MANUFACTURING ACCOUNTS

A firm that manufactures its own products for sale will normally prepare a manufacturing
account to determine its production costs for each accounting period. Production costs are sub-
divided into two main groups: direct costs and indirect costs. Direct costs are traceable to each
unit (or batch of units) being manufactured. Indirect costs, on the other hand, are not traceable to
each unit being manufactured, though they occur in the factory.

DIRECT COSTS

These include direct materials, direct labor and direct expenses.

1. Direct (raw) materials involve:

 Stocks (opening and closing)
 Purchases
 carriage and freight charges
 Import duties
 Returns

2. Direct labour: wages paid to workers who are directly involved in the actual production
process (i.e. Wages paid to production workers). Direct labour may be shown as:
 Direct wages
 Production wages
 Manufacturing wages
 Factory wages
 Wages of machine operators

3. Direct expenses include:

 Hire of special plant and machinery
 Royalties payable (to investors of a particular brand, patent or trade-mark being
used by the firm).
 License fees (e.g. manufactured under license by X. Co. Ltd)
 INDIRECT COSTS (FACTORY OVERHEADS)

These are costs which occur in the factory, but are not traceable to each unit (or batch
of units) being manufactured. They include:
 Indirect materials
 Indirect labour (wages and salaries paid to factory cleaners, crane drivers, fork-lift
truck drivers, factory foreman, factory supervisors , factory managers)
 Rent, rates, insurance, etc., of factory
 Light, heat , gas , fuel , petrol, oil and lubricants (of factory)
 General factory expenses
 Depreciation of plant, machinery and factory equipment
 Repairs and maintenance of factory buildings and equipment

PARTLY MANUFACTURED GOODS/WORK IN PROGRESS

These are products on which production is currently being carried out (started but
not yet completed). As a result, the term work-in-process is commonly used to
refer to such products. Work-in-progress at the beginning of the period should be
added to manufacturing costs, while that at the end should be subtracted, in order
to arrive at the production costs of goods completed within the period.

Tutorial Notes:
1. The manufacturing account should ONLY contain costs relating to the
FACTORY.
2. Production Cost Per Unit = Production Cost
Number of Units Produced

TRADING ACCOUNT

This deals exclusively with finished goods. The production cost of goods completed, when
determined, should be transferred to the trading account, where it will replace purchases. Since
the firm will be manufacturing its own products, there will not normally be purchases of finished
goods. However, where enough units are not produced, the firm might decide to purchase
additional finished goods, rather than try to make them, since production will take some time to
be completed. In this case, the trading account will contain a figure for production cost and
another for purchases of finished goods.
 PROFIT AND LOSS ACCOUNT

Here, the expenses are normally classified under three headings:

Selling and distribution, administrative and financial charges.

1. Selling and Distribution Expenses relate to sales, advertising , promotion and distribution
costs, such as:
 Carriage outwards/carriage on sales
 Delivery expenses
 Advertising and display cost
 Salesmen’s salaries and commissions
 Depreciation of delivery vehicles and display equipment
 Bad debts and provision for doubtful debts

2. Administrative Expenses include:

 Rent, rates, insurance, etc. (of office)
 Light, heat, air-conditioning, etc. (of office)
 Wages and salaries of office managers and other office workers
 Depreciation of office equipment, office buildings and office furniture
 General office expenses/ sundry expenses

3. Financial Charges Include:

 Discounts allowed
 Bank charges
 Loan interest and interest on overdraft
 FORMAT
John Brown
Manufacturing Account for period ended …

RAW MATERIALS:
Opening stock xx
Purchases xx
Add: Carriage and Freight Charges xx
Import Duties xx
xx
Less Return Outwards/Purchases Returns xx
Net Purchases xx
Cost of raw material available for use xx
Less Closing Stock xx
Cost of Raw Material Consumed/ Used-up xx
DIRECT LABOUR:
Manufacturing (factory) Wages xx
DIRECT EXPENSES (if given)
Hire of Plant and Machinery xx
Royalties xx
License Fees xx
xx
PRIMSE COST xx

FACTORY OVERHEADS:
Rent, Rates and Insurance xx
Light, Heat, Fuel xx
Depreciation of Plant and Machinery xx
Indirect Materials xx
Indirect Labour xx
Other Indirect Factory Expenses xx
TOTAL FACTORY OVERHEAD xx
xx
Add Opening Work-in progress xx
xx
Less Closing Work-in-progress xx

PRODUCTION COSTS (Cost of goods Manufactured) xx

Tutorial Notes:
1. The manufacturing account is also called a Schedule of Cost of Goods Manufactured.
2. Where the manufacturing account is prepared HORIZONTALLY, all the above items
would simple be shown on the DEBIT SIDE.
3. Prime Cost sometime involves only Raw Materials Consumed and Direct Labour.
 4. Where necessary, adjustments should be made for accruals and prepayments (whether in
the manufacturing account or the trading and profit and loss account).

John Brown

Trading and Profit and Loss Account for period ended…

Finished Goods:

TURNOVER:

Sales xx

Less Returns Inward / Sales Returns xx

xx

LESS COST OF SALES/COST OF GOODS SOLD:

Opening Sock xx

Production Cost xx

Purchases (of finished goods -if any) xx

Add carriage Inwards (on finished goods) xx

Less Purchases Returns (finished goods) (xx)

Net Purchases (of finished goods) xx

Cost of Goods Available for sale xx

Less Closing stock xx

Cost of Goods Sold xx

GROSS PROFIT/(LOSS) xx

ADD OTHER REVENUES xx

xx

LESS EXPENSES

Selling and Distribution:

Advertising and Display Costs xx

 Salesmen’s Salaries and Commissions xx

Delivery Expenses xx

Bad Debts and Provision for Bad Debts xx

Depreciation of Delivery Vehicles and

Display Equipment xx xx

Administration:

Rent, Rates and Insurance xx

Office Salaries xx

General Office Expenses xx

Depreciation of Office Buildings

and Equipment xx xx

Financial Charges:

Loan Interest/ Interest on Overdraft xx

Bank Charges xx

Discounts Allowed xx xx

xx

NET PROFIT/ (LOSS) xx

 MANUFACTURING ACCOUNTS, CONTINUED

EXERCISE

The following details were extracted from the books of Horizon Enterprise, a block
manufacturer, on September 30, 2013:

Book Value of Plant and Machinery 15 000

Stocks at October 1, 2012
Raw Materials 2 350
Work in progress 1 480
Finished Goods 1 500
Purchase of Raw Materials 8 500
Purchase of Finished Goods 1 600
Carriage Inwards on Materials 270
Wages 7 000
Factory Manager’s Salary 3 000
Factory Power 950
Lighting 750
Rent and Rates 1 900
Carriage Outwards 250
Trade Expenses 350
Sales 35 000
Stock at September 30, 2013
Raw Materials 2 500
Work in progress 1 250
Finished Goods 1 200

NOTE: The following should be taken into consideration:

1. Wages owing $500.
2. Rates prepaid $100.
3. Only 4/5 of the wages is for factory workers.
4. 2/3 of the rent, rates and lighting must be charged to the factory.
5. Plant and Machinery are to be depreciated by 10%.

You are required to:

a) Prepare the manufacturing account.
b) Prepare the trading and profit and loss account for the year ended September 30,
2013.
c) Calculate the production cost per block, assuming that 1 250 blocks were
manufactured for the year.
SOLUTION (a)
Horizon Enterprises
Manufacturing Account for year ended September 30, 2013

Raw Materials: $ $
Opening Stock 2 350
Purchases 8 500
Add Carriage Inwards 270
Net Purchases 8 770
Cost of Materials Available for Use 11 120
Less Closing Stock 2 500
Cost of Materials Consumed (used up) 8 620

Direct Labour:

Wages ($7,000+$500) * 4/5 6,000

PRIME COST 14 620

Factory Overheads:

Factory Manager’s Salary 3 000

Factory Power 950
Lighting (2/3 * $750) 500
Rent and Rates (2/3 * $1,800) 1 200
Depreciation of Plant and Machinery
(10% of 15,000) 1 500
Total factory overheads 7 150
Manufacturing Cost 21 770
Add Opening work in Progress 1 480
23 250
Less Closing Work in Progress 1 250
PRODUCTION COST (Cost of Goods Manufactured) 22 000
(b) Horizon Enterprise
Trading and Profit and Loss Account for year ended September 30, 2013
Finished Goods : $ $

Sales 35 000

Less Cost of Goods Sold:

Opening Stock 1 500
Production Cost 22 000
Purchases 1 600
Cost of Goods Available for Sale 25 100
Less Closing Stock 1 200
Cost of goods sold 23 900
Gross Profit 11 100

Less Expenses
Carriage Outwards 250
Trade Expenses 350
Wages (1/5 * 7,500) 1 500
Lighting (1/3 * 750) 250
Rent and Rates (1/3 * 1,800) 600
2 950
Net Profit 8 150

(C)
Production Cost per Unit = Total Production Cost
Number of Units Produced

= $22 000
1 250
=$17.60 per block.

Tutorial Notes:
1. A manufacturing firm will rarely buy finished goods, since it is making its
own products. As such, questions may not necessarily contain purchases of
finished goods.
2. It is only necessary to categorize the expenses if the question requires this.
3. There may be other income (additional revenues) to be added with gross
profit before the net profit (or loss) is calculated.
 PRACTICE EXECERCISE

Innovations Ltd. Sells cellular phones, some of which they produce themselves and some
of which they buy for resale. The following information was taken from their records for
the year ended December 31, 2013.

RAW WORK IN FINSIHED

MATERIAL PROGRESS GOODS
$ $ $
Stocks: at Jan. 1, 2013 20,000 14,000 8,000
at Dec. 31, 2013 16,000 1,000 6,000

Purchases 60,000 - 24,300

Carriage inwards 15,000 - 400
Purchases Returns 500 - 700
Sales - - 182,500
Sales Returns - - 2,500

OTHER INFORMATION: $
Production Wages 10 000
Factory Power 1 200
Trade Expenses 850
Royalties Paid 4 500
Lighting 2 400
Depreciation of Plant and Machinery 4 000
Carriage Outwards 350
Office Salaries 2 700
Discounts Allowed (selling expense) 200
Rent, Rates and Insurance 3 600
Factory Manager’s Salary 2 500
Other Delivery Expense 500

You are required to:

a) Prepare a Manufacturing Account for the year ended December 31, 2013
b) Prepare a Trading and Profit and Loss Account for the year.
c) Assuming that 200 cellular phones were produced during the year, calculate the cost of
producing a single phone
d) Calculate the percentage net profit on sales.

NOTE: Lighting, rent, rates and insurance should be apportioned among the factory,
general office and sales department in the ratio 2:2:1, respectively.
HINTS:

a) Royalties paid is a direct expense and must be included before prime cost.
b) The trading account will contain production cost and purchases of finished goods.
c) Expenses are to be categorized into “selling & distribution” and “administration”.
d) Prime Cost = $79,500, Production Cost = $90,000, Gross Profit = $64,000,
Net Profit = $55,800, Production Cost Per Unit =$450 and Net Profit Percentage
=31%.

Additional Past Paper Practise Question:

Year 2000 Question 7 Page 7 Colbert Enterprise

Year 2002 Question 7b Page 20 G. Miller
Year 2003 Question 7 Page 27 Environment Enterprises
Year 2005 Question 4 Page 37 McNaughtonTools
Year 2006 Question 4 Page 44 Sport Art
Year 2008 Question 5 Page 58 T. Terrelounge
Year 2010 Question 5 Page 72/13 Jeans and Things
Year 2011 Question 5 Page 78/23 Martha’s Cake and Confectionery
Year 2012 Question 6 Page 87/32 Simon Long
Year 2013 Question 4 Page 39 Fashion Forward
Year 2014 Question 5 Page 49 JB Manufacturing Company
Year 2015 Question 5 Page 66 Sedeno Knitted Goods
Year 2016 Question 4 Page 84 Little People Furnishing
Year 2018 Question 5 Page 127 Kaycee Garments