MANUFACTURING ACCOUNT

Explain why it is necessary to prepare a manufacturing account in addition to a

trading and profit and loss account.
It is necessary to produce a manufacturing account in order to calculate the cost of production for
the business. This will then be used to calculate the cost of sales and the gross profit
Differentiate between direct and indirect costs; fixed and variable costs.
Manufacturing costs may be classified as direct costs and indirect costs on the basis of whether
they can be attributed to the production of specific goods, services, departments or not.
Direct manufacturing costs - costs which can be traced to the item being manufactured. Most
direct costs are variable (e.g, direct materials, direct labour, etc.) but this may not always be the
case. For example, the salary of a supervisor for a month who has only supervised the
construction of a single building is a direct fixed cost incurred on the building.
Indirect manufacturing costs - costs which occur in a factory or other production facility but
cannot be easily traced to the items being manufactured. These typically benefit multiple cost
objects and it is impracticable to accurately trace them to individual products, activities or
departments etc. E.g., Cost of depreciation, insurance, power, salaries of supervisors incurred in a
concrete plant.
Fixed costs - Costs that remain the same (in the short term) irrespective of levels of production
or business activity. e.g., factory rent.
Variable costs -Costs that vary depending on levels of production or business activities. E.g., raw
materials.
Explain the difference between direct labour and indirect labour.
Direct labour is the cost of the wages of the people who are involved with the manufacture of the
product whereas indirect labour is the cost of the wages of the people who are not directly
involved in the production process such as supervisors and managers.
Prime cost: The term prime cost refers to the materials, direct labour and direct expenses.
These items are generally the direct/variable costs of production.
Factory overhead cost is the total cost involved in operating all production facilities of a
manufacturing business. It generally applies to indirect labour and indirect cost; it also includes all
costs involved in manufacturing with the exception of the cost of raw materials and direct labour.
Factory overhead also includes certain costs such as quality assurance costs, cleanup costs, and
property insurance premiums.
Stock of raw materials is the stock of crude or processed material that can be converted by
manufacture into a saleable good.
Stock of work in progress is goods which have started their manufacturing process so are no
longer included in the raw materials stock, but have not yet reached a stage where they are fit to
be sold.
Stock of finished goods is goods which have completed the manufacturing process and are
available to be sold
Work in progress – a company's partially finished goods waiting for completion and eventual sale
or the value of these items. These items are either just being fabricated or waiting for further
processing in a queue or a buffer storage. The term is used in production and supply chain
management.
Production costs – Prime cost plus indirect manufacturing costs.
Suggest one reason why Manufacturing Organisation purchased finished goods.
 To meet an urgent order
 Machinery breakdown
 Delays in production
 LAYOUT
XYZ
Manufacturing account for the year ending 31 December 20XX
£ £ £
Opening inventory of raw materials XXX
Add purchases of raw materials XXX
Add carriage on raw materials XX
Less return outwards on raw materials (XX) XXX
Less closing inventory of raw materials (XXX)
Cost of raw materials consumed/used XXX
Direct labour/Manufacturing wages XXX
Factory direct expenses/Royalties/Packaging, etc. XXX
Prime cost XXX
Factory overheads/indirect expenses:
Factory supervisor/manager salary XXX
Rent and rates (appn) , e.g ⅓, ⅔, ⅞, % etc XXX
Heat and light (appn) , e.g ⅓, ⅔, ⅞, % etc XXX
Factory consumables (appn) , e.g ⅓, ⅔, ⅞, % etc XXX
Indirect factory wages/expenses XXX
Factory power XXX
Insurance of plant and machinery XXX
Repairs to plant and machinery XXX
Depreciation on plant and machinery XXX XXX
XXX
Add Opening work-in-progress XXX
Less Closing work-in-progress (XX)
of finished goods produced
Production cost XXX
N.B: Prime cost = Direct materials + Direct labour + Direct expenses
Production cost = Prime cost + Indirect manufacturing costs (Factory Overhead costs)
Total cost = Prime cost + Production cost + Admin exp. + S&D exp. + Financial charges

XYZ (Manufacturing)
Income Statement for the year ending 31 December 20XX
£ £
Sales Revenue XXX
Less Cost of sales:
Opening inventory of finished goods XXX
Add Production costs XXX
Add Purchases of finished goods XXX
Less goods for own consumption (Drawings) (XX)
Less Closing inventory of finished goods (XX) (XX)
Gross profit XXX
Less Expenses:
Salaries and wages XX
Rent, rates and insurance (appn) , e.g ⅓, ⅔, ⅞, % etc XX
Heat and light (appn) , e.g ⅓, ⅔, ⅞, % etc XX
Carriage outwards XX
Depreciation: F&F, MV etc XX (XX)
Profit / (Loss) for the year XX+/-
 MCQs
1. For a manufacturing business, direct material + direct labour + direct expenses equals
(A) prime cost
(B) administration costs
(C) factory overheads
(D) cost of raw materials consumed
2. Which item is included in prime cost?
(A) carriage on raw materials
(B) carriage on finished goods
(C) depreciation of factory machinery
(D) supervisors’ wages
3. Prime cost includes
(i) Direct labour
(ii) Factory overhead expenses
(iii) Raw materials consumed
(iv) Direct expenses
(A) (i), (ii) and (iii)
(B) (ii), (iii) and (iv)
(C) (i), (iii) and (iv)
(D) (i), (ii) and (iv)
4. In the Manufacturing Account is calculated
(A) The production costs paid in the year
(B) The total cost of goods produced
(C) The production cost of goods completed in the period
(D) The gross profit on goods sold
5. In a manufacturing business, which of the following is a factory overhead?
(A) carriage inwards on raw materials
(B) factory supervisor’s salary
(C) hiring of special machinery
(D) manufacturing wages
6. Ignoring work in progress, which of the following statements correctly defines factory cost
of production?
(A) Raw materials purchased plus indirect costs
(B) Prime cost plus factory overheads
(C) Prime cost minus factory overhead
(D) Prime cost plus direct costs
7. A manufacturing company provided the following information:
£
Closing work in progress 3 300
Factory overheads 83 000
Opening work in progress 2 600
Prime cost 121 000
What was the production cost?
(A) £203 300
(B) £204 000
(C) £204 700
(D) £209 900
8. In a manufacturing business, where should the cost of delivering the goods to customers
be shown?
(A) Appropriation account
(B) Manufacturing account
(C) Profit and loss account
(D)Trading account
9. Which item would not appear in the manufacturing account?
(A) cost of sales
(B) cost of production
(C) prime cost
(D) work in progress
10. Which of the following should be charged in the Profit and Loss Account?
(A) Office rent
(B) Work in progress
(C) Direct materials
(D) Carriage on raw materials
 J Jones
Manufacturing account for the year ending 31 December 2019
£ £
Inventory of raw materials at 1 January 2019 21000
Add Purchases of raw materials 258000
Less Inventory of raw materials at 31 December 2019 (25000)
Cost of raw materials consumed/used 254000
Factory wages 59000
Prime cost 313000
Production overheads:
Fuel and light (21000+4000)x80% 20000
Rent and rates (21000-5000)x75% 12000
Repairs of plant and machinery 9000
Depreciation on plant and machinery (80000x10%) 8000 49000
362000
Add Opening work in progress 14000
Less Closing work in progress (11000)
Production cost 365000
 J Jones
Income statement for the year ending 31 December 2019
$ $
Revenue (Sales) 482000
Less Returns inwards (7000) 475000
Less Cost of sales:
Inventory of finished goods at 1 January 2019 23000
Production cost 365000
Inventory of finished goods at 31 December 2019 (26000) (362000)
Gross profit 113000
Less Expenses:
Fuel and light (21000+4000)x20% 5000
Rent and rates (21000-5000)x25% 4000
Administration salaries 17000
General expenses 9000
Carriage outwards 4000
Provision for irrecoverable debts (20000x5%) 1000 (40000)
Profit for the year 73000

J Jones
Statement of financial position at 31 December 2019
Accumulated Carrying
Cost
depreciation value
$ $ $
Non-current assets:
Freehold premises 410000 - 410000
Plant and machinery 80000 16000 64000
490000 16000 474000
Current assets:
Inventory
Raw materials 25000
Work in progress 11000
Finished goods 26000 62000
Trade receivables 20000
Provision for doubtful debts (20000x5%) (1000) 19000
Other receivables 5000
Cash in hand 11000 97000
Total assets 571000

Equity and liabilities:

Capital 457000
Add Profit for the year 73000 530000

Current liabilities:
Trade payables 37000
Other payables 4000 41000
Total equity and liabilities 571000