Acc 206 Accounting for Manufacturing and Alternative Entities

Lecturer: Mr G. Tobedza Room 245/213

Consultation Hours refer to Course Outline
Lecture Times :
Monday: 5-6 at 252/4
Wednesday: 4-5 at 252/4
Friday 1-2 at 252/1

Proposed Tutorial Hours:

Monday
Wednesday
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 Manufacturing Accounts
• The following is:

a brief introduction to manufacturing

accounts and

how manufacturing costs are classified.

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 Classification of Costs (1)

A manufacturing account is prepared to find

out:
the cost of goods manufactured.
Costs of manufacturing include:
all resources used, directly or indirectly, in the
manufacture of goods.
The manufacturing costs can be classified into
direct costs and indirect costs
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 Classification of Costs (2)
Direct costs are those costs directly involved in the
manufacture of goods.
Examples of direct costs are:
direct materials
direct labour and
direct expenses.
All the direct costs are collectively known as prime
cost.
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 Classification of Costs (3)
Indirect costs are not directly related to production.
They are all the remaining production expenses.
Examples of indirect costs include
factory rent, factory power, depreciation of plant
and machinery, etc.
Indirect costs are also known as factory overheads.

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 Royalties

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Royalties is sometimes included within the

prime cost. These are a cost that is paid to the
owner of a copyrighted process. Usually a fee
is paid for each product that uses this process
and therefore the total royalty cost will be
directly proportional to the level of output.


 Work-in-progress

Goods which are not finished are known as work-in-

progress. The opening balance of work-in-progress is
added on to the production cost and the work-in-progress
left at the end of the year will need subtracting to give us
the cost of the goods completed during the period we are
dealing with.

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Stocks in a Manufacturing Organization

 There are three types of stock that we deal with in

manufacturing accounts. These are as follows:

 Raw materials - the purchases of these will be adjusted

for opening stock and closing stock in the prime cost.

 Work-in-progress - partly completed goods will be dealt

with at the end of the manufacturing account.

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 Stocks in a Manufacturing
Organisation
Finished goods - opening and closing stocks will be
dealt with, as is normal, in the trading account

All three types of closing stocks will appear as current

assets on the balance sheet.

Notice that for all three types, the principle is the

same as ever: add on the opening stock and deduct
the closing stock. The difference lies in the stage at
which you do this for each type of stock.
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 Factory profits
• One of the main reasons why firms
manufacture their own goods, rather than
purchasing them from another firm, is that
the goods can be manufactured at a lower
cost than the purchase price from elsewhere.

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 Factory profits
The difference between the cost of manufacture and the
cost of 'bought in' goods is known as factory profit, or profit
on manufacturing. Any factory profit will boost the overall
profits for the firm but is kept separate from the gross profit
until the net profit has been calculated, when they would be
added together. Any factory loss incurred should also be kept
separate until the net profit is calculated. By keeping the
profits separate, this allows the managers of a firm to see
how profit had been earned - did it arise out of efficiency in
manufacturing, or other areas of the firm?

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 Factory profits
It is hard to estimate how much a firm would
'save' by manufacturing its own products rather
than purchasing them from elsewhere. As a result,
factory profit is usually calculated by simply adding
on an additional percentage of the production cost
to give us the 'transfer price' which will replace the
purchases figure in the trading account. This
procedure is known as marking-up the production
cost
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 Factory profits
• However, if we mark-up the production cost
then the value for the cost of goods sold in
the trading account will be higher. This means
that the final gross and net profits for the firm
would be lower. To cancel out this effect, the
factory profit is added on again at the end of
the profit and loss account.

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 Factory profits

Manufacturing -Add factory profit to cost of

production and deduct factory loss from cost
of production

Profit & loss -Add factory profit to net profit

and deduct factory loss from net profit

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 Example 1

The following data has been extracted from the books of

Wedu Ltd. At 31 December 2017:

Stock of Raw materials 12,500, Stock of Work in progress

7,650, Stock of Finished goods 18,900, Purchases of raw
materials 89,000, Sales 215,000, Direct labour 32,000,
Rent and rates 18,000, Electricity 8,000, Office salaries
43,000, Depreciation for the year: Factory 7,000 Office
3,000

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 Example 1 cont…
Additional information
Stocks at 31.12.08:
Raw materials 11,250
Work in progress 8,420
Finished goods 21,530

Rent, rates and electricity are to be apportioned: Factory 75%, Office 25% .

Finished goods are to be transferred to the trading account at a profit of

20% on factory cost.

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 Question

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Have a go at producing a manufacturing,

trading and profit and loss account for Wedu
for the year ended 31 December 2017.


 Answer Tips

It is vital that you learn the correct format of the final accounts of the manufacturing
organisation - prime cost, factory overheads,
14/09/2023 and trading and profit and loss account.

Only items directly linked to the level of output will appear in the prime cost
calculations.

Items related to production but not directly will appear in the factory overheads
section of the manufacturing account.

When considering depreciation, only depreciation of productive assets (such as

machinery) will appear in the manufacturing account.

Show all your workings for adjustments (e.g. show the calculations for cost of raw
materials consumed).


 Answer Tips

• Look out for any factory profits which will be

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'marked-up' at the end of the manufacturing

account.

• If factory profit has been added then make

sure you add it again at the end of the profit
and loss account - to cancel out of the effect
of increasing production cost.


 Answer Tips

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Trading Account
Sales xxxxx
Opening Stock of Finished goods xxx
Production Cost of Goods Completed xxx
Closing Stock Of Finished Goods (XXx)
(xxxx)
Gross Profit xxxxx

Profit and Loss Account

Expenses :
Administration xxx
Selling and Admin xxx
Financial xxx
(xxx)
Net Profit xx


 Know the Format
Manufacturing Account

Production Cost for the period: 14/09/2023

Direct Material used xxxxx

Direct Labour xxxxx
Direct Expenses xxxxx
Prime Cost xxxxx
Indirect Manufacturing Cost xxxxx
(List)
Production Cost Of Goods Completed xxxxx

Opening Stock of Work in Progress xxxxx

Closing stock of Work in Progress (xxxx)
Production Cost Of Goods Completed c/d to trading Account xxxxxxxxx 