Manufacturing Accounts

A. Function of a Manufacturing Account

For those businesses which deal with manufacturing products. It is common in todays business
to act both as manufacturer and retailer. e.g. Crocodile, Bossini, G2000, U2.
What is the advantage as being a manufacturer as well as a retailer?
B. Division of Costs
The purpose of a Manufacturing Account is to ascertain Cost of Production.
Cost of Production = Prime Cost + Factory Overheads + Opening Work in Progress Closing
Work in Progress
C. Prime Cost
Prime cost is the DIRECT expenses which can be traced back to each unit of production. It
consists of:
(1) Direct Materials
(2) Direct Wages
(3) Direct Expenses e.g. Royalty
D. Factory Overheads
Indirect expenses in the factory which helps production of goods, e.g. Indirect wages, rent and
rates of the factory, depreciation of plant and machinery, factory fuel and power, etc.
E. Work in Progress
Where goods have not been completed, they cannot be sold in the year. For ease of accounts
recording, the whole of the Work-in-Progress is calculated.
The treatment is the same as in Opening Stock and Closing Stock,
i.e. + Opening WIP Closing WIP

F. Format
Company Name
Manufacturing, Trading and Profit and Loss Account
for the year ended 31 December 200X
_________________________________________________________________
$
$
Raw Materials:
Opening Stock
xxx
Purchases (Raw Materials)
xxxx
Add: Carriage Inwards
xx
xxxx
Less: Return Outwards
(xx)
xxxx
xxxx
Less: Closing Stock (Raw materials)
(xx)
Cost of Raw Materials Consumed
Direct Materials
Direct Expenses (Royalty)
PRIME COST
FACTORY OVERHEADS:
Factory rent and rates
xxx
Fuel and power
xxx
Indirect wages
xx
Lubricants
xxx
Depreciation of plant and machinery
xxx

xxxx
xxx
xxx
XXXX

XXXX
______
XXXX
WORK-IN-PROGRESS
Opening Work-in-Progress (1.1.200x)
Less: Closing Work-in-Progress (31.12.200y)
PRODUCTION COST OF GOODS COMPLETED c/d

xxxx
(xxx)
_____
XXX
XXXX
=====

(Trading Account)
Finished Goods
Sales
Less: Cost of Goods Sold
Opening Stock
Add: Production Cost of Goods Completed b/d
Less: Closing Stock
GROSS PROFIT
Less: Expenses
Administrative Expenses (Office expenses)
e.g. Office rent and rates
Administrative salaries
General administration expenses
Depreciation of office furniture, office equipment
Selling and Distribution Expenses
e.g. Advertising expenses
Sales Commissions
Carriage Outwards
Financial Expenses
e.g. Discounts allowed
Bad Debts
Provisions for Bad Debts
NET PROFIT FOR THE YEAR

xxxx
xxx
xxxx
_____
xxxx
(xxx)
_____

(xxx)
_____
XXX

(xxx)
_____
XXX
====

Balance Sheet as at 31 December 200X

FIXED ASSETS
Machinery
Office Equipment

CURRENT ASSETS
Stock: Raw Materials
Work in Progress
Finished Goods
Debtors
Less: Provisions for Bad Debts

Cost

Net
Book
Value
xxxxx
xxx
xxxx
xxxx
xxx
xxxx
_______________________________
xxxxx
xxx
xxxx
=============
xxx
xx
xxx
xxx
(xxx)
_____

Prepaid Expenses
Bank
Cash
Less: CURRENT LIABILITIES
Creditors
Accrued expenses
Working Capital

FINANCED BY:
Capital on 1.1.200x
Add: Net Profit for the year
Less: Drawings

Accumulated
Depreciation

xxx
xx
___

xxx
xx
xxx
xxx
_____
xxxx

(xxx)
_____
xxx
_____
xxxx
====
xxxx
xxx
______
xxxx
(xxx)
_____
xxxx
====

G. Difficult Entries:
Example:
Trial Balance for the year ended 31 December 2002
Dr.
$

Cr.
$

Opening Stock:
Loose Tools
12,000
Purchases of loose tools
36,000
Carriage inwards
195,000
Wages and salaries: administrative staff
420,000
Notes:
1. Closing Stock: Loose Tools $8,000
2. Salaries of administrative staff included an amount of $80,000 payable to the factory manager
as a bonus.
Answer:
Manufacturing Account for the year ended 31 December 2002

_________________________________________________________________

EXERCISES
Question 1
Tictac Ltd. Manufactured and sold sports shoes. It had also decided to import genuine leather
shoes to meet the needs of the local consumers. The following balances were extracted from the
books on 31 December 1990:
$
Carriage inwards: shoes imported
62,300
Carriage outwards
6,500
Electricity
5,600
Factory expenses
44,000
Manufacturing wages
137,500
Office expenses
19,700
Office furniture and fixtures at cost
121,000
Opening stocks:
Finished goods at cost
52,300
Work in progress at cost
23,800
Plant and machinery at cost
308,000
Purchases: shoes imported
352,000
Rates and insurance
8,300
Raw materials consumed
354,900
Returns inwards: Shoes manufactured
13,400
Office salaries
146,800
Sales:
Shoes manufactured
925,300
Shoes imported
538,600
Selling expenses
36,200
Additional information:
(i) Closing stocks valued at cost:
Shoes manufactured
Shoes imported

$
55,400

Work in progress
36,700
(ii) From 1 January 1990 onwards, the manufactured goods are transferred to the trading account
at factory cost plus 25% profit loading.
(iii) Depreciation is to be provided at 10% on cost for office furniture and fixtures and plant and
machinery.
(iv) The expenses on electricity, and rates and insurance are chargeable three-fifths to the factory
and the balance to the office.
(v) On 1 July 1990, the company issued for cash $300,000 10% debentures repayable at the end
of June 1995.
(vi) On 31 December 1990, accrued office salaries amounted to $13,200 and the prepaid
insurance premium was $2,300.
REQUIRED:
Prepare for Tictac Ltd. The following accounts for the year ended 31 December 1990:
(a) A manufacturing account showing the prime cost and the total cost of
manufactured shoes transferred to the trading account.
(b) A trading and profit and loss account showing separately the gross
profit on sales of manufactured shoes and imported shoes.

Question 2
Success Limited is a retailer of kitchenware. Most goods it trades are purchased from various
suppliers in a finished form. In addition, the company manufactures several types of kettles. The
bookkeeper drew up the following trial balance at 30
April 1996:
$
$
Ordinary share capital of $1 each
200,000
General reserve
23,000
Retained profits
164,000
15% long-term loan
120,000
Machinery at cost
400,000
- accumulated depreciation as at 1 May 1995
100,000
Motor vehicles at cost
160,000
Stocks at 1 May 1995
Raw materials
20,000
Manufactured goods
10,000
Other goods
170,000
Debtors
160,000
Creditors
48,000
Bank
50,000
Sales
2,200,000
Purchases Raw materials
430,000
- Other goods
1,150,000
Salaries
257,000
Rent and rates
22,000
Electricity
10,500
Interest on loan
9,000
Sundry expenses
7,100
--------------------------2,855,600
2,855,600
========
========
Additional information:
(i) Depreciation is to be provided using the reducing balance method at the following rates:
Motor vehicles 12.5% per annum
Machinery 10% per annum
The motor vehicle was purchased in 1996. It is the companys policy to charge a full years
depreciation in the year of acquisition.
(ii) Salaries include wages of $54,000 paid to the kettle-making employees.
(iii) Rates prepaid at 30 April 1996 amounted to $2,000.
(iv) Accruals at 30 April 1996 were: Electricity $1,500
(v) The apportionment of rent and rates and electricity to the kettle-making department is 25%.
(vi) Stocks at 30 April 1996 were:
$
Raw materials
40,000
Manufactured goods
12,500

Other goods
215,000
(vii) The directors proposed to transfer 440,000 of the profits to general reserve and to declare a
final dividend of $0.50 per share.
REQUIRED:
(a) a manufacturing, trading and profit and loss account (with the section on appropriations) for
the year ended 30 April 1996: and
(13 marks)
(b) a balance sheet
(7 marks)

Question 3
The following trial balance was extracted from the books of Rock Limited, a candy
manufacturer, on 30 April 1999:
$
$
Ordinary share capital of $1 each
240,000
General reserve
50,000
Retained profits
48,423
Machinery at cost
873,800
- accumulated depreciation as at 1 May 1998
167,180
Motor vehicles at cost
134,240
- accumulated depreciation as at 1 May 1998
74,280
Stock as at 1 May 1998
Raw materials
165,300
Work in progress
27,200
Finished goods
72,910
Debtors and creditors
127,500
83,920
Sales
2,186,400
Purchases of raw materials
936,440
8% debentures (issued in 1990)
200,000
Bank
70,560
Wages
60,790
Salaries
240,680
Rent and rates (3/5 office; 2/5 factory)
243,620
Selling expenses
97,163
________
________
3,050,203
3,050,203
========
========
Additional information:

(i) Stock as at 30 April 1999:

$
Raw materials
97,200
Work in progress
30,200
Finished goods
88,400
(ii) Depreciation was to be provided for:
Machinery 20% on cost
Motor vehicles 25% on net book value
(iii) Analysis of the wages figure revealed: $
Direct manufacturing
48,632
Factory maintenance
12,158
(iv) Accruals at 30 April 1999 were:
$
Debenture interest
?
Rent
4,380
(v) Rock Limited recently agreed to act as the consignee for Mountain Sweet Limited at a
commission of 10% on sales. Consignment sales of $115,000 were credited to the sales account
and consignment expenses of $26,500 were included in selling expenses. The unsold
consignment goods were included in the closing stock of finished goods at $25,000. No
information about the sales has been given to the consignor and no settlement has yet been made.
(vi) The directors proposed to transfer $20,000 of the profits to general reserve and declare a
final dividend of 30%.
REQUIRED TO PREPARE:
(a) A manufacturing, trading and profit and loss account (with the section on appropriations) for
the year ended 30 April 1999; and (11 marks)
(b) A balance sheet as at the same date. (9 marks)

Question 4
The following information is supplied by the bookkeeper of the Overseas
Manufacturing Company for the year ended 31 March 2001:
$
Stocks, 1 April 2000
Raw materials
3,150,000
Finished goods
4,470,000
Work in progress
2,745,000
Sales
77,280,000
Sales commission
1,512,000
Wages and salaries
Direct labour
24,930,000
Indirect labour
4,890,000
Administrative staff
4,203,000
Purchases of raw materials
16,936,000
Carriage inwards
195,000
Carriage outwards
896,000
Electricity and water
1,035,000
Other production expenses
4,980,000
Other administration expenses
2,565,000
Plant and machinery, at cost
6,000,000
Office equipment, at cost
3,800,000
Stocks, 31 March 2001
Raw materials
2,370,000
Finished goods
2,625,000
Work in progress
2,820,000
Additional information:
(i) Depreciation was to be provided for:
Plant and machinery 20% on cost
Office equipment 25% on cost
(ii) Electricity charges of $165,000 were in arrears at 31 March 2001.
(iii) Electricity and water was to be apportioned as follows:
Factory 80%
Administration 20%
(iv) Salaries of administrative staff included an amount of $80,000 payable to the factory
manager as a bonus.
REQUIRED:
Prepare the manufacturing and trading accounts of Overseas Manufacturing Company for the
year ended 31 March 2001, showing clearly the cost of raw materials consumed, the prime cost,
the production cost of finished goods and gross profit.
(10 marks)

Question 6
On 30 April 2002, the following balances were extracted from the books of Wilson
Manufacturing Company:
$
Sales
9,890,400
Purchases of raw materials
4,372,000
Carriage inwards
58,000
Carriage outwards
83,840
Stocks, 1 May 2001
Raw materials
225,522
Work in progress
30,180
Finished goods
194,500
Plant and machinery, at cost
980,000
Office equipment, at cost
385,000
Rent and rates
395,250
Electricity and water
134,400
Wages and salaries
Direct labour
491,100
Indirect labour
240,000
Administrative staff
910,150
Repairs to machinery
18,928
Other production expenses
326,400
Other administrative expenses
198,685
Additional information:
(i) Stocks as at 30 April 2002:
$
Raw materials
115,290
Work in progress
94,840
Finished goods
181,900
(ii) Depreciation was to be provided for:
Plant and machinery 15% on cost
Office equipment 20% on cost
(iii) Salaries of administrative staff included an amount of $100,000 paid to the factory manager.
(iv) Electricity and water was to be apportioned as follows:
Factory 75%
Administration 25%
(v) Rent and rates was to be apportioned as follows:
Factory 80%
Administration 20%
REQUIRED:
(a) Briefly explain the difference between direct costs and indirect costs. (2 marks)
(b) Calculate the following for Wilson Manufacturing Company for the year ended 30 April
2002:
(i) Prime cost;
(3 marks)
(ii) Total factory overheads; and
(3 marks)

(iii) Production cost of each unit of finished goods, assuming that Wilson Manufacturing
Company had produced 400,000 units of finished goods during the year.
(3 marks)
(c) Prepare the trading account of Wilson Manufacturing Company for the year ended 30 April
2002. (3 marks)

PROBLEMS
Q1. Manufacturing sole trader.
Kimeu retired from Jambo Plastics in February 2009 and started his own business on 30 April
2009. His enterprise, known as Kimeu Plastics manufactures one product which it sells to the
wholesale trade. The following trial balance was extracted from the books of the enterprise as at
30 April 2010.
Sh.
Inventories as at 1May 2009:
Raw materials, at cost
Work-in-Progress, at factory cost
Finished goods
Raw material purchased
Sales
Manufacturing wages
Factory rent and rates
Factory light, heat and power
Plant at cost
Plant depreciation at 1 May 2009
Work managers salary
Plant repairs
Administrative overheads
Factory lease at cost (20 years duration)
Amortization at 1 may 2009
Capital
Account receivable
Bank balance
Account payable
Carriage inwards

Sh.

350,000
1,800,000
3,500,000
3,950,000
18,000,000
3,000,000
1,400,000
655,000
6000000
2,800,000
245,000
400,000
1,800,000
4,000,000
1,200,000
7,500,000
3,050,000
1,600,000
2,450,000
200,000
--------------31,950,000
=========

------------31,950,000
========

The following additional information is available;

1. Plant depreciation is to be provided at 10% on the cost of plant owned at the year end.
2. Raw materials costing Sh.500000, work in progress valued at Sh.100000 and finished
goods worth Sh.200000 were in inventory on 30 April 2001.
Required:
a) Manufacturing account and income statement for the year ended 30 April 2010.
b) Statement of financial position as at 30 April 2010.

Q2. Manufacturing partnership business.

Chacha and Mushi are in partnership sharing profits and losses equally. They are manufacturer of
shoes whose brand name is DAWO. The trial balance as at 31 December 2004 was as follows:
Sh.000
Capital accounts:
Chacha
Mushi
Current accounts:
Chacha
Mushi
Drawings:
Chacha
Mushi
Stock (1 January 2004)
Raw materials
Work in progress
Finished goods
Factory land and buildings at cost (land Sh. 17 million)
Plant and machinery at cost
Delivery van (for sales distribution)
Provision for depreciation on:
Factory buildings
Plant and machinery
Delivery van
Sales
Purchase of raw materials
Production wages
Factory managers salary
Office salaries
Distribution costs
Factory rates and insurance
Fuel and electricity

Sh.000
4000
4000
500

100
200
300
1500
2200
1200
18000
3500
1400
40
1400
700
86240
40000
10000
480
5000
3250
700
800

Office rates and insurance

Bad debts
Provision for doubtful debts:
Royalties payable
Trade debtors are creditors
Bank balance
Carriage on raw materials
Provision for unrealized profit

500
20
20
1000
800
6390
500
---------97840
======

700
240
---------97840
======

Additional information:
1. Stock at 31 December 2004 was valued as follows:
Sh.000
Raw materials
2000
Work in progress
4200
Finished goods
1000
2. Insurance prepaid (31 December 2004)
Sh.000
Factory
200
Office
35
Rates owing (31 December 2004)
Sh.000
Factory
500
Office
25
3. Depreciation is provided at the following rates:
Factory buildings-2% p.a on cost
Delivery van -25% p.a on cost
Plant and machinery -20% p.a on cost
4. Provision for doubtful debts is to be maintained at 5% of the debtors balance at the end
of the year.
5. Manufactred goods are transferred to the warehouse at cost plus 25% of factory profit.
6. The partnership agreement has the following provisions:
i)
A commission of 10% to Mushi is based on factory profit while Chacha is entitles
to a commission of 10% based on net profit from trading.
ii)
Partners are allowed interest on their fixed capitals at a rate of 10% p.a.
iii)
Chacha had guaranteed Mushi a total income from the partnership of not less than
Sh.15,000,000 p.a.
Required:
a) Manufacturing, trading and profit and loss and appropration accounts for the year
ended 31 December 2004.
b) Balance sheet as at 31 December 2004.
Q3. Manufactring Company.

Kaluwax Ltd. Manufacturers have one product which it sells to the wholesale trade. The
following trial balance was extracted from the books of the company at 30 April 2001.
Sh.
Sh.
Stocks at 1 May 2000:
Raw material, at cost
350,000
Work in progress, at factory cost
1,800,000
Finished goods (3500 units) at factory cost
3,500,000
Raw materials purchased
3,950,000
Sales (12000 units)
18,000,000
Manufacturing wages
3,000,000
Factrory rent and rates
1,400,000
Factory light, heat and power
655,000
Plant at cost
6,000,000
Plant depreciation at 1 May 2000
2,800,000
Works managers salary
245,000
Plant repairs
400,000
Administrative overheads
1,600,000
Facory lease at cost (20 years duration)
4,000,000
Amortization at 1 May 2000
1,200,000
Share capital
7,500,000
Debtors
3050,000
Bank balance
1600,000
Creditors
2,450,000
Carriage inwards
200,000
--------------------------31,950,000
31,950,000
=========
========
The following additional information is available:
1. Plant depreciation is to be provided at 10% on the cost of plant owned at the year end.
2. Raw materials costing Sh.500,000 were in stock on 30 April 2001.
3. Finished goods are transferred to the warehouse as soon as the are completed. During the
year, 10,000 units were completed and transferred to the warehouse. Work in progress at
the end of the financial year (at factory cost) amounted to Sh.2,300,000.
4. There was no wastage or pilferage during the current year.
Required:
a) Manufacturing, tranding and profit and loss account for the year ended 30 April 2001.
b) Assume the facts as in (a) above, except that it had always been the companys practice to
transfer completed units from factory to warehouse at cost plus 25% and to value stock of
finished goods at the transfer price for the trading account but at factory cost for balance
purposes. Show how the manufacturing, tranding and profit and loss account for the year
ended 30 April 2001 would appear.