         The purchase of finished goods is added with cost of production in the trading account.
·   The depreciation of any asset used in the office should be shown as an expense in the profit & loss a/c.
·         Cost of readymade items bought for the production of items manufactured should be treated as
direct expense.
Trading, Profit and Loss Account for the year ended 31. 12. xx
Sales                                                                                                                                  xx
Less cost of goods sold                                                                                   
Add production cost of goods completed b/d                                                            xx
                                                                                                                        xx
Less closing stock of finished goods                                                              (xx)
Cost of Sales                                                                                                                    ( xx)
Gross Profit                                                                                                                       xx
Less Expenses
Office Rent                                                                                          xx
Office Electricity                                                                                 xx
Depreciation of Office Machinery                                                     xx
Selling & distribution expenses                                                          xx
Advertising                                                                                          xx
Delivery Van expenses                                                                        xx
Carriage Outwards                                                                             xx
Salesmen salaries                                                                               xx
                                                                                                                                    (xx)
Net Profit / (Loss)                                                                                           xx / (xx)                                   
Note:
Expenses should be appointed as follows:
Indirect manufacturing costs Charged in manufacturing account
Administrative expenses
Selling and distribution expenses                               Charged in the profit & loss account
Financial charges

Treatment of manufacturing Profit.

Manufacturing profit occur where goods manufactured are transferred from factory to the warehouse at a higher
value more than the cost of production i.e the market value.
The difference between the market value and the cost of production is the manufacturing profit.
Manufacturing profit should be added to the cost of production in the manufacturing account so as to arrive at
the market value of goods manufactured.
The market value of goods manufactured should take the place of purchases in the trading account.
The double entry for the manufacturing profit is:
DR Manufacturing Account
CR Profit and loss account.

Treatment of unrealized Profit

Unrealized Profit occurs where it is the policy of the firm to value stocks of finished goods at market value
rather than at cost.
The difference between the market value and the cost of the finished goods is the unrealized profit.
The difference between the unrealized profit on the opening stock of finished goods and the unrealized profit
on the closing stock of finished goods should be charged to the profit and loss account.
The provision for unrealized profit on the closing stock by the end of year should be subtracted from the market
value of the finished goods in the balance sheet. (i.e closing stock is stated at production cost on the balance
sheet)