Objectives

2. Objectives To introduce students to: • the preparation of financial reports in a businesses operating in a manufacturing environment, including among others the following- • Computation of prime cost • Computation of production cost • Adjusting the manufacturing account in respect of work in progress • Further methods of computing depreciation in a manufacturing environment. Financial Accounting

3. Classification of Costs (1) • In this lecture, you will learn how to prepare a manufacturing account and why the need to do prepare a manufacturing account. • An important (and different account for a retailer) aspect of preparing a final account for a manufacturing business is the computation of the cost of goods manufactured. Financial Accounting

4. Classification of Costs of Manufacturing (1) The cost of goods manufactured comprises of: • all resources used, directly or indirectly, in the manufacture of goods. • thus, manufacturing costs can be classified into direct costs and indirect costs Financial Accounting

5. Classification of Cost of Manufacturing (2) • Direct costs are those costs directly involved in the manufacture of goods: • Examples of direct costs are: • direct materials (raw materials) • direct labour and • direct expenses (such as electricity used). • All the direct costs are collectively known as prime cost. Financial Accounting

6. Classification of Cost of Manufacturing (3) • Indirect costs are not directly related to production. They are all the remaining production expenses. Examples of indirect costs include: • factory rent, factory power, depreciation of plant and machinery, etc. • Indirect costs are also known as factory overheads. Financial Accounting

7. Classification of Cost of Manufacturing (Summary) A manufacturing account is prepared to find out the Cost of goods manufactured. Costs of manufacturing include all resources used, directly or indirectly, in the manufacture of goods. The manufacturing costs can be classified into direct costs and indirect costs. Direct costs are those costs directly involved in the Manufacture of goods. Examples of direct costs are direct materials, direct labour and direct expenses. All the direct costs are collectively known as prime cost. Financial Accounting

8. Classification of Cost of Manufacturing (Summary) Indirect costs are not directly related to production. They are all the remaining production expenses. Examples of indirect costs include factory rent, factory power, depreciation of plant and machinery, etc. Indirect costs are also known as factory overheads. (Try thinking of more examples of indirect expenses ) Financial Accounting

9. Administrative Expenses • These are expenses that generally do not relate to the to the manufacturing process specifically but considered as part of the cost of operations of the organization. Such expenses are not included in the cost of manufacturing. Examples include: • CEO’s salary • Legal and accounting/audit cost • Depreciation of office machinery • Secretarial services Financial Accounting

10. Selling and Distribution Expenses & Financial Charges • These are expenses relating to sale of goods manufactured. These expenses are not considered direct cost as they are incurred after the completion of the production process. • Examples of sales and distribution are: • Sales commission • Carriage outwards • Depreciation of delivery van • Advertising expenses Financial Accounting

11. Format of a of Financial Statement for Manufacturing Business: (A) Manufacturing Account • Manufacturing account: the cost of goods produced is computed in this account. The account comprises of the following elements of cost: • Direct (raw) materials • Direct labour (wages) • Direct expenses • Indirect manufacturing cost/expense Financial Accounting

12. Format of a of Financial Statement for Manufacturing Business: (B) Trading Account • This account is prepared to compute gross income from the manufacturing process. Thus, production cost of goods sold is compared with the total sales to compute the gross profit. • Like in the trading account for a retail business, the opening and closing stock of finished goods should be taken into account in computing the production cost of goods sold. Financial Accounting

13. Format of a of Financial Statement for Manufacturing Business: (C) Profit & Loss Account • This account is prepared to compute the net profit or loss for the manufacturing business. Thus, the account will compare the gross profit/loss from the trading account with the expenses incurred before sales is generated. The expenses comprises of: • Administrative expenses • Selling and administration expenses • Financial charges (interest on loans) Financial Accounting

14. Format of a of Financial Statement for Manufacturing Business: (D)Work in progress • These are goods which have been put through production process but which have not been fully converted into finished goods. For a manufacturing that have operated for more than a year, there could exist work-in-progress for last previous year and the current year. • The following procedure is used in computing production where there is work in progress: • Add cost work-in-progress from the previous year computed in the current year • Deduct the cost of work-in-progress of the current period not yet completed (into finished goods) Financial Accounting

15. Further Methods of Computing Depreciation • Depletion unit method: This is a common method used to compute depreciation for ‘wasting assets’. These are assets which deplete in quantity with time. Examples includes: a quarry or gold mine. • Formula: Cost of fixed assets (estimated) Expected total contents in units • Machine hour method: This is used to compute depreciation for categories of machines. • Formula: total annual usage(hours used) total expected hours over life spam of FA Financial Accounting

16. Classification of Cost of Manufacturing (Summary) A manufacturing account is prepared to find out the cost of goods manufactured. Costs of manufacturing include all resources used, directly or indirectly, in the manufacture of goods. The Manufacturing costs can be classified into direct costs and indirect costs. Direct costs are those costs directly involved in the manufacture of goods. Examples of direct costs are direct materials, direct labour and direct expenses. All the direct costs are collectively known as prime cost. Indirect costs are not directly related to production. They are all the remaining production expenses. Examples of indirect costs include Factory rent, factory power, depreciation of plant and machinery, etc. Indirect costs are also known as factory overheads. (You can refer to your text-book ) Financial Accounting

17. ABC COMPANY LTDMANUFACTURING ACCOUNT FOR THE YEAR ENDING 31.1.2008 RM RM RM Raw materials: Stock at 1.2.2007 12000 Purchases 75000 Carriage inwards 11000 86000 Less stock at 1.1.2008 13000 73000 Cost of Materials used 85000 Direct wages 13000 Prime Cost 98000 Add: factory overhead (IM+IL+IE) 77000 175000 Add: WIP at 1.2.2007 9000 Less: WIP at 1.1.2008 (9800)(800) Cost of goods produced transferred to trading A/C 174200 Financial Accounting

18. ABC COMPANY LTD TRADING, PROFIT & LOSS ACCOUNT FOR THE YEAR ENDING 31.1.2008 RM RM Sales 700000 Less: Cost of sales Cost of finished goods 35000 Cost of goods produced 174200 209200 Less: Closing stock 13000 Cost of sales 196200 Gross profit 503800 Add: Other income 150000 Total Income 653800 Less: Selling & Distribution Exp. 40000 Admin. Exp. 89000 Finance Cost 11000 (140000) Net Profit 513800 Financial Accounting

19. End of Lecture 2 Thank You…. Financial Accounting