MANUFACTURING

ACCOUNTS
MANUFACTURING ACCOUNTS
We now have to deal with business which are manufacturers. For these
businesses a manufacturing account is prepared in a addition to the
profit and loss account. It is produced for internal use only. People
other than the owners and managers of the organization concerned
rarely see the manufacturing account.
If the business is using manufacturing accounts, instead of a figure for
purchases(of finished goods) the trading account will contain the cost
of manufacturing the goods that were manufactured during the period.
The manufacturing account is used to calculate and show the cost of
manufacturing these goods. The figure that it produces that is used in
the trading account is known as the production cost.
DIVISION OF COSTS
In a manufacturing business, the costs are divided into different types.
Direct Materials x
Direct labour x
Direct expenses X
Prime cost X
Indirect manufacturing costs x
Production cost x
Administrative expenses x
Selling and distribution expenses x
Financial charges x
Total cost x
DIVISION OF COSTS
The prime cost items and other production costs are shown in the
manufacturing account. The selling, administration and other financial
charges are shown in the profit and loss account.
DIRECT AND INDIRECT COSTS
When you see the word direct with a type of cost, you know that it has
been possible to trace the cost to the item being manufactured. The
sum of the direct cost is called the prime cost. If a manufacturing cost
cannot be easily traced to an item being manufactured, then it is an
indirect cost and then it will be included under indirect manufacturing
costs ( which are also commonly called as overhead costs).
Production costs is the sum of prime costs and overheads.
For example, the wages of a machine operator making a particular item
will be a direct labour cost and the wages of a supervisor in charge of
many men on different jobs will be classified as an indirect labour cost.
INDIRECT MANUFACTURING COSTS
Indirect manufacturing costs are all those costs which occur in the factory or other
places where production is being done, but which cannot be directly traced to the
items being manufactured.
Examples are:
• Wages of cleaners
• Wages of crane drivers
• Rent of a factory
• Depreciation of plant and equipment
• Costs of operating forklift trucks
• Factory power
• Lighting.
ADMINITRATION EXPENSES
Administration expenses consists of such items as salaries of managers,
legal and accountancy charges, the depreciation of accounting
machinery and secretarial salaries.
SELLING AND DISTRIBUTION
EXPENSES
Selling and distribution expenses are items such as sales staff salaries
and commissions, carriage outwards, depreciation of delivery vans,
advertising and display expenses.
FINANCIAL CHARGES
Financial charges are expense items such as bank charges and discount
allowed.
FORMAT OF FINANCIAL STATEMENT
MANUFACTRING ACCOUNTS SECTION
This is debited with the production cost of goods completed in the period.
It contains costs of:
• Direct materials
• Direct expenses
• Direct labour
• And indirect manufacturing costs.
The manufacturing account includes all purchases of raw materials,
including inventory adjustments for raw materials. It also includes
inventory adjustments for work in progress.
MANUFACTURING ACCOUNT
The following are the steps of preparing a manufacturing account:
1. Add the opening inventory of raw materials to purchases and subtract the closing
inventories of raw materials.
2. Add in all the direct costs to get in the prime cost.
3. Add in all the indirect manufacturing costs
4. Add in all the opening inventory of work in progress and subtract the closing
inventory of work in progress to get the production cost of all the goods
completed in the period.
Thus when completed the manufacturing account shows the total of all the
production costs that relates to the manufactured goods that have been available for
sale in the period. This figure will then be transferred to the statement of profit or
loss where it will replace the entry for purchases.
TRADING ACCOUNT SECTION OF THE
STATEMENT OF PROFIT OR LOSS.
This account includes:
• Production cost brought down from the manufacturing account
• Opening and closing inventory of finished goods
• Sales
When completed, this account shows the gross profit. This is then
carried down to the profit or loss.
 MANUFACTURING ACCOUNT
Production cost for the period: K
Direct materials xxx
Direct Labour xxx
Direct expenses xxx
PRIME COST xxx
Indirect manufacturing costs xxx
Production cost of goods completed c/d to trading account xxx

TRADING ACCOUNT
K K
Sales xxx
Less: Production cost of goods sold
Opening inventory of goods sold (A) xxx
Add: production costs of goods completed b/d xxx
xxx
less: clsoing inventory of finished goods (B) (xxx)
(xxx)
Gross profit xxx

(A) is production cost of goods unsold in the previous period

(B) is production cost of goods unsold in the current period
EXAMPLE 1
Details of the production costs for 31 December 2014 are as follows:
1 January 2014, inventory of raw materials 5,000
31 December 2014, inventory of raw materials 7,000
Raw materials purchased 80,000
Manufacturing(Direct) wages 210,000
Royalties 1,500
Indirect wages 90,000
Rent of factory-excluding administration, selling and distribution blocks 4,400
Depreciation of plant and machinery in factory 4,000
General expenses 3,100
Required:
Prepare a manufacturing account for the year ended 31 December 2014.
MANUFACTURING ACCOUNT FOR THE YEAR ENDING 31 DECEMBER 2014
K K
Inventory of raw materials 1.1.2014 5000
Add: Purchases 80000
85000
Less: inventory of raw materials at 31.12.2014 7000
Cost of raw materials consumed 78000
Manufacturing wages 210000
Royalties 1500
Prime cost 289500
Indirect manufacturing costs
Rent 4400
indirect wages 90000
General expenses 3100
Depreciation of plant and machinery 4000
101500
Production costs of goods completed b/d 391000
EXAMPLE 2
1 January 2014, inventory of raw materials 8000
31 December 2014, inventory of raw materials 10500
1 January 2014, work in progress 3500
31 December 2014, work in progress 4200
Year to 31 December 2014:
Wages: Direct 39600
indirect 25500
Purchase of raw materials 87000
Fuel and power 9900
Direct expenses 1400
Lubricants 3000
Carriage inwards of raw materials 2000
Rent of factory 7200
Depreciation of factory plant and machinery 4200
Internal transport expense 1800

Insurance of plant and factory buildings 1500

General factory expense 3300

Required
Prepare a manufacturing and trading account for the year ended 31 December 2014
SOLUTION
MANUFACTURING ACCOUNT FOR THE YEAR ENDING 31 DECEMBER 2014
K K
Inventory of raw materials on 1.1.2014 8000
Add: Purchases 87000
Carriage inwards 2000
97000
Less: invenetory of raw materials on 31.12.2014 10500
86500
Direct wages 39600
Direct expenses 1400
PRIME COSTS 127500
Indirect manufacturing costs
Fuel and power 9900
Indirect wages 25500
Lubricants 3000
Rent 7200
Depreciation of plant and machinery 4200
Internal transport expense 1800
insurance 1500
General factory expense 3300
56400
183900
Add: work in progress at 1.1.2014 3500
187400
Less: work in progress 31.12.2014 4200
Production cost of goods completed 183200
TRADING ACCOUNT
TRADING ACCOUNT FOR THE YEAR ENDED 31
DECEMBER 2014
K K
Sales 250000
Less: cost of goods sold
Inventory of finished goods
1.1.2014 3500
Add: production cost of goods
completed 183200
186700
Less: inventory of finished goods
31.12.2014 4400
182300
Gross profit 67700