Manufacturing Account

Production Cost
Production cost = Prime cost / Direct cost + Factory overhead expenses / Indirect cost

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

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

3.

Direct expenses

They refer to the expenses paid according to each unit of production. Examples: Royalties

Factory Overhead Expenses / Indirect Costs

 Cost incurred in the manufacturing process, but they cannot be traced directly to the goods being produced.  Include indirect materials, indirect labour and indirect expenses.  Examples:
 Indirect materials  Lubricants  Loose tools (opening balance + purchase closing balance)  Indirect labour  wages, salaries, bonus or commission to cleaners, crane drivers, foremen, supervisors and production managers.
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 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

Work in Progress
 It refers to the semi-finished goods, which should be included in the cost of goods manufactured.

Manufacturing Account
 It shows the production cost or transfer price of goods completed during the accounting period.

1. 2. 3. 4. 5. 6.

Direct materials Direct labour Direct expenses Factory overhead expenses Work in progress Manufacturing profit / loss
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Trading Account
 This account shows the gross profit or loss resulted from the trading of manufactured and other purchased goods.  The account includes:
 Sales  Cost of goods sold
 Manufactured goods  Other goods
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Profit and Loss Account

 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  Manufacturing profit / loss

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 Administration expenses  Selling and distribution expenses  Financial expenses  Increase / decrease in the provision for unrealized profit  Net abnormal loss
 cash misappropriated  losses of raw materials  losses of finished goods
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 Some expenses are related to both the manufacturing process and the administration of the office such as:
      Rent and rates Electricity Insurance Depreciation on premises Motor vehicles Motor vehicles expenses
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 These expenses should be allocated to the factory and office and debited to the manufacturing account and the profit and loss account respectively.  The bases of allocation are usually given in the examination questions.

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Format of Manufacturing, Trading and Profit and loss account

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Manufacturing, Trading and Profit and Loss Account for the year ended 31 Dec XXXX $ $ Opening stock of Raw Materials X Add: Purchases of Raw Materials X Carriage inwards X Less: Closing stock of Raw Materials (X) Cost of Raw Materials Consumed X Direct material Direct Labour X Direct labour Royalties X Prime Cost X Direct Expenses Factory Overhead Expenses: Loose Tools (opening bal. + purchases closing bal.) X Rent (e.g. 25%) X Production Managers salaries X Factory Power X Overhead Maintenance of plant & Machinery X Depreciation of Plant & Machinery X X 16 X

Add: Opening Work in Progress Less: Closing Work in Progress Production Cost of Goods Completed Factory profit/(loss) Transfer price of Goods Completed Sales The goods are transferred Less: Returns inwards

Less: COGS Opening stock of finished goods Production cost/Transfer price of Gds completed Less: Returns outwards Fire Loss Less: Closing stock of finished goods Gross Profit Add: Factory Profit Add: Discount Received

to trading a/c at production cost/ transfer price

$ X X X X X X (X) X

X X (X) (X) (X)

X X X X 17 X

Less: Expenses Carriage Outwards Rent (e.g. 75%) Discount allowed Administration Expenses Distribution Expenses Selling Expenses Depreciation of Delivery Van Provision for Unrealized Profit Fire Loss Net Profit

$ X X X X X X X X X

X X

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Production Cost Vs. Transfer Price of Goods Completed

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Production cost Vs. Transfer price

 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.
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Provision of Unrealized Profit

 Be made on the closing stock valued at production cost plus a percentage of factory profit.  Provision for unrealized profit Mark up% = Stock (at transfer price) x 100%+ Mark up(%)
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Example 1

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A company manufactures and sells it own products. It also purchases and sells other finished goods.
Production 100 units Sales 80 units $2@ Closing stock 20 units $1@ Expenses for this period $50 $1@ $100 $160 $20

Prepare manufacturing, trading and profit and loss account for the following 2 situations would be shown:

1. 2.

The factory output is transferred to the trading account at 23 factory cost. The factory output is transferred to the trading account at

1.

Manufacturing, trading and profit and loss account (extract) $ $ 100 160

Production cost of Gd completed (100 units*$1) Sales (80 units*$2) Less: COGS Production cost of Gd completed Less: Closing stock(at cost) (20 units*$1) Gross Profit Less: Expenses Expenses 100 20

80 80

50 30
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2.
$ Production cost of Gd completed (100 units*$1) Add: Manufacturing profit (100*0.2) Transfer price of Gds completed Sales (80 units*$2) Less: Cost of goods sold Transfer price of Gd completed 120 Less: Closing stock(at transfer price) (20+20*0.2) 24 Gross Profit Cost + profit Add: Manufacturing profit Less: Expenses Expenses Provision for unrealized profit (24*20/120) Net Profit $ 100 20 120 160

96 64 20 84

50 4

54 30
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Increase/ Decreased in Provision of Unrealized Profit

Accounting entries
Increase in Provision

Decrease in Provision Dr Provision for Unrealized Profit Cr Profit and Loss

Dr Profit and Loss Cr Provision for Unrealized Profit

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Example 2

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 Goods manufactured are to be transferred to sales department at factory cost plus 20%.
1994 1995 1996 $ $ $ Stock at 1 Jan (at transfer price) - 2,400 3,600 Stock at 31 Dec (at transfer price)2,400 3,600 3,000
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Provision for unrealized profit 1994 $ 1994 Dec 31 Bal c/d (2400*20/120) 400 Dec 31 P/L Profit and Loss account (extract) 94 $ $ X

$ 400

Gross Profit Less: Expenses Increase in provision for unrealized profit

400

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Provision for unrealized profit 1994 $ 1994 Dec 31 Bal c/d (2400*20/120) 400 Dec 31 P/L 1995 Dec 31 Bal c/d (3600*20/120) 1995 Jan 1 Bal b/d Dec 31 P/L

$ 400 400 200 600

600 600 Profit and Loss account (extract)

Gross Profit Less: Expenses Increase in provision for unrealized profit

95 94 $ $ $ $ X X

400

200

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Provision for unrealized profit 1994 $ 1994 Dec 31 Bal c/d (2400*20/120) 400 Dec 31 P/L 1995 Dec 31 Bal c/d (3600*20/120) 1996 Dec 31 1995 Jan 1 Bal b/d Dec 31 P/L 1996 Jan 1 bal b/d

$ 400 400 200 600 600

600 600 100 500 600

P/L

Dec 31 Bal c/d (3000*20/120)

600

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Profit and Loss account (extract) 94 95 96 $ $ $ $ $ $ X X X 100

Gross Profit Add: Decrease in provision for unrealized profit Less: Expenses Increase in provision for unrealized profit

400

200

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Stock Loss

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Stock Loss
i.

Normal loss

Normal losses refer to losses related to the ordinary activities of the business/ Examples: damaged / spoiled stock, obsolete stock No entry is required for normal loss

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ii.

Abnormal loss

Abnormal losses refer to losses not related to the ordinary activities of the business. Examples: fire loss, burglary loss

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Accounting entries Loss of raw materials without an insurance claim Dr Profit and Loss With the total loss Cr Manufacturing Loss of finished goods without an insurance claim Dr Profit and Loss Cr Trading With the total loss

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Loss of raw materials with an insurance claim

Dr Bank/Insurance Company Dr Profit and Loss Cr Manufacturing Dr Bank/Insurance Company Dr Profit and Loss Cr Trading With the insurance claim With the net loss With the total loss With the insurance claim With the net loss With the total loss

Loss of finished goods with an insurance claim

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Cheung Kong Enterprises Manufacturing, Trading and Profit and Loss Account for the year ended 30 April 2004 Cost of raw materials consumed Opening stock Purchase 160,000 1,640,000 1,800,000 200,000 1,600,000 800,000 2,400,000
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Closing stock Manufacturing wages Prime cost

Prime cost Factory overheads Manufacturing expenses Depreciation Opening work in progress Closing work in progress Cost of goods completed 416,000 192,000

2,400,000

608,000 3,008,000 126,000 3,134,000 120,000 3,014,000

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Depreciation Total 2,400,000 x 10% = 240,000 Manufacturing 80% = 192,000

Administration

10% = 24,000

Selling and distribution

10% = 24,000

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