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Chapter 7:
Manufacturing Account
TYPES OF INVENTORY
Raw materials
Work in progress
Finished goods/completed goods
TYPES OF PRODUCTION COST
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Prime cost/
Direct cost
Overhead
cost/
Indirect cost
Production
cost
Cost incurred in the
manufacturing process, but
they cannot be traced
directly to the goods being
produced.
Direct materials
Direct labor
Direct expenses
Indirect materials
Indirect labor
Indirect expenses
PRIME COST
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1. Direct materials
Costs of the materials used during the period.
Include the purchase price of the raw materials
and the acquisition costs related to the purchase.
Examples: Purchase of raw materials,
Carriage inwards / freight charges on raw
materials
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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
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3. Direct expenses
They refer to the expenses paid
according to each unit of production.
Examples: Royalties, hire purchase of
special materials
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1. Indirect materials
Lubricants
Loose tools

2.Indirect labour
wages, salaries, bonus or commission to
cleaners, crane drivers, foremen, supervisors
and 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
FINANCIAL STATEMENT
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1. Manufacturing Account
2. Income Statement
3. Balance Sheet
1) Manufacturing Account
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It shows the production cost or transfer price of
goods 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 X
Factory Overhead Expenses:
Production Managers 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) X
Transfer price of finished goods X
2) Income Statement
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Profit or loss of the whole business during the
accounting period.
Includes all the expenses and income related to
the 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)
X
less: Closing stock of finished goods (X)
(X)
Gross Profit X
Add: Factory Profit X
Add: Other revenue
Discount 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 XXX
discount allowed XXX
interest XXX
increase in provision for unrealized profit XXX
XXX
Net profit XXX

3) Balance Sheet
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It shows the assets, liabilities and equities of the
Whole 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 the
manufacturing process and the administration
of the office such as: Rent, electricity, insurance,
depreciation on premises, motor vehicles etc.
These expenses should be allocated to the
factory and office and debited to the
manufacturing account and the profit and loss
account respectively.
In the event of examinations, the bases of
allocation are usually given.

IMPORTANT TO NOTE
Production cost Vs. Transfer price
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Stock of raw materials, work in progress and
other finished goods are valued at cost.
However, the stock of manufactured goods
can be valued at production cost or the
transfer price of goods completed.
Provision of unrealized profit of on stock
should be made if closing stock of
manufactured goods is valued at transfer
price.
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 for
Unrealized Profit
Dr Provision for
Unrealized Profit
Cr Profit and Loss
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)
Revenue
Balance b/d (prepaid) Balance b/d (accrued)
Balance c/d (prepaid)
Balance c/d (accrued)
Cash/Bank Income Statement
Acc. Pay (for
dis.received)
Adjustment on revenue
Income Statement
Income statement (admin)
Manufacturing account (factory)
Accum. depreciation of non-current assets
Balance b/d) Balance c/d
Income Statement
Depreciation for current years
1.Policy given
2.No policy (cost-NBV)
Accum. depreciation for previous years
1.Stated in question
2.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@ $160
Closing 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 trading
account at factory cost.
2. The factory output is transferred to the trading
account at factory cost plus 20% factory profit, and
the 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
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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 120
Less: Closing stock(at transfer price) (20+20*0.2) 24 96
Gross Profit 64
Add: Manufacturing profit 20
84
Less: Expenses
Expenses 50
Provision for unrealized profit (24*20/120) 4 54
Net Profit 30


Cost + profit