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(c ) Manufacturing Accounts Some firms may manufacture or produce goods rather than buy due to savings in operational costs.

(i.e. it is cheaper to produce the goods rather than buy). Due to additional costs involved in the production process, additional information is reported in the final accounts. Therefore, in addition to a trading, profit and loss account, a new account called manufacturing account is shown before these others. The purpose of the manufacturing account is to report all the costs incurred in producing the goods. These costs are divided into 2 classes: 1) Direct costs (prime costs) 2) Indirect costs (overheads) Direct Costs/Prime Costs This is a cost that can be traced directly to a unit that has been produced. This include 1) Direct material 2) Direct labour (wages) 3) Direct expense Indirect costs/Production overheads These are all other costs incurred in the production of manufacturing of goods but cannot be traced directly to any particular unit. Example: 1) Rent for the factory 2) Salaries to supervisors and factory managers 3) Depreciation of plant and machinery used in production The manufacturing account will show the factory cost of goods produced that will be shown in the trading account in place of purchases.

FORMAT Name Manufacturing Trading Profit and Loss Account for the year ended 31 December Raw Materials Opening stock of raw materials XX Purchases of raw materials XX Add carriage inwards XX XX Less returns outwards (XX) XX Cost of raw materials available for use XX Less closing stock of raw materials (XX) Raw materials consumed XX Direct labour (factory wages) XX Direct expenses XX Prime cost XX Factory overheads Salary to factory manager XX Depreciation on Plant and machinery XX - Factory buildings XX Other expenses Factory power XX Lighting and heating XX Water XX Cleaners wages XX XX Total cost of production XX Add: opening Work In Progress XX Less: closing Work In Progress (XX) XX Factory cost of production (cost of finished goods) XX FACTORY PROFIT XX Finished goods at a transfer price XX Sales Less returns inwards Less cost of sales Opening stock finished goods Factory cost of production/transfer price Less closing stock of finished goods Gross profit Add factory profit Other incomes discount received - Profit on disposal Less expenses Salaries and wages administration & non production Rent for administration building Depreciation - Delivery vans - Fixtures and distribution Other selling and distribution costs Net profit/(net loss) XX XX XX (XX) XX (XX) XX

Note 1 Note 2



(XX) XX/(XX)

For the balance sheet, the format is the same for all the assets and liabilities except for the current assets section whereby the stock at the end of the period should be shown for each type of stock as per this format: Current Assets Stock: raw materials Work in progress Finished goods XX XX XX XX

Note 1: This represents the total costs of all the units produced during the period and therefore will be taken to the trading account as the goods are transferred to the selling department. Note 2: If the firm transfers the goods to the selling department at a price higher than the cost of production, then this generates a factory profit. The goods will be shown in the trading account at the transfer price and the factory profit is added to the Gross Profit of the period. Expenses can also be classified into: 1) Administration Expenses These are expenses incurred in running or managing the affairs of the firm and includes managers salaries (not factory managers), legal and accounting fees, depreciation of furniture and fixtures and equipment not used in production, finance cost e.g. loan interest. 2) Selling and Distribution These are expenses incurred to generate sales income e.g. Salaries and commission to the sales manager and staff Carriage outwards (i.e. to deliver goods to the customers Depreciation on motor vehicles (used for the delivery purpose) Advertising Bad debts

Example 6.10 B spikes Trial Balance as on 31 December 2002 Stock of raw materials 1.1.2002 Stock of finished goods 1.1.2002 Work in progress 1.1.2002 Wages(direct 180,000: factory indirect145,000) Royalties Carriage inwards (on raw materials) Purchases of raw materials Productive machinery (cost 280,000) Accounting machinery (cost 20,000) General factory expenses Lighting Factory power Administrative salaries Sales representatives salaries Commission on sales Rent Insurance General administration expenses Bank charges Discounts allowed Carriage outwards Sales Debtors and creditors Bank Cash Drawings Capital as at 1.1.2002 Notes at 31.12.2002 1. 2. 3.

Dr 21,000 38,900 13,500 325,000 7,000 3,500 370,000 230,000 12,000 31,000 7,500 13,700 44,000 30,000 11,500 12,000 4,200 13,400 2,300 4,800 5,900 142,300 56,800 1,500 20,000 ______ 1,421,800


1000,000 125,000

29,680 1,421,800

Stock of raw materials 24,000, stock of finished goods 40,000, work in progress 15,000. Lighting, and rent and insurance are to be apportioned: factory 5/6ths, administration 1/6th. Depreciation on productive and accounting machinery at 10 per cent per annum on cost.

Required: Prepare a manufacturing, Trading Profit and Loss Account for the year ended 31 December 2002.

Solution: B Spikes Manufacturing, Trading Profit and Loss Account for the year ended 31 December 2002 Raw Materials Opening Stock of raw materials 21,000 Purchases 370,000 Carriage inwards on raw materials 3,500 373,500 394,500 Less: closing stock of raw materials (24,000) Raw materials consumed 370,500 Direct wages 180,000 PRIME COST 550,500 Factory Overheads Wages 145,000 Royalties 7,000 Depreciation: productive machinery 28,000 General factory expenses 31,000 Lighting( 5/6 x 7,500) 6,250 Factory power 13,700 Rent(5/6 x 12,000) 10,000 Insurance( 5/6 x 4,200 ) 3,500 24,4,450 Total cost of production 794,950 Add: opening work in progress 13,500 808,450 Less: closing work in progress (15,000) Factory cost production per finished goods 793,450 Sales 1,000,000 Less cost of sales Opening stock of finished goods 38,900 Factory cost of production 793,450 832,350 Less closing stock of finished goods (40,000) 792,350 Gross profit 207,650 Expenses Accounting machinery depreciation 2,000 Lighting (1/6 x 7,500) 1,250 Administrative salaries 44,000 Sales representatives salaries 30,000 Commission on sales 11,500 Rent ( 1/6 x 12,000) 2,000 Insurance (1/6 x 4200) 700 General administrative expenses 13,400 Bank charges 2,300 Discounts allowed 4,800 Carriage outwards 5,900 (117,850) Net profit 89,800

B Spikes

Balance Sheet as at 31 December 2002 COST DEPRECIATION Non current Assets Productive machinery Accounting machinery Current Assets Stock: raw materials Finished goods Work in progress Debtors Cash at bank Cash in hand Current liabilities Creditors Capital Add net profit Less drawings 280,000 20,000 300,000 24,000 40,000 15,000 (78,000) (10,000) 88,000 NET BOOK VALUE 202,000 10,000 212,000

79,000 142,300 56,800 1,500 279,600 (125,000) 154,600 366,600 296,800 89,800 386,600 (20,000) 366,600

Example 6.11 (Exam Type June 1986 Question Two) Bibi Maridadi owns and manages a small manufacturing business. The following balances have been extracted from her books of account at 31 January 1986: Dr Sh 5,400 92,000 60,000 150,360 12,000 60,000 24,000 36,000 18,400 16,000 276,800 144,000 4,000 Cr Sh 171,120 86,000

Capital at 1 February 1985 Accounts payable Bank and cash balance Accounts receivable Drawings Administration expenses Advertising expenses Factory direct wages Factory indirect wages Factory power Furniture and fittings (all offices) Heat and light Plant and equipment Motor vehicle (used by salesmen) Plant hire Provision for bad debts Provision for depreciation 1 February 1985: Furniture and fittings Plant and equipment Motor vehicle Raw material purchases Rent rates Sales Selling and distribution expenses Inventories at cost, 1 February 1985: Raw materials Work in progress Finished goods The following additional information is provided: (i) Accruals at 31 January 1986 were: Factory power Sh.1,600 Rent and rates Sh. 4,000

3,200 9,200 138,400 24,000

228,000 20,000 66,400 8,000 16,000 24,000 1,261,360


_______ 1,261,360

There was also prepayment of Sh. 800 for salesmens motor vehicle insurance. (ii) Inventories at 31 January 1986, were valued at cost as follows: Raw materials Work in progress Finished goods (iii) Sh. 15,200 Sh. 30,400 Sh. 45,600

Depreciation is to be charged on plant and equipment, motor vehicle, furniture and fittings at the rates of 20%, 25% and 10% per annum respectively on cost.


Expenditure on heat and light, and rent and rates is to be apportioned between the factory and office in the ratio of 9 to 1 and 3 to 2 respectively. (v) The provision for bad debts is to be made equal to 5% of accounts receivable at 31 January 1986. Required: Using the vertical method, prepare Bibi Maridadis manufacturing, trading and profit and loss account for the year ended 31 January 1986 and a balance sheet as at that date. (22 marks) Solution: Bibi Maridadi Manufacturing, Trading and Profit and Loss Account for the year ended 31 January 1986 Direct materials Sh Sh Opening stock of raw materials 8,000 Add: purchases of raw materials 228,000 236,000 Less: closing stock of raw materials (15,200) Raw materials consumed 220,800 Factory direct wages 60,000 PRIME COST 280,800 Factory overheads Factory indirect wages 24,000 Factory power 37,600 Plant hire 4,000 Heat and light 14,400 Rent and rates 14,400 Depreciation on plant 55,360 149,760 430,560 Add opening work in progress 16,000 446,560 Less closing work in progress (30,400) Factory cost of production 416,160 Sales 829,440 Less cost of sales Opening stock of finished goods 24,000 Add factory cost of production 416,160 440,160 Less closing stock of finished goods (45,600) 394,560 Gross profit 434,880 Less expenses Increase in provision for doubtful debts 1,400 Rent and rates 9,600 Heat and light 1,600 Depreciation: motor vehicle 36,000 Furniture and fittings 1,840 Selling and distribution expenses 65,600 Administration expenses 150,360 Advertising expenses 12,000 278,400 Net profit 156,480 Bibi Maridadi Balance Sheet as at 31 January 1986



Non current Assets Plant and equipment Furniture and fittings Motor vehicle Current Assets Stock: Raw materials Work in progress Finished goods Debtors Less: provision for doubtful debts Prepayments Cash in hand and bank Current liabilities Creditors Accruals Capital Add net profit Less drawings

276,800 18,400 144,000 439,200 15,200 30,400 45,600 92,000 (4,600)

(193,760) (11,040) (60,000) (264,800)

VALUE 83,040 7,360 84,000 174,400

91,200 87,400 800 5,400 184,800 (91,600) 93,200 267,600 171,120 156,480 327,600 (60,000) 267,600

86,000 5,600

UNREALISED PROFITS ON CLOSING STOCK In most cases where business transfers finished goods at a profit to the selling department and the goods are reflected in the balance sheet at the transfer price, then the closing stock includes a profit that has not been earned or realised. If the mark up profit (the profit based on cost of production is always uniform, then any changes in the value of closing stock will result in a reduction or an increase in the unrealised profits. If there is an increase on unrealised profit on the closing stock, then this increase will be reduced from the gross profit from our profit and loss account and if there is a reduction in unrealised profits, then this reduction will be added to the gross profit in our profit and loss account. Any unrealised profit of closing stock should be deducted from the closing stock in the balance sheet. The slight change in the format of the Profit and Loss Account and Balance Sheet will be as follows

Increase in unrealised profit in closing stock (UPCS) Profit and loss (extract) Account for year ended.. Gross profit Add: factory profit Add: other expenses Less expenses Other expenses Increase in unrealised profit on closing stock Net profit Decrease in UPCS Profit and Loss Account (extract) for year ended Gross profit Add: factory profit Add: other incomes Add: decrease in UPCS Less expenses Other expenses Net profit

X X X X (X) X


X X X X X (X) X

Example: A firm always values its stock (finished goods) at a mark-up of 20% on cost of production. The opening stock of finished goods for the period was valued at Sh. 100,000. (The marked up cost) The closing stock at the end of the financial period was Sh.160,000. Opening Stock: 100,000 (marked up) (16,667) 83,333 Closing Stock 160,000 (marked up) (26,667) 133,333 = = = = = = 120% (20%) 100% 120% (20%) 100%

Balance c/d

UPCS Balance b/f 26,667 Profit and loss a/c 26,667

16,667 10,000 26,667

Profit and Loss (Extract) Less: Expenses: Increase in unrealized profits on closing stock Balance Sheet (Extract) Current Assets Stock: Raw materials Work in progress Finished goods Less: UPCS Sh X X 160,000 (26,667)

Sh 10,000