Professional Documents
Culture Documents
GRADE-12
NOTES
ACCOUNTING
MANUFACTURING ACCOUNTS
So far, we have considered the final accounts of sole traders who do not make the
goods that they sell. In all prior examples, the firms generate profits by purchasing stock
and then selling this stock for a price higher than the cost, meaning a profit has been
earned - i.e. the difference between sales and the cost of those goods that were sold. In
reality, most firms do not act in this way. Even if a firm does not make its own products,
it is likely to add something to the products themselves.
If a firm actually produces the goods that they sell then there will be no obvious
'purchases' figure to include in the trading account. The costs incurred in the production
of goods will appear instead and these will be calculated in a manufacturing account.
A manufacturing account shows the cost of producing the goods that are sold during an
accounting period.
Stocks in manufacturing organisations
There are three types of stock that we deal with in manufacturing accounts. These are
as follows:
1. Raw materials - the purchases of these will be adjusted for opening stock and
closing stock in the prime cost.
2. Work-in-progress - partly completed goods will be dealt with at the end of the
manufacturing account.
3. Finished goods - opening and closing stocks will be dealt with, as is normal, in
the trading account
All three types of closing stocks will appear as current assets on the balance sheet.
How to prepare a Manufacturing Account:
Select from the trial balance those expenses that relate to the companys
manufacturing operation. The expenses are either direct (e.g the cost of materials from
which the goods are made, and the wages of the workers who actually make the goods)
or indirect (all other manufacturing expenses).
MANUFACTURING ACCOUNTS
Page 1
ACCOUNTING
MANUFACTURING ACCOUNTS
Page 2
ACCOUNTING
MANUFACTURING ACCOUNTS
xxxx
xxxx
xxxx
xxxx
(xxxx)
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
(xxxx)
Page 3
ACCOUNTING
Cost of Production
(+) Factory Profit (20% of cost of production)
Cost of goods Transfer to Trading Account
xxxx
xxxx
xxxx
Sample Layout of
Trading and profit and Loss Account
For the year ended 31.12.07
$000
Sales
(-) Cost of sales:
Inventory (Stocks) of finished goods (1.1.07)
Transfer of finished goods
(-) Inventory (Stocks) of finished goods (31.12.07)
Cost of sales
Gross profit
(-) Operating Expenses:
Selling and distribution expenses
Administration expenses
Net profit on Trading
(+) Factory Profit
(-) Unrealised Profit on closing stock of F.G
Net profit
$000
xxxx
xxx
xxx
xxx
(xxx)
xxxx
xxxx
xxx
xxx
(xxxx)
xxxx
xxx
(xxx)
xxxx
MANUFACTURING ACCOUNTS
Page 4
ACCOUNTING
$
xxxx
(opening balance)
xxxx
(increase in provision)
xxxx
Balance b/d
xxxx
xxxx
$000
Current Assets:
Inventory(Stocks)-Direct materials
Work-in-progress
Finished goods
xxxx
(-) Provision for Unrealised Profit (xxx)
MANUFACTURING ACCOUNTS
xxx
xxxx
xxx
Page 5
ACCOUNTING
MANUFACTURING ACCOUNTS
Page 6
ACCOUNTING
Worked Example:
The following balances have been extracted from Makeit & Co.s trial balance at 31
December 2004.
$000
$000
Inventory (Stock) at 1 January 2004:
Direct materials
10
Work in progress
38
Finished goods
40
Purchases (direct materials)
Carriage inwards
Direct wages
Direct expenses (patent royalties)
Indirect materials
Indirect labour
Rent:
Factory
Offices
Heating, lighting and power: Factory
Offices
Sales
Administration salaries and wages
140
24
222
46
45
72
100
90
45
35
1 300
175
Further information:
1. Inventory (stock) at 31 December 2004 was as follows.
$000
Direct materials
18
Work in progress 20
Finished goods
60
2. Depreciation is to be provided on fixed assets as follows.
$000
Factory building
20
Factory machinery 36
Office equipment 24
3. Factory profit is to be calculated at 15% on cost of production.
MANUFACTURING ACCOUNTS
Page 7
ACCOUNTING
Required:
Prepare the Manufacturing, Trading and Profit and Loss Account for the year ended 31
December 2004.
Answer:
Makeit & Co
Manufacturing, Trading and Profit and Loss Account
For the year ended 31 December 2004
$000
Direct materials Inventory (stock) at 1 January 2004
10
Purchases
140
Carriage inwards
24
174
Less stock at 31 December 2004
(18)
Direct labour
Direct expenses
Prime cost
Indirect materials
45
Indirect labour
72
Rent of factory
100
Heating, lighting and power
45
Depreciation: factory
20
Machinery
36
Work in progress 1 January 2004
Work in progress 31 December 2004
Factory cost of finished goods
Factory profit (15%)
Transferred to Trading Account
Sales
Cost of sales
Inventory (Stock) of finished goods at 1 January 2004
Transferred from factory
Inventory (Stock) of finished goods at 31 December 2004
Gross profit
Wages and salaries
Rent of office
Heating and lighting
Depreciation of office equipment
Net profit on trading
Add factory profit
MANUFACTURING ACCOUNTS
38
(20)
40
874
914
60
173
90
35
24
$000
156
222
46
424
318
742
18
760
114
874
1 300
854
446
322
124
114
Page 8
ACCOUNTING
111
235
$000
Current Assets:
Inventory(Stocks)-Direct materials
Work-in-progress
Finished goods
(-) Provision for Unrealised Profit
18
20
60
(8)
90
SUMMARY:
It is the change in the provision of unrealised profits that will appear in the profit
and loss account!
The full provision for unrealised profits will be deducted from finished goods on
the balance sheet.
MANUFACTURING ACCOUNTS
Page 9