Chapter 11 Manufacturing Accounts

The purpose of preparing a Manufacturing Account is to find the Production Cost. A Manufacturing Account includes two sections: (a) The Prime Cost Section and (b) The Factory Overheads Section. Prime Costs: These are also known as Direct Costs or Variable Costs. These are directly related to the product and vary directly with output. For example if car manufacture doubles the output of cars, more material will be used, and more wages will be paid. Factory Overheads: These are also known as Fixed Costs or Indirect Costs. These are not directly related to the product but are necessary to the production just the same. They do not vary with production/output they remain the same. If the firm doubles its production there is no need to pay more factory rent or factory insurance. Total Cost = Variable Cost + Fixed Costs

Production = Cost

Prime Cost

Factory Overheads

(A) Prime Cost Section: Prime Cost = Cost of Raw Materials Used + Direct Expenses Opening Stock of Raw Materials Net Purchases of Raw Materials Closing Stock of Raw Materials Cost of Raw Materials Used Direct Labour (Cost of workforce engaged in production). Royalties (Cost of trademark payable to the designer of the product). Direct Expenses Prime Cost

+ + + + =

(B) Factory Overheads Section: Includes all the factory indirect expenses such as wages of cleaners and maintenance staff, petrol and oil, repairs, depreciation of plant and machinery, factory rent, factory insurance etc.
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(C) Work In Progress. These are products in course of manufacture. They are semi-finished products, which are not yet ready to be sold at the end of the accounting period. The Final accounts of a manufacturing business will include: Manufacturing Account Trading Account Profit and Loss Account Balance Sheet Manufacturing account for the year ending 31 December 2001 Opening Stock of Raw Material Purchases of Raw Material XXXX less Returns Out of Raw Material (XXXX) XXXX add Carriage In of Raw Material XXXX Net Purchases Closing Stock of Raw Material Cost of Raw Material Used Direct Labour Royalties Direct Expenses Prime Cost Factory Overheads: Light and Heat Cleaners Wages Cleaning Materials Insurance Depreciation of Plant and Machinery Factory power Factory Rent plus Opening Work In Progress less Closing Work In Progress Production Cost

XXXX

XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX

XXXX XXXX XXXX XXXX XXXX XXXX XXXX

Plus

XXXX XXXX XXXX XXXX XXXX XXXX

Notes:

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Trading and Profit and Loss account for the year ending 31 December 2001 Sales Less Returns Inwards Net Sales Cost of Sales Opening Stock of finished goods XXXX Production Cost XXXX XXXX Less Closing Stock of finished goods XXXX Gross Profit Less Office Expenses Net Profit

XXXX XXXX XXXX

XXXX xxxx xxxx xxxx

There are certain manufacturing businesses that buy finished goods. This is included in the Trading Account added to the Production Cost. Expenses are apportioned according to given ratios between factory (manufacturing) and office (Profit and Loss). Example: Products Company provides the following extract from its Trial Balance at 31 December 2001. Trial Balance (Extract) as at 31 December 2001 Dr Cr Lm Lm Plant and Machinery 500,000 Motor Vehicles 100,000 Stocks at 1 Jan.2001: Raw Materials 85,900 Work In Progress 39,440 Finished Goods 128,620 Direct Labour 286,200 Purchases of Raw Material 119,700 Raw Materials Returned 1,300 Sales 748,500 Carriage on Raw Materials 2,860 Carriage on Sales 9,420 Factory Supervisor Wages 69,400 Factory Repairs 42,000 Insurance 4,000 Factory Power 9,500 Heat and Light 2,000 Office Wages 62,300 Salesmen Salaries 76,000 Royalties 10,000 Sundry factory expenses 3,860

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Further information: 1) Depreciation is charged at 10% per annum on cost for Plant and Machinery and 20% per annum on cost for Motor Vehicles. 2) Stocks at 31 December 2001: Raw Materials Lm21000 Work in Progress Lm32,600 Finished Goods Lm180,000. 3) At 31 December 2001 there is Lm1,800 outstanding for direct labour. 4) Insurance And Heating and Lighting are split factory:office 3:1. 5) Factory Power is treated as part of Prime Cost. You are required to prepare: (i) A Manufacturing Account for the year ended 31 December 2001 showing clearly the Prime Cost and the Production Cost. (ii) A Trading and Profit and Loss Account showing clearly the Gross and Net Profit. Manufacturing Account for the year ended 31 December 2001 Opening Stock of Raw Materials Purchases of Raw Materials Carriage of Raw Materials less Raw Materials returned less Closing Stock of Raw Materials Cost of Raw Materials consumed Add Direct Labour (+ 1,800) Royalties Power Prime Cost Add Factory Overheads Supervisors Wages Repairs and Maintenance Insurance (3/4 x4000) Light and Heat (3/4 x2000) Sundry Expenses Depreciation of Machinery (10% x 500,000) Add Opening Work in Progress Less Closing Work in Progress Production Cost
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85,900 119,700 2,860 208,460 1,300 207,160 21,000 186,160 288,000 9,500 10,000 493,660 69,400 42,000 3,000 1,500 3,860 50,000

Plus

169,760 663,420 39,440 702,860 32,600 670,260

Trading and Profit and Loss Account for the year ended 31 December 2001 Sales 748,500 Less Cost of Sales Opening Stock od Finished Goods 128,620 Production Cost 670,260 798,880 Less Closing Stock of Finished Goods 180,000 618,880 Gross Profit 129,620 Less Office Expenses Insurance (1/4 x 4,000) 1,000 Light and Heat (1/4 x 2,000) 500 Office Wages 6,230 Salesmens salaries and commission 7,600 Depreciation of Motor Vehicles (20/100 x 100,000) 20,000 Carriage on Sales 9,420 44,750 Net Profit 84,870 Sometimes the office expenses are shown under three headings, namely: (i) Administration Expenses; (ii) Selling and Distribution Expenses; (iii) Financial Charges. The Balance Sheet is presented the same way as that of a sole trader, the only difference being that of including the three closing stocks, that are, that of raw materials, of work- in progress and of finished goods.

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Exercises
1. Bugeja Ltd is a manufacturing company producing a single product. The following information has been extracted from the books of Bugeja Ltd for the year ending 31.12.1997. Stocks 1 Jan 1997: Raw Materials Finished Goods Work - In - Progress Stocks 31.12.1997: Raw Materials Finished Goods Work - In - Progress Lm 40,000 21,600 9,000

48,000 27,000 12,500

Purchases of raw materials 165,000 Sales 485,000 Factory direct wages 78,000 Machinery repairs 10,500 Plant and Machinery (cost) 300,000 Carriage In on Raw Materials 4,000 Factory light and heat 6,000 Royalties 2,000 Factory supervisor wages 3,500 Factory cleaning expenses 500 Depreciate plant and machinery by 10% per annum on cost. You are required to prepare a: a. Manufacturing account for the year ended 31.12.1997; b. Trading account for the year ended 31.12.1997. 2. Jimmy Long, a specialist manufacturer, produces a single product. The following information was extracted from his books on 31 December 1998. Stocks at 1 January 1998: Raw Materials Finished Goods Work- in-progress Stocks at 31 December 1998: Raw Materials Finished goods Work-in-progress Lm 22,000 Nil 6,000

24,000 24,700 8,200

During the year ending 31 December 1998 the following transactions took place: Lm Purchases of raw materials 143,000 Sales 336,000 Carriage In of raw materials 1,500 Returns In 4,200 Direct wages 70,000

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Royalties Factory rent and rates Factory general expenses Depreciation of machinery

5,000 24,000 26,000 30,000

Prepare for Jimmy Long a Manufacturing Account and a Trading Account for the year ending 31 December 1998.

3.

a. Explain the meaning of the terms direct costs and indirect costs. b. Classify the following lists of costs, as either a prime cost or a factory overhead. i. Raw materials purchases ii. Factory rent and rates iii. Plant depreciation iv. Wages of factory cleaners v. Royalties vi. Carriage inwards. c. John Saliba is a sole trader who manufactures wooden garden seats of one style and size only. He has been in business for several years and prepares final accounts on 30 April each year. The following information is available for the year ending 30 April 1998. Stocks at 1 May 1997: Lm Raw materials 2,000 Finished garden seats Nil During the year ending 30 April 1998: Purchases of wood, glue, nails etc . Rent and rates of factory Insurance of factory Direct factory wages Depreciation of machinery and tools Heat, light and power (factory) Sales of garden seats Stocks at 30 April 1998: Raw materials Finished garden seat

25,500 3,200 1,440 16,400 1,200 3,400 62,400

1,300 4,000

There were no partly finished garden seat on either 1 May 1997 or 30 April 1998. From the above information prepare a manufacturing account to show the Prime cost and the cost of production for the year ended 30 April 1998.

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4.

David Portelli commenced business on 1 May 1997 as a Manufacturer of a single product. He provided the following information for the year ended 30 April 1998: Lm Stocks at 30 April 1998: Raw materials 18,000 Finished goods 15,000 Works in progress 5,300 Purchases of Raw Materials 110,000 Manufacturing Direct Wages 45,000 Direct factory expenses 8,000 Repairs to Machinery 4,500 Rent and Rates (Office and factory) 12,000 Factory Heating and Lighting 2,300 Sales 215,000 Sales Returns 1,200 Depreciation of Machinery 12,000 Rent and Rates are to be apportioned to the factory and the office in the ratio 3:1.

You are required to prepare for the year ending 30 April 1998:a Manufacturing account and a Trading account.

5.

Tony Zammit has a manufacturing business. December 1999 was as follows: Trial Balance Carriage Outwards Rent : Office Factory Office Machinery (cost Lm6,000) Bank Debtors Sales Machinery (cost Lm50,000) Salaries to Salesmen Purchases of Raw Materials Sundry Expenses : Factory Office Creditors Stocks at 1 January 1994 : Raw Materials Finished Goods Office Salaries Manufacturing Direct Wages Lighting and heating : Office Factory Drawings Capital

His Trial Balance as at 31 Dr Lm 7,038 990 4,850 4,200 28,972 184,715 28,000 8,570 57,245 1,362 898 15,477 15,872 51,897 8,416 64,371 1, 475 4,896 9,900 298,952 84,400 298,952 Cr Lm

14,360

You are to draw up a Manufacturing, Trading and Profit and Loss Account for the year ended 31 December 1994, and a Balance Sheet as on that date.

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Include the following adjustments: a. Depreciate Machinery Lm5,000 and Office Machinery Lm800. b. The following were due at 31 December 1994: Carriage Outwards Lm188; Lighting and Heating: Office Lm125 Factory Lm488. c. The factory Rent had been prepaid Lm250 at 31 December 1994. d. Stocks at 31 December 1994: Raw Materials Lm13,820 Finished Goods Lm56,842. Office Rent Prepaid Lm108. Parts Products had the following balances at 31 March 1998: Sales Factory buildings Office Rent Insurance Heating and Lighting Factory Power Factory Supervisor wages Stocks 1 April 1997: Raw Materials Work in Progress Finished goods Direct labour Office salaries Selling expenses General administrative expenses Plant and machinery at cost Provision for depreciation on plant 01.04.97 Delivery vehicles at cost Provision for depreciation on vehicles 01.04.97 Debtors Creditors Purchases of raw materials Bank overdraft Cash Royalties Capital Loan interest 12% Bank Loan (repayable 2002) Lm 470,000 250,000 5,800 1,648 820 2,444 18,705 14,387 2,168 9,840 75,704 28,614 7,262 1,907 180,000 72,000 75,000 48,000 26,077 20,782 188,755 9,218 1,269 4,000 160,000 15,600 130,000

e. 7.

Additional information : i. The firm has no accruals or prepayments at 31 March 1998, but closing stocks are: Raw materials Lm18,846 Work in progress Lm 5,168 Finished goods Lm16,440 ii. Insurance and heating and lighting costs are allocated 75% to the factory and 25% to the office. iii. Depreciation is provided at 20% per annum on the cost of plant, and at 40% per annum using the reducing balance method for vehicles.

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You are asked : prepare the manufacturing and trading and profit and loss for the year ended 31 March 1998 for Parts Products showing clearly cost of materials used, prime cost, production cost, factory cost of goods completed, cost of goods sold, gross and net profits.

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