Manufacturing Accounts

Some firms may manufacture or produce goods rather than buy due to savings in operational costs. (i.e. it
is cheaper to produce the goods rather than buy).
Due to additional costs involved in the production process, additional information is reported in the final
accounts.
Therefore, in addition to a trading, profit and loss account, a new account called manufacturing account is
shown before these others.
The purpose of the manufacturing account is to report all the costs incurred in producing the goods.
These costs are divided into 2 classes:
1) Direct costs (prime costs)
2) Indirect costs (overheads)

Direct Costs/Prime Costs

This is a cost that can be traced directly to a unit that has been produced. This include
1) Direct material
2) Direct labour (wages)
3) Direct expense
Indirect costs/Production overheads
These are all other costs incurred in the production of manufacturing of goods but cannot be traced
directly to any particular unit. Example:
1) Rent for the factory
2) Salaries to supervisors and factory managers
3) Depreciation of plant and machinery used in production

TOTAL COST OF PRODUCTION= PRIME COST+ FACTORY/ PRODUCTION OVERHEADS

PRIME COST= DIRECT RAW MATERIALS+ DIRECT LABOUR (WAGES)+ DIRECT EXPENSES

The manufacturing account will show the factory cost of goods produced that will be shown in the trading
account in place of purchases.

WORK- IN- PROGRESS (WIP)

Is the cost of those items which remain incompleteat the end of accounting period.
FORMAT
Name
Manufacturing Trading Profit and Loss Account for the year ended 31 December
£ £
Raw Materials
Opening stock of raw materials XX
Purchases of raw materials XX
Add carriage inwards XX
XX
Less returns outwards (XX) XX
Cost of raw materials available for use XX
Less closing stock of raw materials (XX)
Raw materials consumed XX
Direct labour (factory wages) XX
Direct expenses XX
Prime cost XX
Factory overheads
Salary to factory manager XX
Depreciation on – Plant and machinery XX
 - Factory buildings XX
Other expenses – Factory power XX
Lighting and heating XX
Water XX
Cleaners wages XX XX
Total cost of production XX
Add: opening Work In Progress XX
Less: closing Work In Progress (XX) XX
Factory cost of production (cost of finished goods) XX Note 1
FACTORY PROFIT XX
Finished goods at a transfer price XX Note 2

Sales XX
Less returns inwards (XX)
XX
Less cost of sales
Opening stock – finished goods XX
Factory cost of production/transfer price XX
XX
Less closing stock of finished goods (XX) (XX)
Gross profit XX
Add factory profit XX
Other incomes – discount received XX
- Profit on disposal XX
XX
Less expenses
Salaries and wages – administration & non XX
production
Rent for administration building XX
Depreciation - Delivery vans XX
- Fixtures and distribution XX
Other selling and distribution costs XX (XX)
Net profit/(net loss) XX/(XX)

For the balance sheet, the format is the same for all the assets and liabilities except for the current assets
section whereby the stock at the end of the period should be shown for each type of stock as per this
format:

Current Assets £ £
Stock: raw materials XX
Work in progress XX
Finished goods XX XX

Note 1: This represents the total costs of all the units produced during the period and therefore will be
taken to the trading account as the goods are transferred to the selling department.
Note 2: If the firm transfers the goods to the selling department at a price higher than the cost of
production, then this generates a factory profit. The goods will be shown in the trading account at the
transfer price and the factory profit is added to the Gross Profit of the period.
Expenses can also be classified into:
1) Administration Expenses
These are expenses incurred in running or managing the affairs of the firm and includes managers salaries
(not factory managers), legal and accounting fees, depreciation of furniture and fixtures and equipment
not used in production, finance cost e.g. loan interest.
2) Selling and Distribution
These are expenses incurred to generate sales income e.g.

 Salaries and commission to the sales manager and staff

 Carriage outwards (i.e. to deliver goods to the customers
 Depreciation on motor vehicles (used for the delivery purpose)
 Advertising
 Bad debts
Example
Bibi Maridadi owns and manages a small manufacturing business. The following balances have been
extracted from her books of account at 31 January 1986:

Dr Cr
Sh Sh
Capital at 1 February 1985 171,120
Accounts payable 86,000
Bank and cash balance 5,400
Accounts receivable 92,000
Drawings 60,000
Administration expenses 150,360
Advertising expenses 12,000
Factory direct wages 60,000
Factory indirect wages 24,000
Factory power 36,000
Furniture and fittings (all offices) 18,400
Heat and light 16,000
Plant and equipment 276,800
Motor vehicle (used by salesmen) 144,000
Plant hire 4,000
Provision for bad debts 3,200
Provision for depreciation 1 February 1985:
 Furniture and fittings 9,200
 Plant and equipment 138,400
 Motor vehicle 24,000
Raw material purchases 228,000
Rent rates 20,000
Sales 829,440
Selling and distribution expenses 66,400
Inventories at cost, 1 February 1985:
 Raw materials 8,000
 Work in progress 16,000
 Finished goods 24,000 _______
1,261,360 1,261,360

The following additional information is provided:

(i) Accruals at 31 January 1986 were:
Factory power - Sh.1,600
Rent and rates - Sh. 4,000

There was also prepayment of Sh. 800 for salesmen’s motor vehicle insurance.
(ii)Inventories at 31 January 1986, were valued at cost as follows:

Raw materials - Sh. 15,200

Work in progress - Sh. 30,400
Finished goods - Sh. 45,600
(iii) Depreciation is to be charged on plant and equipment, motor vehicle, furniture and fittings at the
rates of 20%, 25% and 10% per annum respectively on cost.
(iv) Expenditure on heat and light, and rent and rates is to be apportioned between the factory and office
in the ratio of 9 to 1 and 3 to 2 respectively.
(v) The provision for bad debts is to be made equal to 5% of accounts receivable at 31 January 1986.
Required:
Using the vertical method, prepare Bibi Maridadi’s manufacturing, trading and profit and loss account for
the year ended 31 January 1986 and a balance sheet as at that date. (22 marks)