Manufacturing-Accounts Teaching Guide
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Transcript of Manufacturing-Accounts Teaching Guide
8/11/2019 Manufacturing-Accounts Teaching Guide
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Chapter 7:Manufacturing Account
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TYPES OF INVENTORY
Raw materials
Work in progress
Finished goods/completed goods
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TYPES OF PRODUCTION COST
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Prime cost/Direct cost
Overheadcost/
Indirect cost
Productioncost
Direct materials
Direct labor
Direct expenses
Indirect materials
Indirect labor
Indirect expenses
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PRIME COST
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1. Direct materials
• Costs of the materials used during the period.
• Include the purchase price of the raw materialsand the acquisition costs related to the purchase.
• Examples: Purchase of raw materials,
Carriage inwards / freight charges on rawmaterials
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2. Direct labour
• Wages paid to the people who aredirectly involved in the manufacturingprocess.
• Example: Direct labour, Direct wages,Factory wages, Production wages,Manufacturing wages
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3. Direct expenses
• They refer to the expenses paidaccording to each unit of production.
• Examples: Royalties, hire purchase ofspecial materials
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1. Indirect materials Lubricants Loose tools
2.Indirect labour wages, salaries, bonus or commission to
cleaners, crane drivers, foremen, supervisorsand production managers.
OVERHEAD COST
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3. 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
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FINANCIAL STATEMENT
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1. Manufacturing Account
2. Income Statement
3. Balance Sheet
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1) Manufacturing Account
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It shows the production cost or transfer price ofgoods completed during the accounting period.
Direct materials
Direct labour
Direct expenses Factory overhead expenses
Work in progress
Factory profit
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Manufacturing Account for the year ended…….
Opening stock of Raw Materials X
Add: Purchases of Raw Materials X
Return Outwards (raw materials) (X)Carriage inwards (raw materials) (X)
Drawings (raw materials) (X)
X
X
Less: Closing stock of Raw Materials (X)Cost of Raw Materials Consumed X
Direct Labor Wages X
Royalties X
Prime Cost XFactory Overhead Expenses:
Production Manager’s salaries X
Factory Power X
Maintenance of Plant & Machinery X
Depreciation of Plant & Machinery X X
Direct material
Direct labour
Direct Expenses
Overhead
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Add: Opening Work in Progress X
Less: Closing Work in Progress X
Production Cost of finished goods X
Factory profit (% PCFG) XTransfer price of finished goods X
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2) Income Statement
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Profit or loss of the whole business during theaccounting period.
Includes all the expenses and income related tothe office and the running of the whole business
such as: Gross profit / loss from the trading account
Factory profit / loss
Administration expenses
Selling and distribution expenses
Financial expenses
Increase / decrease in the provision for unrealized
profit
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Sales X
Less: Returns inwards (X)
X
Less: Cost of Goods Sold
Opening stock of finished goods X
add: Transfer price of Finished goods X
Less: Drawings (finished goods) (X)
Returns outwards (X)
Xless: Closing stock of finished goods (X)
(X)
Gross Profit X
Add: Factory Profit X
Add: Other revenueDiscount Received X
Reduction in provision for unrealized profit X
X
Income Statement for the year ended ……
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Less: Other Expenses
Selling expenses
commissions on sales XXX
salesman salaries XXX
carriage outwards XXX
depreciation of delivery van XXX
Administrative expenses
rental XXX
depreciation of office equipment XXX printing XXX
postage XXX
Financial charges
bad debts XXXdiscount allowed XXX
interest XXX
increase in provision for unrealized profit XXX
XXX
Net profit XXX
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3) Balance Sheet
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It shows the assets, liabilities and equities of theWhole business on a specific date of the accounting
period.
Assets (closing inventory : raw materials, WIPs,
and finished goods)
Liabilities
Equities
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Non-current Assets X
Current Asset
Inventory :-raw materials X-work in progress X
-finished goods X
less: provision for unrealized profit (X) X
Total assets X
Financed by:
Owner`s capital
Opening capital X
Add: net profit X
Less: drawings (X)
X
Non-current liabilities X
Current liabilities X
Total liabilities and owner`s capital X
Balance Sheet as at………….
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Some expenses are related to both themanufacturing process and the administration
of the office such as: Rent, electricity, insurance,depreciation on premises, motor vehicles etc.
These expenses should be allocated to thefactory and office and debited to the
manufacturing account and the profit and lossaccount respectively.
In the event of examinations, the bases ofallocation are usually given.
IMPORTANT TO NOTE
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Production cost Vs. Transfer price
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Stock of raw materials, work in progress andother finished goods are valued at cost.
However, the stock of manufactured goodscan be valued at production cost or the
transfer price of goods completed.
Provision of unrealized profit of on stockshould be made if closing stock ofmanufactured goods is valued at transferprice.
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Provision of Unrealized Profit
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Mark up%
100%+ Mark up(%)= Stock (at transfer price) x
Increase/ Decreased in Provision of Unrealized
Profit
Increase in Provision
(other expenses)
Reduction in Provision
(other revenues)
Dr Profit and Loss
Cr Provision forUnrealized Profit
Dr Provision for
Unrealized ProfitCr Profit and Loss
Adj
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Expenses
Balance b/d (prepaid) Balance b/d (accrued)
Balance c/d (prepaid)Balance c/d (accrued)
Cash/Bank Income Statement
Drawings (expenses)Acc. Rec. ( for dis.
allowed)
Adjustment on expenses
Income Statement Income statement (admin)
Manufacturing account (factory)
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Revenue
Balance b/d (prepaid)Balance b/d (accrued)
Balance c/d (prepaid) Balance c/d (accrued)
Cash/BankIncome Statement
Acc. Pay (fordis.received)
Adjustment on revenue
Income Statement Income statement (admin)
Manufacturing account (factory)
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Accum. depreciation of non-current assets
Balance b/d)Balance c/d
Income Statement
Depreciation for current years1.Policy given2.No policy (cost-NBV)
Accum. depreciation for previous years1.Stated in question2.cost-NBV
Adjustment on depreciation
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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@ $160Closing 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:
1. The factory output is transferred to the tradingaccount at factory cost.
2. The factory output is transferred to the tradingaccount at factory cost plus 20% factory profit, andthe stock of manufactured goods is valued at
transfer price.
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1.
$ $
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
Manufacturing, trading and profit and loss account (extract)
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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 120Less: Closing stock (at transfer price) (20+20*0.2) 24 96
Gross Profit 64
Add: Manufacturing profit 20
84Less: Expenses
Expenses 50
Provision for unrealized profit (24*20/120) 4 54
Net Profit 30
Cost + profit