MANUFACTURING ACCOUNTS 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. .g. in the manufacture of tables, direct materials consists of timber, nails, glue etc. ii) Direct labour 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 labour consists of wage paid to those wor"ers who saw, shape of #oin the piece of timber into table. iii) Direct expenses These are e$penses that must be incurred in the manufacture of a product. That is, they can be directly allocated a particular unit of a product e.g. live charges for a special e%uipment used in the process of manufacture, royalties &': The sum of all the direct costs is "nown as prime costs iv) In irect manu!acturin" costs # !actor$ over%ea s These are any other e$penses (apart from the direct costs) for items being manufactured: .g. cleaners* wages, factory rents, depreciation of plant and e%uipment, factory power and lighting N&' prime cost ( in irect manu!acturin" costs ) *RODUCTION COSTS v) A ministrative +xpenses

These are e$penses that are administrative in nature, that is, e$penses incurred in the process of panning, controlling and directing the organization. e.g. office rents, office electricity, depreciation of office machinery, secretarial salaries.

vi)

Sellin" an

istribution expenses

These are e$penses incurred in the process of selling, promoting and distributing the goods manufactured. .g. advertising e$penses, carriage outwards, depreciation of motor van, salesmen salaries etc. vii) Finance Costs These are e$penses such as ban" charges, discount allowed. Format o! t%e !inancial statements Manu!acturin" account part This is debited with the production cost of goods completed during the accounting period: It consists of: Direct materials Direct labour Direct e$penses Indirect manufacturing costs. It also includes ad#ustments for wor" in progress (goods that are part, completed at the end of a period). ST+*S +. -dd opening stoc" of raw materials to purchases and subtract the stoc" of raw materials. This is to get the cost of materials used during the period. .. -dd in all the direct costs to get the prime costs /. -dd all the indirect manufacturing costs. 0. -dd the opening stoc" of 1I2 and subtract the closing stoc" 1I2 to get the production cost of all goods completed in the period. This is because 1I2 cannot be sold and therefore should not be included in the trading account. 3. 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. Final accounts o! a manu!acturer +) 4anufacturing accounts 5 used to determine the cost of production. .) Trading account, 6sed to determine the gross profit on trading. /) 'alance sheets.

Treatments o! 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: 7pening stoc" of loose tools -dd purchases of loose tools $$ $$ $$ 8ess closing stoc" of loose tools 9ost of loose tools consumed ($$) $$

Manu!acturin" Accounts Formats Manu!acturin" Account !or t%e ,ear en e -. December xx shs :toc" of raw materials +.+..; $ < -dd purchases of raw materials 9arriage inwards of raw materials $$ $$ $$ $$ 8ess closing stoc" of raw materials 9ost of raw materials consumed -dd: Direct 1ages Direct $penses 2rime 9osts Indirect 4anufacturing costs Factory lighting Factory =ent Depreciation of Factory 4achinery Indirect labour Indirect 4aterials 9ost of loose tools consumed $$ $$ $$ $$ $$ $$ $$ $$ -dd wor" in 2rogress +.+..;$< $$ $$ 8ess wor" in 2rogress /+.+...;$< 2roduction costs of goods completed c/d ($$) $$ ($$) $$ $$ $$ $$ shs

Tra in"/ *ro!it an 0oss Account !or t%e $ear en e -.1 .21 xx shs :ales 8ess cost of goods sold -dd production cost of goods completed b/d 8ess closing stoc" of finished goods 9ost of :ales >ross 2rofit 8ess $penses 7ffice =ent 7ffice lectricity Depreciation of 7ffice 4achinery :elling ? distribution e$penses -dvertising Delivery @an e$penses -dvertising Delivery @an e$penses 9arriage 7utwards :alesmen salaries $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ ($$) &et 2rofit / (8oss) Note' +xpenses s%oul be appointe as !ollo3s' Indirect manufacturing costs 5 9harged in manufacturing account -dministrative e$penses :elling and distribution e$penses Financial charges 9harged in the profit ? loss account $$ / ($$) $$ $$ ($$) ( $$) $$ shs $$

Treatment o! manu!acturin" *ro!it1 4anufacturing 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 mar"et value. The difference between the mar"et value and the cost of production is the manufacturing profit. 4anufacturing profit should be added to the cost of production in the manufacturing account so as to arrive at the mar"et value of goods manufactured. The mar"et value of goods manufactured should ta"e the place of purchases in the trading account. The double entry for the manufacturing profit is: DR 4anufacturing -ccount CR 2rofit and loss account. Treatment o! unreali4e *ro!it 6nrealized 2rofit occurs where it is the policy of the firm to value stoc"s of finished goods at mar"et value rather than at cost. The difference between the mar"et value and the cost of the finished goods is the unrealized profit. The difference between the unrealized profit on the opening stoc" of finished goods and the unrealized profit on the closing stoc" of finished goods should be charged to the profit and loss account. The provision for unrealized profit on the closing stoc" by the end of year should be subtracted from the mar"et value of the finished goods in the balance sheet. (i.e closing stoc" is stated at production cost on the balance sheet)