ACCOUNTS OF

MANUFACTURING
BUSINESS
distinguish between direct and indirect costs

understand direct material, direct labour, prime cost and factory

overheads

understand and make adjustments for work in progress

calculate factory cost of production

prepare manufacturing accounts, income statements and

statements of financial position

make adjustments to financial statements

Manufacturer

Converts raw materials into finished goods

Financial Statements

Manufacturing account

Calculate cost of production

Income Statement

Statement of Financial Position

Types of Manufacturing
Costs
Direct Costs

Costs can be directly traced to the manufacturing of goods

Direct Materials

Cost of Raw Materials used

Direct Labor (Direct wages)

Cost of the actual labour

Direct Expenses

Expense can be directly traced to the production.

Royalty
Types of Manufacturing
Costs
Indirect Costs (Factory Overheads)

Costs cannot be directly traced to the manufacturing

process

Indirect Materials

Indirect Labor

Indirect Expenses
Manufacturing Account
Direct Material

Opening Inventory of Raw Material

+ Net Purchases of Raw Material

- Closing Inventory of Raw Material

Prime Cost = Direct Material + Direct Wages + Direct

Expenses
Manufacturing Account

Factory Overhead = Indirect Material + Indirect Labor +

Indirect Expenses

Cost of Production = Prime Cost + Factory Overhead +

Opening Inventory of WIP - Closing Inventory of WIP
Example
20.1-.2
Kapoor Manufacturing Company
Manufacturing Account for the year
ended 30 April 2016
$ $ $
Direct Materials
Opening Inventory of Raw Materials 14900
Purchases of Raw 181200
Raw Materials Carriage Inwards 3300
184500
199400
Less: Closing inventory of Raw Materials
15300
184100
Direct Wages 166100
Direct Expenses
Royalties 10000
Prime Cost 360200
Kapoor Manufacturing Company
Manufacturing Account for the year
ended 30 April 2016
$ $ $
Prime Cost 360200
Add: Factory Overhead
Indirect Wages 93800
Factory Insurance 2070
Factory Rent and Rates 2930
Factory General Expenses 6350
Depreciation of Factory Machinery 9500
114650
474850
Add: Opening Inventory of Work in Progress
8790
483640
Less: Closing Inventory of Work in Progress
8640
Cost of Production 475000
Income Statement
Cost of production is included as part of the purchases of
finished goods

Manufacturer may still purchase some finished goods when:

production does not meet demand

cheaper to buy than to produce

particular products can not be manufactured by the

business
Example 20.4
Income Statement (Trading Account
Section) for the year ended 30 April
2016
$ $
Sales 661500
Less: Cost of Sales
Opening Inventory of Finished Goods 31000
Add: Cost of Production 475000
Add: Purchases of FInished Goods 15500
521500
Less: Closing inventory of Finished Goods
23250
498250
Gross Profit 163250
Income Statement (Profit &
Loss Account Section)

Office expenses (apportionment is required)

Administration expenses

Selling and distribution expenses

Financial expenses
Example 20.5
Statement of Financial Position
(Extract) at 30 April 2016
$ $

Current Assets

Inventory - Raw Materials 15300

Work in Progress 8640

Finished Goods 23250

47190