Manufacturing Accounts

AL MADRASATHUL MUNAVVARA

Manufacturing BusinessMANY BUSINESS ENTITIES ENGAGE IN MANUFACTURING ACTIVITIES AND THIS INVOLVES:

The purchasing of raw materialsIncurring laborand other cost

IN CONVERTING THE RAW MATERIALS INTO FINISHED GOODS.

Manufacturing BusinessIn order to ascertain the cost of producing the goods a manufacturing account is prepared. This account is also normally prepared at the end of the accounting period. Both direct and indirect expenses associated with the manufacturing process debited to the manufacturing account. The balance of this account representing cost of the goods produced is then transferred to the trading account.

(a)Manufacturing BusinessThe order of presentation of the final accounts is as under: (a) Manufacturing Account Part (b) Income Statement (Trading AC Part) (c) Income Statement (Profit and Loss AC

Part) (d) Balance Sheet Part.

Division of CostsDirect MaterialsDirect LabourDirect Expenses

Plus Factory Overhead

Plus Administrative Expenses Selling & Distribution Expenses Financial Charges

Prime Cost Productio

n Cost

Total Cost

Production CostPrime Cost

xxxxxAdd: Factory Overhead

xxxxxProduction cost

xxxxx

(Production Cost = Prime cost (Direct Cost)+ Factory overhead expenses (Indirect cost)

Prime CostDirect Material

xxxxxAdd: Direct Labour

xxxxx Direct Expenses

xxxxxPrime Cost

xxxxx

(Prime Cost = Direct Material+ Direct Labour + Direct Expenses)

1. Direct materials • Costs of the materials used during the period.• Include Opening Inventory of Raw Materials• + Purchase price of the raw materials and the acquisition costs

related to the purchase.• - Closing Inventory of Raw Materials• Examples:

Opening Inventory of Raw Materials xxxxx

Add: Purchase of raw materials xxxxx Carriage inwards / freight charges xxxxxAvailable for use xxxxxLess: Closing Inventory of Raw Materials (xxxx)Direct Material used xxxxx

2. 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• Wages of a machine operator making a particular item

3. Direct Expenses• They refer to the expenses paid according to each unit of

production.• Examples: Royalties

Prime CostDirect Material

xxxxxAdd: Direct Labour xxxxx Direct Expenses xxxxxPrime Cost xxxxx

Factory Overhead (Indirect Manufacturing Costs)Factory Overhead or Indirect Manufacturing Costs are all those costs which occur in the factory or other place where production is being done, but which cannot be traced to the items being manufactured. Example: Wages of CleanerWages of Crane operatorWages of SupervisorsRent and Rates of FactoryDepreciation of Plant and MachineryFactory PowerFactory Lighting

Factory Overhead (Indirect Manufacturing Costs)

Factory Overhead or Indirect Manufacturing Costs are all those costs which occur in the factory or other place where production is being done, but which cannot be traced to the items being manufactured.

Production CostDirect MaterialsDirect LabourDirect Expenses

Plus Factory Overhead

Prime Cost Production

Cost

Work in Process

Direct MaterialsDirect LabourDirect Expenses

Plus Factory Overhead

Plus Work in Process (opening) Less Work in Process (Closing)

Prime Cost Production

CostTotal Cost of Goods Manufactured

It refers to the semi-finished goods, which should be included in the cost of goods manufactured.The opening inventory of the Work In Process should be addedAnd The closing inventory of the Work In Process should be subtracted

(a) Manufacturing Account

(b) Income StatementThis includes: Production cost brought down from Manufacturing Account Opening and Closing Stock of Finished Goods Sales

(c) Income StatementThis includes: Gross Profit brought down from Trading Account All administrative expenses All selling and distribution Expenses All Financial Charges

(d) Balance SheetThis includes: All Assets (Current & non-current) All Liabilities (Current & non-current) All Capital & Drawing and Net Profit or Loss

(d) Balance Sheet

Thank You

AL MADRASATHUL MUNAVVARA

ALI NASEER ABDUL RAHEEMalinaseer1407@gmail.com