Manufacturing Account

1. Manufacturing Account

2. Production Cost Production cost = Prime cost / Direct cost + Factory overhead expenses / Indirect cost

3. Direct materials • Costs of the materials used during the period. • Include the purchase price of the raw materials and the acquisition costs related to the purchase. • Examples: Purchase of raw materials Carriage inwards / freight charges on raw materials

4. Direct labour • Wages paid to the people who are directly involved in the manufacturing process. • Example: Direct labour, Direct wages, Factory wages, Production wages, Manufacturing wages

5. Direct expenses • They refer to the expenses paid according to each unit of production. • Examples: Royalties

6. Factory Overhead Expenses / Indirect Costs • Cost incurred in the manufacturing process, but they cannot be traced directly to the goods being produced. • Include indirect materials, indirect labour and indirect expenses. • Examples: • Indirect materials • Lubricants • Loose tools (opening balance + purchase – closing balance) • Indirect labour • wages, salaries, bonus or commission to cleaners, crane drivers, foremen, supervisors and production managers.

7. Indirect expenses related to the factory, machinery and vehicles • Rent and rates • Depreciation • Insurance • Repairs and maintenance • Factory power / electricity • Internal transport • Loss on disposal

8. Work in Progress • It refers to the semi-finished goods, which should be included in the cost of goods manufactured.

9. Manufacturing Account • It shows the production cost or transfer price of goods completed during the accounting period. • Direct materials • Direct labour • Direct expenses • Factory overhead expenses • Work in progress • Manufacturing profit / loss

10. Trading Account • This account shows the gross profit or loss resulted from the trading of manufactured and other purchased goods. • The account includes: • Sales • Cost of goods sold • Manufactured goods • Other goods

11. Profit and Loss Account • Profit or loss of the whole business during the accounting period. • Includes all the expenses and income related to the office and the running of the whole business such as: • Gross profit / loss from the trading account • Manufacturing profit / loss

12. Administration expenses • Selling and distribution expenses • Financial expenses • Increase / decrease in the provision for unrealized profit • Net abnormal loss • cash misappropriated • losses of raw materials • losses of finished goods

13. Some expenses are related to both the manufacturing process and the administration of the office such as: • Rent and rates • Electricity • Insurance • Depreciation on premises • Motor vehicles • Motor vehicles expenses

14. These expenses should be allocated to the factory and office and debited to the manufacturing account and the profit and loss account respectively. • The bases of allocation are usually given in the examination questions.

15. Format of Manufacturing, Trading and Profit and loss account

16. Manufacturing, Trading and Profit and Loss Account for the year ended 31 Dec XXXX $ $ Opening stock of Raw Materials X Add: Purchases of Raw Materials X Carriage inwards X Less: Closing stock of Raw Materials (X) Cost of Raw Materials Consumed X Direct Labour X Royalties X Prime Cost X Factory Overhead Expenses: Loose Tools (opening bal. + purchases –closing bal.) X Rent (e.g. 25%) X Production Manager’s salaries X Factory Power X Maintenance of plant & Machinery X Depreciation of Plant & Machinery X X X Direct material Direct labour Direct Expenses Overhead

17. $ $ Add: Opening Work in Progress X Less: Closing Work in Progress X Production Cost of Goods Completed X Factory profit/(loss) X Transfer price of Goods Completed X Sales X Less: Returns inwards (X) X Less: COGS Opening stock of finished goods X Production cost/Transfer price of Gds completed X Less: Returns outwards (X) Fire Loss (X) Less: Closing stock of finished goods (X) X Gross Profit X Add: Factory Profit X Add: Discount Received X X The goods are transferred to trading a/c at production cost/ transfer price

18. $ $ Less: Expenses Carriage Outwards X Rent (e.g. 75%) X Discount allowed X Administration Expenses X Distribution Expenses X Selling Expenses X Depreciation of Delivery Van X Provision for Unrealized Profit X Fire Loss X X Net Profit X

19. Production Cost Vs. Transfer Priceof Goods Completed

20. Production cost Vs. Transfer price • Stock of raw materials, work in progress and other finished goods are valued at cost. • However, the stock of manufactured goods can be valued at production cost or the transfer price of goods completed. • Provision of unrealized profit of on stock should be made if closing stock of manufactured goods is valued at transfer price.

21. Provision of Unrealized Profit • Be made on the closing stock valued at production cost plus a percentage of factory profit. • Provision for unrealized profit Mark up% 100%+ Mark up(%) = Stock (at transfer price) x

22. Example 1

23. A company manufactures and sells it own products. It also purchases and sells other finished goods. Production 100 units $1@ $100 Sales 80 units $2@ $160 Closing stock 20 units $1@ $20 Expenses for this period $50 Prepare manufacturing, trading and profit and loss account for the following 2 situations would be shown: • The factory output is transferred to the trading account at factory cost. • The factory output is transferred to the trading account at factory cost plus 20% factory profit, and the stock of manufactured goods is valued at transfer price.

24. 1. Manufacturing, trading and profit and loss account (extract) $ $ Production cost of Gd completed (100 units*$1) 100 Sales (80 units*$2) 160 Less: COGS Production cost of Gd completed 100 Less: Closing stock(at cost) (20 units*$1) 20 80 Gross Profit 80 Less: Expenses Expenses 50 30

25. 2. $ $ Production cost of Gd completed (100 units*$1) 100 Add: Manufacturing profit (100*0.2) 20 Transfer price of Gds completed 120 Sales (80 units*$2) 160 Less: Cost of goods sold Transfer price of Gd completed 120 Less: Closing stock(at transfer price) (20+20*0.2) 2496 Gross Profit 64 Add: Manufacturing profit 20 84 Less: Expenses Expenses 50 Provision for unrealized profit (24*20/120) 454 Net Profit 30 Cost + profit

26. Increase/ Decreased in Provision of Unrealized Profit Accounting entries

27. Example 2

28. Goods manufactured are to be transferred to sales department at factory cost plus 20%. 199419951996 $ $ $ Stock at 1 Jan (attransfer price) - 2,400 3,600 Stock at 31 Dec (at transfer price)2,400 3,600 3,000 Prepare the provision for unrealized profit account, profit and loss account and balance sheet respectively for the three years

29. Provision for unrealized profit 1994 $ 1994 $ Dec 31 Bal c/d (2400*20/120) 400 Dec 31 P/L 400 Profit and Loss account (extract) 94 $ $ Gross Profit X Less: Expenses Increase in provision for unrealized profit 400

30. Provision for unrealized profit 1994 $ 1994 $ Dec 31 Bal c/d (2400*20/120) 400 Dec 31 P/L 400 1995 1995 Dec 31 Bal c/d (3600*20/120) 600 Jan 1 Bal b/d 400 Dec 31 P/L 200 600 600 Profit and Loss account (extract) 94 $ $ 95 $ $ Gross Profit X X Less: Expenses Increase in provision for unrealized profit 400 200

31. Provision for unrealized profit 1994 $ 1994 $ Dec 31 Bal c/d (2400*20/120) 400 Dec 31 P/L 400 1995 1995 Dec 31 Bal c/d (3600*20/120) 600 Jan 1 Bal b/d 400 Dec 31 P/L 200 600 600 1996 1996 Jan 1 bal b/d 600 Dec 31 P/L 100 Dec 31 Bal c/d (3000*20/120) 500 600 600

32. Profit and Loss account (extract) 94 $ $ 95 $ $ 96 $ $ Gross Profit X X X Add: Decrease in provision for unrealized profit 100 Less: Expenses Increase in provision for unrealized profit 400 200

33. Stock Loss

34. Stock Loss • Normal loss • Normal losses refer to losses related to the ordinary activities of the business/ • Examples: damaged / spoiled stock, obsolete stock • No entry is required for normal loss

35. Abnormal loss • Abnormal losses refer to losses not related to the ordinary activities of the business. • Examples: fire loss, burglary loss

36. Accounting entries

38. Cheung Kong Enterprises Manufacturing, Trading and Profit and Loss Account for the year ended 30 April 2004 Cost of raw materials consumed Opening stock 160,000 Purchase 1,640,000 1,800,000 Closing stock 200,000 1,600,000 Manufacturing wages 800,000 Prime cost 2,400,000

39. Prime cost 2,400,000 Factory overheads Manufacturing expenses 416,000 Depreciation 192,000 608,000 3,008,000 Opening work in progress 126,000 3,134,000 Closing work in progress 120,000 Cost of goods completed 3,014,000

50. Depreciation Total 2,400,000 x 10% = 240,000 Manufacturing 80% = 192,000 Administration 10% = 24,000 Selling and distribution 10% = 24,000