Manufacturing Accounts (Copy)
5.5 Manufacturing Accounts
Nature of Manufacturing Accounts
- A manufacturing business produces goods rather than buying and selling them.
- In addition to an income statement and statement of financial position, a manufacturing business also prepares a manufacturing account.
- The manufacturing account calculates the total cost of goods produced during the period (factory cost of production).
- This cost is then transferred to the income statement for calculation of gross profit.
Direct and Indirect Costs
Direct Costs
- Costs that can be traced directly to the production of goods.
- Examples:
- Direct materials – raw materials used in production
- Direct labour – wages of workers directly involved in production
- Direct expenses – costs specifically related to the production, e.g., royalties per unit produced
Indirect Costs
- Costs that cannot be directly traced to a specific product.
- Also called factory overheads.
- Examples:
- Factory rent
- Factory lighting
- Depreciation of factory machinery
- Indirect labour (e.g., supervisors, cleaners)
Key Terms
- Direct materials consumed
= Opening inventory of raw materials- Purchases of raw materials
− Closing inventory of raw materials
- Purchases of raw materials
- Prime Cost
= Direct materials consumed- Direct labour
- Direct expenses
- Factory Overheads
= All indirect production costs - Total Factory Cost (Cost of Production)
= Prime Cost- Factory overheads
- Opening work in progress
− Closing work in progress
Work in Progress (WIP)
- Work in progress refers to goods partially completed at the beginning or end of the accounting period.
- Must be adjusted to ensure that only the cost of goods fully completed during the year is recorded.
- Included in manufacturing account as:
+ Opening WIP – Closing WIP
Structure of a Manufacturing Account
Manufacturing Account for the Year Ended 31 December 20XX
| Particulars | Amount ($) |
|---|---|
| Opening inventory of raw materials | 5,000 |
| Add: Purchases of raw materials | 20,000 |
| Less: Closing inventory of raw materials | (4,000) |
| Direct materials consumed | 21,000 |
| Add: Direct labour | 18,000 |
| Add: Direct expenses | 1,000 |
| Prime Cost | 40,000 |
| Add: Factory rent | 6,000 |
| Add: Depreciation – machinery | 4,000 |
| Add: Factory supervisor’s wages | 3,000 |
| Total factory overheads | 13,000 |
| Total production cost (before WIP) | 53,000 |
| Add: Opening work in progress | 2,000 |
| Less: Closing work in progress | (3,000) |
| Factory Cost of Production | 52,000 |
- The Factory Cost of Production is transferred to the Income Statement under the Cost of Sales section.
Link to Income Statement
- The income statement of a manufacturing business includes:
- Factory cost of production (from manufacturing account)
- Add: Opening inventory of finished goods
- Less: Closing inventory of finished goods
- = Cost of sales
Cost of Sales =
= Factory cost of production
- Opening finished goods inventory
− Closing finished goods inventory
Income Statement for Manufacturing Business
| Particulars | Amount ($) |
|---|---|
| Sales | 100,000 |
| Less: Cost of sales: | |
| – Factory cost of production | 52,000 |
| – Add: Opening inventory of finished goods | 6,000 |
| – Less: Closing inventory of finished goods | (5,000) |
| Total cost of sales | 53,000 |
| Gross profit | 47,000 |
| Less: Expenses (admin, selling, etc.) | (15,000) |
| Net profit | 32,000 |
Statement of Financial Position
- Same format as for other businesses but includes:
- Raw materials inventory
- Work in progress
- Finished goods inventory
- Factory equipment or machinery under non-current assets
Adjustments Required (Same as Sole Traders)
- Depreciation on factory equipment
- Accruals and prepayments for factory expenses
- Inventory valuation (materials, WIP, finished goods)
- Irrecoverable debts (for credit customers)
- Provision for doubtful debts
- Accrued and prepaid income