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Manufacturing Accounts

Manufacturing Accounts. Why Prepare this account. Manufacturers make goods rather than buy them from suppliers A manufacturing account is required to provide a value for the Cost of such production

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Manufacturing Accounts

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  1. Manufacturing Accounts

  2. Why Prepare this account • Manufacturers make goods rather than buy them from suppliers • A manufacturing account is required to provide a value for the Cost of such production • A Manufacturing account is made up of ALL of the relevant costs of the finished goods sold and can be split into DIRECT and INDIRECT costs

  3. Manufacturing costs • Direct costs (can be traced to the manufacture of specific products) • Material • Labour • Expenses (carriage in, royalties) • Indirect Costs (must be paid but are of a general benefit to production and so are NOT specifically related to any particular product • Supervisors wages • Factory rent • Factory rates • Factory heat/light • Depreciation of factory machinery

  4. Basic structure • COST OF RAW MATERIALS CONSUMED • These are direct costs of raw materials AND relevant expenses • It is calculated as follows • Opening stock of raw materials • ADD • Purchase of raw materials • Carriage in of raw materials • LESS • Closing stock of raw materials • PRIME COST OF PRODUCTION • This is the total of ALL DIRECT COSTS incurred in manufacture of the product • It is calculated by adding the following • Cost of raw materials consumed • Direct Labour • Royalties

  5. Basic structure • FACTORY COST OF PRODUCTION • This is the total of ALL DIRECT AND ALL INDIRECT COSTS incurred in manufacture of the product • It is calculated by adding the following • Prime Cost • Indirect Expenses

  6. Manufacturing Account of John Doe Plc for the year ended 31 December 2010 ££ £ Opening Stock of Raw Materials 10.000 Add Purchases of raw materials 100,00 Less Returns of raw materials 5,000 95,000 Add Carriage In of raw materials 2,000 97,000 Less Closing Stock of raw materials 5,00092,000 COST OF RAW MATERIALS CONSUMED102,000 Add Direct Wages 50,000 Add Direct Expenses 2,00052,000 PRIME COST OF PRODUCTION154,000 Add Factory Overheads Maintenance of factory machinery 5,000 Factory Rent and Rates 5,000 Factory Light and |Heat 3,000 FactorySupervision 2,000 Depreciation ofFactorymachinery 10,000 Factory Overheads 25,000 FACTORY COST OF PRODUCTION179,000

  7. Exercise 2Manufacturing Account of Woodcraft Plc ££ £ Opening Stock of Raw Materials 2.000 Add Purchases of raw materials 60,000 Less Returns of raw materials 0 60,000 Add Carriage In of raw materials 0 60,000 Less Closing Stock of raw materials 3,00057,000 COST OF RAW MATERIALS CONSUMED59,000 Add Direct Wages 36,000 Add Direct Expenses 036,000 PRIME COST OF PRODUCTION95,000 Add Factory Overheads Insurance of factory building 900 Depreciation of FactoryEquipment 2,500 Factory Light and |Heat 800 Factory Rates 520 FACTORY OVERHEADS4,720 FACTORY COST OF PRODUCTION99,720

  8. Accruals / Prepayments • Accruals occur when a debt is outstanding/ still owing when drawing up the final accounts • Prepayments occur when a debt has been paid in advance/overpaid at the time of creating the final accounts • The Manufacturing and Trading profit & Loss account must show what SHOULD HAVE been paid for the year therefore • If an amount is underpaid/accrued – the amount due is added to the figure in the trial balance and the adjusted figure taken to the P&L account. • The amount due is transferred to the Balance sheet as a Current Liabiity

  9. Accruals / Prepayments • If an amount is prepaid – the amount due is deducted from the figure in the trial balance and the adjusted figure taken to the P&L account. • The amount prepaid is then transferred to the balance sheet as a current asset Depreciation • This is the amount by which an asset drops in value over a period of time (usually a year), due to wear and tear • The amount of depreciation for the year is taken to the Manufacturing/Profit & Loss account • The accumulated depreciation is posted in the company’s balance sheet

  10. Exercise 3Manufacturing Account of Acorn Plc for the year ended 31 July ££ £ Opening Stock of Raw Materials 2,300 Add Purchases of raw materials 87,600 Less Closing Stock of raw materials 3,25084,350 Cost of Raw Materials consumed86,650 Add Direct Wages 48,000 Add Direct Expenses 048,000 PRIME COST134,650 Add Factory Overheads General Expenses 3,450 Lighting & Heating 4,320 Insurance 980 Rent & Rates 1,430 Factory Overheads 10,180 144,830 ADD WIP at beginning 4,500 149,330 Less WIP at end 4,200 FACTORY COST OF PRODUCTION 145,130

  11. Exercise 3Trading Account of Acorn Plc for the year ended 31 July £ ££ Sales 200,000 LESS Cost of Sales Opening stock of finished goods 6,200 ADD Factory cost of Production 145,130 151,330 Less Closing stock of finished goods 7,500 Cost of Sales 143,830 GROSS PROFIT 56,170

  12. Exercise 4The Vineyard Notes for the Manufacturing Account ACCRUALS Lighting and Heating Amount paid 3,400 Add Accrual 720 Liability (Balance Sheet) 4,120 Manufacturing Acc PREPAYMENTS Insurance Amount paid 2,400 Less Prepayment 600 Asset (Balance Sheet) 1,800 Manufacturing Acc

  13. Exercise 4Manufacturing Account of The Vineyard for the y/e 30 Nov £££ Opening Stock of Raw Materials 12,400 Add Purchases of raw materials 230,820 Less Closing Stock of raw materials 10,660220,160 Cost of Raw Materials consumed232,560 Add Direct Wages 124,000 Add Direct Expenses 0124,000 PRIME COST356,560 Add Factory Overheads General Expenses 14,500 Lighting & Heating 4,120 Insurance 1,800 Rent & Rates 6,000 Depreciation of factory equipment 20,000 Factory Overheads 46,420 402,980 ADD WIP at beginning 32,460 435,440 Less WIP at end 46,500 FACTORY COST OF PRODUCTION 388,940

  14. Exercise 4Trading Account of The Vineyard for the year ended 31 July E ££ Sales 480,000 LESS Cost of Sales Opening stock of finished goods 60,800 ADD Factory cost of Production 388,940 449,740 Less Closing stock of finished goods 85,340 Cost of Sales 364,400 GROSS PROFIT 115,600

  15. Exercise5Glenisla Papers Plc for the year ended 31 December Notes for the Manufacturing Account ACCRUALS Note 1 Wages Amount paid 180,000 Add Accrual 5,600 Liability (Balance Sheet) 185,600 Manufacturing Acc Note 2 Factory Rent and Rates Amount Paid 34,000 Add Accrual 2,570 Liability (Balance Sheet) 36,570 Manufacturing Account Note 3 Depreciation Cost 80,000 Depreciation 25%20,000 Manufacturing Account Net Book Value 60,000

  16. Exercise 5Manufacturing Account of Glenisla Papers Plc for the year ended 31 December ££ Opening Stock of Raw Materials 15,000 Add Purchases of raw materials 220,000 Less Returns of raw materials 6,500 213,500 Less Closing Stock of raw materials 12,500201,000 Cost of Raw Materials consumed216,000 Add Direct Wages * Note 1 185,600 Add Direct Expenses 0185,600 PRIME COST401,600 Add Factory Overheads Maintenance of factory machinery 18,000 Factory Rent and Rates *Note 2 36,570 Factory Light and |Heat 2,600 Factory Supervision 25,000 Depreciation of factory machinery *Note3 20,000 Factory Overheads 102,170 FACTORY COST OF PRODUCTION 503,770

  17. Exercise 6Northern Lights Notes for the Manufacturing Account PREPAYMENTS Rent Amount paid 16,500 Less Prepayment 3,400 C Asset (Balance Sheet) 13,100 Manufacturing Acc Insurance Amount Paid 4,500 Less Prepayment 1,200 C Asset (Balance Sheet) 3,300 Manufacturing Account ACCRUAL Lighting and Heating Amount paid 4,200 Add Accrual 840 Asset (Balance Sheet) 5,040 Manufacturing Acc

  18. Exercise 6Manufacturing Account of Northern Lights for the y/e 28 February ££ £ Opening Stock of Raw Materials 18,300 Add Purchases of raw materials 126,900 Less Closing Stock of raw materials 15,630111,270 Cost of Raw Materials consumed129,570 Add Direct Wages 143,560 Add Direct Expenses 0143,560 PRIME COST273,130 Add Factory Overheads General Expenses 21,500 Lighting & Heating 5,040 Insurance 3,300 Rent 13,100 Depreciation of Machinery 40,000 Factory Overheads 82,940 356,070 ADD WIP at beginning 24,600 380,670 Less WIP at end 32,500 FACTORY COST OF PRODUCTION 348,170

  19. Exercise 6Trading Account of Northern Lights for the year ended 28 February ££ £ Sales 600,000 LESS Cost of Sales Opening stock of finished goods 38,000 ADD Factory cost of Production 348,170 386,170 Less Closing stock of finished goods 36,210 Cost of Sales 349,960 GROSS PROFIT 250,040

  20. Exercise 7Sunseekers Products Plc Notes for the Manufacturing /Trading Acc ACCRUAL Direct Wages Amount paid 210,800 Add Accrual 41,400 C Liability (Balance Sheet) 252,200 Manufacturing Acc PREPAYMENTS Factory Insurance Amount paid 12,250 Less Prepayment 3,220 Asset (Balance Sheet) 9,030 Manufacturing Acc Office Insurance Amount Paid 14,520 Less Prepayment 1,050 Asset (Balance Sheet) 13,470 Profit & Loss Acc

  21. Exercise 7Sunseekers Products Plc Notes for the Manufacturing /TPL Acc DEPRECIATION Factory Machinery Cost 140,000 Depreciation 20% 28,000 Manufacturing Acc Net Book Value 112,000 Office Equipment Cost 60,000 Depreciation 15% 9,000 Profit & Loss Acc Net Book Value 51,000

  22. £ £ £ Opening Stock of Raw Materials 26,000 Add Purchases of Raw Materials 320,000 Less Closing Stock of Raw Materials 32,500287500 COST OF RAW MATERIALS CONSUMED313,500 Add Direct Wages 252,200 Add Direct Expenses 0252,200 PRIME COST565,700 ADD FACTORY OVERHEADS Maintenance and Machinery 48,000 Insurance of Buildings (12250-3220) 9,030 Rent and Rates 43,600 General Expenses 22,430 Depreciation of Machinery 28,000 FACTORY OVERHEADS 151,060 716,760 Add WIP at Beginning12,500 729,260 Less WIP at End 16,780 FACTORY COST OF PRODUCTION 712,480 Exercise 7Manufacturing Account of Sunseekers Products Plc for the y/e 30 April

  23. Exercise 7Trading Profit & Loss Acc of Sunset Products Plc for the y/e 30 April   £ £ £ Sales 900,000 LESS COST OF GOODS SOLD Opening stock of finished goods 84,000 Add Factory Cost of Production 712,480   796,480 Less Closing stock of finished goods 98,420698,060 GROSS PROFIT 201,940 LESS EXPENSES Insurance 3,320 Rent and Rates 14,520 Advertising 80,000 Provision for Doubtful Debts 5,000 Provision for Dep Office Equipment 9,000111,840 NET PROFIT 90,100

  24. BAD DEBTS • Bad debts are amounts of money owed to a business by DEBTORS who WILL NOT pay their debt due to bankruptcy etc • Bad Debts listed as an entry in the trial balance should ONLY be entered as an EXPENSE in the PROFIT AND LOSS Account

  25. PROVISION FOR BAD DEBTS If you are asked to create this account in the notes: • Profit and Loss Account • Calculate the TOTAL value (eg 5% of Debtors, etc). • Enter the total value of Provision as an EXPENSE in the Profit and Loss Account • Balance Sheet • SUBTRACT the TOTAL value of provision from the Debtors Figure in the Balance Sheet

  26. INCREASE IN PROVISION FOR BAD DEBT If after calculating the new Provision for Bad Debts figure it shows an increase - eg from £3,000 to £5,000 then: • Add the difference (ie £2000) as an expense in the Profit and Loss Account • Subtract the new amount (ie £5,000) from the Debtors figure in the balance sheet

  27. A DECREASE IN PROVISION FOR BAD DEBT If after calculating the new Provision for Bad Debts figure it shows a decrease - eg from £6,000 to £4,000 then: • Add the difference (ie £2000) to the Gross Profit figure • Subtract the new amount (ie £4,000) from the Debtors figure in the balance sheet

  28. Exercise 8Beachwear Plc Notes for the Manufacturing /TPL Acc PREPAYMENTS Factory Rent & Rates Amount paid 26,700 Less Prepayment4,200 Asset (Balance Sheet) 22,500 Manufacturing Acc Office Rent & Rates Amount paid 4,500 Less Prepayment 750 Asset (Balance Sheet) 3,750 Profit & Loss Acc ACCRUALS Office Salaries Amount Paid 43,200 Add Accrual 4,380 Liability (Balance Sheet) 47,580 Profit & Loss Acc

  29. Exercise 8Beachwear plc Notes for the Manufacturing /Trading Acc PROVISION FOR DOUBTFUL DEBTS Provision so far 2,000 Adjusted to 6,000 Deducted from Debtors B/S Difference +£4,000 Increase to Man Acc DEPRECIATION Factory Machinery Cost 220,000 Depreciation 25% 55,000 Manufacturing Acc Net Book Value 165,000 Office Equipment Cost 30,000 Depreciation 10% 3,000 Profit & Loss Acc Net Book Value 27,000

  30. £ £ £ Opening Stock of Raw Materials 14,500 Add Purchases of Raw Materials 235,600 Less Closing Stock of Raw Materials 12,500223,100 COST OF RAW MATERIALS CONSUMED237,600 Add Direct Wages 167,830 Add Direct Expenses (royalties) 8,000175,830 PRIME COST413,430 ADD FACTORY OVERHEADS Maintenance and Machinery 12,000 Electricity 4,355 Insurance of Buildings 3,500 Rent and Rates (26700-4200) 22,500 Depreciation of Machinery 55,000 FACTORY OVERHEADS 97,355 510,785 Add WIP at Beginning 23,480 534,265 Less WIP at End 23,560 FACTORY COST OF PRODUCTION 510,705 Exercise 8Manufacturing Account of Beachwear plc for the y/e 30 June

  31. Exercise 8Manufacturing Account of Beachwear plc for the y/e 30 June   £ £ £ Sales 620,000 Less Cost of Goods Sold Opening stock of finished goods 64,595 Add Factory Cost of Production 510,705 575,300 Less Closing stock of finished goods 82,300493,000 GROSS PROFIT 127,000 Less Expenses Electricity 1,420 Insurance of Buildings 985 Rent and Rates (4500-750) 3,750 Office Salaries(43200+4380) 47,580 Provision for Doubtful Debts 4,000 Prov for Depreciation of Equipment 3,00060,735 NET PROFIT 66,265

  32. Exercise 11Harvey & Nicholl Notes for the Manufacturing /TPL Acc DEPRECIATION Factory Machinery Cost 180 Depreciation 25%45 Manufacturing Acc 135 Office Equipment Cost 40 Depreciation 15%6 Profit & Loss Acc 34 Delivery Van Cost 76 Depreciation 25%19 Profit & Loss Acc 57

  33. Exercise 11Harvey & Nicholl Notes for the Manufacturing /Trading Acc ACCRUALS Indirect Wages Amount Paid 97 Add Accrual 4 Liability (Balance Sheet) 101 Profit & Loss Acc Office Salaries Amount Paid 54 Add Accrual 6 Liability (Balance Sheet) 60 Profit & Loss Acc PREPAYMENT Rent and Rates Amount Paid 30 Less Prepayment 5 Asset (Balance Sheet) 25

  34. Exercise 11Harvey & Nicholl Notes for the Manufacturing /Trading Acc ALLOCATION OF EXPENSES Rent and Rates Amended Figure 25 Factory 60% 15 Manufacturing Account Admin 40% 10 Profit & Loss Account Insurance of Buildings Amount Paid 12 Factory 75% 9 Manufacturing Account Admin 25% 3 Profit & Loss Account PROVISION FOR DOUBTFUL DEBTS Debtors 80 Provision 10% 8 Profit & Loss Account Net Debtors 72 Asset (Balance Sheet)

  35. Exercise 11Manufacturing Account of Harvey Nicholl for the y/e 31 December Ledger Balances at 31 December 2004 £000 Stocks at 1 January: Raw Materials 75 Work in Progress 64 Finished Goods 72 Direct Factory Wages 682 Indirect Factory Wages 97 Royalties 23 Purchases of Raw Materials 820 Returns of Raw Materials 28 Carriage on Raw Materials 8 Purchases of Finished Goods 107 Rent and Rates 30 Insurance of Building 12 Factory Machinery at cost 180 Provision for Depreciation on Factory Machinery 64 Office Equipment at cost 40 Provision for Depreciation on Office Equipment 26 Delivery vans at cost 76 Provision for Depreciation on Delivery Vans 28 Maintenance of Factory Machinery 23 Sales 2,000 Office Salaries 54 Provision for Doubtful Debts 6 Debtors 80 Creditors 46 Notes Stocks at 31 December: Raw Materials 67 Work in Progress 59 Finished Goods 84

  36. Exercise 11Manufacturing Account of Harvey Nicholl for the y/e 31December   £ £ £ Opening Stock of Raw Materials 75 Add Purchases of Raw Materials 820 Less Returns of Raw Materials 28 792 Add Carriage of Raw Materials 8 800 Less Closing Stock of Raw Materials 67733 COST OF RAW MATERIALS CONSUMED808 Add Direct Wages 682 Add Direct Expenses (royalties) 23705 PRIME COST1,513 ADD FACTORY OVERHEADS Indirect Wages (97+4) 101 Rent and Rates(30 - 5)*60% 15 Insurance of building (12* 75%) 9 Provision for Dep of Machinery 45 Maintenance of Machinery 23 FACTORY OVERHEADS 193 1,706 Add WIP at Beginning +64 1,770 Less WIP at End -59 FACTORY COST OF PRODUCTION 1,711

  37. Exercise 11Trading Profit & Loss Acc of Harvey Nicholl for the y/e 31 December   £ £ £ Sales 2,000 Less Cost of Goods Sold Opening stock of finished goods (1 Jan) 72 Add Factory Cost of Production 1,711 Add Purchases of Finished Goods 107 1,890 Less Closing stock of finished goods 841,806 GROSS PROFIT 194 Less Expenses Rent and Rates (30-5)*40% 10 Insurance of Buildings(12*25%) 3 Provision for Depreciation Of Equip 6 Provision for Depreciation Del Vans 19 Office Salaries(54+6) 60 Provision for Doubtful Debts 2100 NET PROFIT 94

  38. MANUFACTURING PROFIT/LOSS ON MARKET VALUE/PRICE MARKET VALUE/ PRICE • This is the price that the finished goods could have been purchased for – Instead of the company manufacturing them themselves MANUFACTURING PROFIT/LOSS • A Manufacturing profit is made if the company can make the goods for less than the market value • A manufacturing loss is made if the cost to make the goods is more than the market value • Therefore: Market price of Prod – Factory Cost of Prod = Manufacturing profit /loss

  39. Transfer to Trading Account MARKET VALUE • If the MARKET VALUE is known, it is this amount that is transferred to the TRADING ACCOUNT and NOT the MANUFACTURING COST OF PRODUCTION MANUFACTURING PROFIT / LOSS • A manufacturing PROFIT (calculated at end of manufacturing account) is ADDEDTO the Gross Profit in the trading account • A manufacturing LOSS is DEDUCTEDFROM the Gross Profit in the Trading account

  40. Depreciation – Reducing Balance • A fixed percentage of Depreciation is calculated on the NET BOOK VALUE or written down value of the Fixed Asset each year • As the Asset decreases in value the provision for depreciation each year will also reduce • The YEARLY AMOUNT of depreciation is charged to the P&L ACCOUNT • The accumulated depreciation is taken off the Asset’s COST in the BALANCE SHEET

  41. Depreciation – Reducing Balance (Continued) Example On 1 January Year 1, XYZ plc purchased Fixtures for £30,000 by cheque. Assets are depreciated by 10% per annum using the reducing balance method. Year 1 Asset cost 30,000 Depreciation = 10% 3,000 P&L Acc NBV year 1 27,000 Bal Sheet Year 2 NBV from year 1 27,000 Depreciation = 10% 2,700 P&L Acc NBV year 2 24,300 Bal Sheet

  42. Depreciation – Reducing Balance (Continued) The depreciation shown in the balance sheet will be as follows Year 1 Fixed Assets CostDepNBV Fixtures 30,000 3,000 27,000 Year 2 Fixed Assets CostDepNBV Fixtures 30,000 5,700 24,300

  43. Nethermains Notes for the Manufacturing/ P&L Account ACCRUAL Rates Amount paid 36 Add Accrual 4 Liab (Balance Sheet) 40 Manufacturing Acc/P&L APPORTIONMENT Rates40 Factory 75% 30 Man O/Head Admin 25% 10 P&L Management Salaries 50 Factory 80% 40 Man / O’Head Admin 20% 10 P&L

  44. Nethermains Notes for the Manufacturing/ P&L Account DEPRECIATION – REDUCED BALANCE METHOD Factory Machiney Cost 60 Depreciation to date 20 Current NBV 40 Yearly Depreciation 20% 8 Man O’Head New NBV 32 Delivery Vehicles Cost 20 Depreciation to date 5 Current NBV 15 Yearly Depreciation 20% 3 P&L New NBV 12

  45. ££ Opening Stock of Raw Materials 8 Add Purchases of raw materials 250 Add Carriage In of raw materials 5 255 Less Closing Stock of raw materials 6249 Cost of Raw Materials consumed257 Add Direct Wages 100 Add Direct Expenses (Royalties) 10 PRIME COST367 Add Factory Overheads Management Salaries 40 Factory Labour 13 Factory Power 10 Repairs to Factory Machinery 5 Rates 30 Heat & Light 24 Dep of Factory Machinery 8 Factory Overheads 130 497 Manufacturing Account of Nethermains for the y/e 31 May

  46. Manufacturing Account of Nethermains for the y/e 31 May ££ B/F 497 ADD WIP at beginning 4 501 Less WIP at end 5 FACTORY COST OF PRODUCTION 496 Market value of finished goods 520 Less Factory Cost of Production496 Manufacturing Profit 24

  47. Trading Account of Nethermains for the year ended 31 May ££ Sales 960 LESS Cost of Sales Opening stock of finished goods 12 Add purchases of finished goods 119 131 Less return of finished goods 2 129 ADD Mkt V of finished goods 520 649 Less Closing stock of finished goods 9 Cost of Sales 640 GROSS PROFIT 320 Add Manufacturing Profit 24 344

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