SUBJECT: FINANCIAL ACCOUNTING

CLASS:� SS 2

DATE:

TERM: 2nd TERM

�

WEEK THREE AND FOUR

TOPIC: MANUFACTURING ACCOUNTS

CONTENT

Meaning of Manufacturing Accounts
Purpose of Manufacturing Account
Element of Cost of Production�
Layout of Manufacturing Account
Transfer Pricing
Practical Illustration�

�

MEANING OF MANUFACTURING ACCOUNTS�

Manufacturing can simply be described as the transformation of raw materials into finished goods e.g. manufacturing companies like Nestle, Cadbury, PZ e.tc. These manufacturing firms do manufacture their goods or product before they are sold to their customer. They do not buy to sell but produce what they sell.

There manufacturing companies prepare a final accounts called Manufacturing Account.�

�

PURPOSE OF MANUFACTURING ACCOUNTS�

Manufacturing Account are prepared to ascertain the cost of goods manufactured during the financial�

year. Therefore manufacturing accounts have the following purposes.

To ascertain the cost of production
To determine the profit on the manufacturing process.

�

ELEMENTS OF COST OF PRODUCTION�

�

COST OF PRODUCTION: This is the total expenditure incurred in the production of goods. Production costs include PRIME COST + FACTORY OVERHEADS�

PRIME COST: These are cost directly related in the production process. It is also called Direct Cost which include: Direct materials, direct labour, direct expenses and any other direct expenditure.�

Direct materials cost: These are cost of raw materials

Direct labour cost: These are cost of labour wages paid

Direct expenses: These are cost of other expenditure incurred in the production process.

�

FACTORY OVERHEADS: These are cost incurred in the running of the factory but not directly related to the production process. It is also called INDIRECT COST. �They include; factory rent and rates, depreciation of plant and machinery. Indirect wages, upkeep of factory building�

�

Format of Manufacturing Trading Profit and Loss Account

�� N � � � N�� N

Opening stock of raw material �� x�� Cost of production�� x

Add purchases of raw material�� x

Carriage inward of raw material�� x�� x

�� X

Loss closing stock or raw material net�� (x)

Cost of raw material consumed�� x

Add direct wages�� x

Royalties�� x

Direct expenses�� x

Prime cost�� x

Factory overheads:�� x

Factory power�� x

Factory rent & rates�� x

Indirect wages�� x

Factory insurance�� x

Depreciation of P & M�� x

Fuel and power�� x

Lubricants�� x�� x

�� X

Add opening stock W.I.P�� X

�� X

Less closing stock W.IP�� X

Cost of production�� x�� x

Manufacturing Trading, Profit and loss Account contd

�� N�� N�� N�� N

Opening stock of finished goods�� x�� sales�� x

Add cost of production �� x

Cost of good available for sale�� x

Less closing stock of finished goods�� (x)

Cost of goods sold�� x

Gross profit c/d�� X��

�� X �� x

Expenses�� Gross profit b/d�� x

Selling & distribution�� Discount received�� x

Carriage outward�� x�� x

Commission sales�� x

Salesmen salaries�� x�� x

Administration exp��

Admin salaries�� x

Office rent�� x

Office insurance�� x

Office lighting�� x

Depreciation of

Office machinery �� x�� x

�

�� X

Net profit c/d�� x��

�� X�� x

TRANSFER PRICING

In the trading account, the cost of production is charged to determine profit on sales. The changing of cost of production of goods may be done in two ways.

Actual factory cost
Current market values�

�

When goods manufactured are charged at the current market value to the trading account,� the main objective is obtain� profit on the manufacturing process. The manufacturing accounts will then have to show a balance which represents a profit or loss on production and this is transferred to profit and loss account.�

�

EVALUATION

State four classifications of costs revealed by manufacturing accounts.
State two reasons for the preparation of manufacturing accounts.

PRACTICAL ILLUSTRATIONS

The following information was extracted from the books of Tasty Enterprises for the year ended 31st December 1991

�� N

Manufactured goods�� 9,740

Raw materials�� 3,000

Discount allowed�� 3,740

Depreciation on plant and machinery�� 13,000

Printing and stationery�� 930

Purchases: Manufactured goods�� 12,740

�� Carriage inwards�� 500��

Debtors�� 21,740

Cash at bank�� 1,710

Purchases of raw material�� 87,260

Office rent and rates�� 6,500

Repairs to machinery�� 2,500

Plant and machinery�� 75,200�

Factory electricity�� 5,790

Carriage inwards (raw materials)�� 3,410

Office salaries�� 9,400

Carriage outwards�� 2,330

Factory rent and rates�� 22,710

Cash in hand�� 570

Manufacturing wages�� 110,290

Sales�� 299,420

Capital�� 77,820

Creditors�� 21,790

Additional �� �� �� �� �� ��

(a) Stock on 31st Dec 1991

�� Manufactured goods N27,940

�� Raw material�� N 2,000

(b) Goods manufactured to be posted to the sales department at net �� realizable value of N271,500

�

You are required to prepare manufacturing trading profit and loss account for year ended 31st Dec. 1991.

SOLUTION:�� �� �� TASTY ENTERPRISES

Manufacturing Trading Profit and Loss Account for the year ended 31st December, 1991.

�

Dr�� �� �� �� �� N�� �� N�� �� �� �� N�� N

Opening stock of r.m�� 3,000�� Transfer cost � � � 271,500

Add. Purchases of r.m�� 87,260

Carriage of raw mat.�� 3,410�� 90,670

�� 93,670

Less closing stock of r.m�� 2,000

�� 91,670

Manufacturing wages�� 110,290

Prime cost�� 201,960

Factory overheads

Depreciation p&m�� 13,000

Repair to machinery�� 2,500

Electricity�� 5,790

Factory rent and rates�� 22,710�� 44,000

Production cost�� 245,960

Gross profit on production�� 25,540

�� 271,500�� �� �� 271,500

Opening stock of finished gds�� 9,740Sales �� 299,470

Add: Transfer cost 271,500

Purchases of finished gds�� 12,740

Carriage inwards�� 500 � � � � � 284,740

Cost of goods available �� 294,480

for sales��

�

TASTY ENTERPRISES

Manufacturing Trading Profit and Loss Account for the year ended 31st December, 1991.

�

�� N�� N�� N�� N

Cost of goods available �� 294,480 Sales b/f�� 299,420

for sale b/f

Less closing stock�� 27,940

Cost of goods sold�� 266,540

Gross profit c/d�� 32,880

�� 299,420�� 299,420

Expenses�� Gross profit b/d�� 32,880

Discount allowed�� 3,740�� Profit on manufacture�� 25,540

Office rent & rates�� 6,500

Office salaries�� 9,400

Carriage outward�� 2,330

Printing & stationary�� 930

Net profit�� 35,520

�� 58,420�� 58,420

�

EVALUATION

What is factory overhead? ��
What is prime cost?
Define cost of production by way of formula

�

GENERAL EVALUATION QUESTIONS

Explain three differences between a trial balance and a balance sheet
State four reasons for disagreement between a bank statement balance and cash book balance
List five methods of providing for depreciation
State five reasons for making provision for depreciation
List six factors to be considered in computing the depreciation on fixed assets��

�

READING ASSIGMENT

Essential Financial Accounting for S.S. by O.A. Longe page 160-171

�

WEEKEND ASSIGNMENT

The following is the main objective of a manufacturing account (a) to ascertain gross profit (b) to ascertain net profit (c) to ascertain profit on �� asset (d) to ascertain cost of production�
The cost components of manufacturing directly related in the per unit of good produced is called (a) factory cost (b) cost of production (c) prime �� cost (d) fixed cost.
Cost of production is also called (a) factory overhead (b) factory expenses (c) manufacturing cost (d) prime cost
Prime cost can also be described as (a) indirect cost (b) direct cost�

�� (c) fixed cost (d) variable cost

Royalties is an example of ________ cost (a) factory cost (b)� indirect cost (c) prime cost (d) selling and distribution�

�

THEORY

Write short note on:
Prime cost �
Factory overhead
Distinguish between�
Work in progress (W.I.P) and finished goods�
Prime cost and factory overhead.

Lesson Notes By Weeks and Term - Senior Secondary School 2