Manufacturing Account

The businesses which produce and sell the items prepare the following accounts at the end of its accounting year:-

a. The Manufacturing account (to calculate the total cost of production)

b. The Trading and profit & loss account (to find out the net profit or loss)

c. The balance sheet.(to show the financial position of the business)

The total cost of production = Prime cost + Factory overhead

The Prime cost = Direct material + Direct labour + Direct expenses

Direct material cost = Opening stock of raw materials + purchase of raw materials +

Carriage inwards – returns outwards – closing stock of raw materials.

Factory overhead expenses = All expenses related to the factory (indirect expenses)

In a manufacturing concern, usually there are three kinds of stocks:

·         Stock of Raw materials (the materials which are mainly used for production of the item)

·         Stock of Work in progress (the materials on which some work process have been completed)

·         Stock of Finished goods (The materials on which all the production processes are completed and    ready for sale to the customers)

In the examination questions, the stock figures will be given separately.

The format of a manufacturing account

             Manufacturing Account For the year ended . . . . . . . . . . . . . . . . .

Opening stock of raw materials	Xxxx
Add purchase of raw materials	Xxxxx
Add carriage inwards ( if any )	Xxxx
	Xxxxx
Less Returns outwards (of raw materials)	Xxxx
	Xxxxx
Less Goods drawings ( if any )	Xxxx
	Xxxxx
Less Closing stock of raw materials	Xxxx
Cost of Direct Materials		xxxxxxx
Add Direct labour		xxxxxxx
Add Direct expenses		xxxxxxx
Prime Cost		xxxxxxx
Add Factory overhead expenses
Factory lighting	xxxxxx
Factory heating	xxxxxx
Factory insurance	xxxxxx
Factory rent	xxxxxx
Factory maintenance	xxxxxx
Factory indirect wages	xxxxxx
Factory supervisor’s wages	xxxxxx	( + )
Depreciation on plant & machinery	xxxxxx
Depreciation on factory building	xxxxxx
Depreciation on factory furniture	xxxxxx
Depreciation on factory motor van	xxxxxx
Depreciation on other factory fixed assets	xxxxxx	XXXXXXX
		XXXXXXX
Add Opening stock of work in progress		xxxxxx
		XXXXXXX
Less Closing stock of work in progress		xxxxxx
Cost of production		XXXXXXX

 Format of trading account of a manufacturing concern

Sales of finished goods		xxxxx
Less Returns inwards		xxxxx
		xxxxxx
Less Production cost of goods sold
Opening stock of finished goods	Xxxxx
Add Cost of production	xxxxxxx	(-)
	xxxxxx
Less closing stock of finished goods	Xxxxx
	xxxxxxx
Less finished goods drawings by the owner	Xxxxx	xxxxxxx
Gross profit or Gross loss		XXXXXX

The profit & loss account and the balance sheet preparations will be the same as that of a sole trader’s. So the students have to follow the previous method for the preparation of these.

Fixed expenses and Variable expenses

Some expenses will remain constant whether the level of activity increases or falls. These expenses are called fixed expenses E.g. rent of building. The expenses which change with changes in activity are called variable expenses. E.g: cost of materials.

Key points:

• Carriage on raw materials means carriage inwards and it is a part of prime cost.
• Carriage outwards is shown in the profit & loss account as an expense.
• Royalties paid is to be treated as direct expense.
• Depreciation on Plant and Machinery or any other factory asset is to be treated as factory overhead expense.
• Stocks of raw materials and work-in-progress are taken in the manufacturing account and stock of finished goods is taken in the trading account.
• Stocks at the end of the year (raw materials, work-in-progress and finished goods) are shown in the balance sheet as current assets.
• Owner’s raw materials drawings are shown in the manufacturing account while calculating the prime cost.
• Finished goods drawings are shown in the trading account while calculating the cost of goods sold.
• The purchase of finished goods is added with cost of production in the trading account.
• The depreciation of any asset used in the office should be shown as an expense in the profit & loss account.
• Cost of readymade items bought for the production of items manufactured should be treated as direct expense.
• Unit cost of production = Total cost of production/ No of units produced

MCQ.

Q 1. The purpose of preparing the manufacturing account is to calculate:

A. Gross profit 

B. Manufacturing profit   

C. Net profit  

D. Cost of production

Q 2. What does production cost include in a manufacturing account?

A Factory power                                      

B. Purchase of raw materials

C Carriage inwards on raw materials     

D. All of these

Q 3. Prime cost includes

A. Factory direct wages                   

B. Factory indirect wages

C. Finished goods                            

D. Work in progress  

Q 4. The costs of a manufacturing firm are as follows: 

	$
Raw materials purchased Direct Labour Cost of Raw material consumed Factory overheads	5000 3000 7000 2000

What was the prime cost?

A. $10000          B. $15000       C. $12000       D. $17000

Q 5. Prime cost In a Manufacturing account is equal to

A. All factory indirect costs              

B. All factory costs

B. Direct factory costs only              

D. Direct materials plus direct expenses

Q 6. Carriage outward in manufacturing concern is included in which heading?

A. Direct expenses                         

B. Factory overhead expenses

C. Administrative expenses            

D. Selling and distribution expenses

Q 7. Which of the following is not included in the Manufacturing account?

A. Foreman’s wages                      

 B. Depreciation on factory machinery

C. Indirect wages                            

D. Depreciation on office equipment

Q 8.      The following table shows the cost incurred for the production of an item.

Direct materials                $ 1200

Direct wages                      $ 700

Manufacturing expenses   $ 100

Factory overhead expenses $ 300

What is the amount of prime cost?

A. $ 2300          B. $ 2 000         C. $ 1 700         D. $ 3 000

Q 9. How is the production cost calculated in a manufacturing account?

A. Prime cost + administrative expenses

B. Prime cost + administrative expenses

C. Prime cost + Factory overhead expenses

D. Raw materials + direct labour.

Q 10.    Which on of the following is not factory overhead expense?

A. Wages of cleaners                

B. Carriage on raw materials

C. Factory lighting                    

D. Factory power

Q 11.Which are the stock figures shown in the manufacturing account?

A. Finished goods and raw materials      

 B. Finished goods only

C. Raw materials and working progress  

D. Finished goods, working progress and raw materials.

Q 12. In the balance sheet of a manufacturing concern, which stock is shown?

A. Finished stock                      

B. Raw materials

C. Work in progress                  

D. All three.

Q 13.    A manufacturing firm’s costs were as follows:

Raw materials                                          55000

Direct labour                                            86400

Factory overhead                                   122000

Depreciation of plant                                 6400

Administrative expense                             8800

Selling & distribution expense                 12000

There was closing work in progress of    12400

What was the factory cost of production?

A.  257400      B. $ 263400      C. 269800 D. 278200

Q 14 The material drawings are shown in the:

A. trading account                     

B. profit & loss account

C. manufacturing account          

D. balance sheet only

Q 15 Royalties paid by a manufacturer is:

A. shown as factory overhead    

B. a part of prime cost.

C. a selling expense                 

D. an indirect expense.

Assignment questions

Q 1. Jo Towbury is a manufacturer and the following balances appeared in his books for the year ended   31^st Dec 2002:-

Stocks on 1-1-2002:- $

Raw materials                            2000

Work in progress                          850

Finished goods                           1280

Stocks on 31-12-2002:-

Raw materials                            1250

Work in progress                          750

Finished goods                            1120

Purchase of raw materials           8700

Fuel and power                              990

Direct expenses                              200

Factory insurance                           300

Depreciation of factory plant          420

Insurance of office machinery        150

Wages – factory                             3970

Carriage on raw materials                120

Sales of finished goods                 38000

Return outwards                                250

Return inwards                                  300

Required to prepare:

a. The Manufacturing account for the year ended 31^st Dec 2002.

b. The trading & profit & loss account for the year ended 31^st Dec 2002. 

Q 2 The following balances are available from the books of a manufacturer for the year ended

31^st Dec 2002:-

Account balances	$
Stocks on 1-1-2002:-   Raw materials	4914
Work in progress	300
Finished goods	2592
Purchase of raw materials	42786
Manufacturing wages	46800
Direct expenses	3600
Sales of finished goods	120000
Salaries	6720
General expenses	5493
Carriage inwards	696
Discount allowed	1530
Depreciation on :-         Plant & machinery	4800
Factory building	280
Office building	450
Stocks on 31-12-2002:-  Raw materials	2058
Work in progress	600
Finished goods	3714

·         General expenses include $ 592 incurred for the factory.

·         Carriage outstanding on 31-12-2002 was $ 400.

Required to prepare Manufacturing, trading and profit & loss account for the year ended 31^st Dec 2002. 

Q 3. On 31^st Dec 2003, the following balances appeared in the books of A. Allen, a manufacturer of a specialized product::- 

Stocks on	1-1-2003	31-12-2003
Raw materials	1000	6000
Work in progress	25000	19000
Finished goods	61000	45000

$

Purchase of raw materials ———————–          125000

Carriage inwards ————————————–        5000

Sales less returns  ——————————–           431220

Advertisement —————————————–        4000

Insurance of the office building ——————-         1000

Bank charges ——————————————         250

Salaries ———————————————–        22000

Bad debts  ———————————————-      1700

Power charges ————————————–         35000

Gas & water ——————————————-       5000

Carriage outwards ———————————–              2000

Factory rent ——————————————            12000

Factory rates & taxes   —————————–               2200

Insurance of plant ———————————–              6000

Direct wages —————————————-             75000

Depreciation of plant ——————————             40000

Depreciation of office furniture ——————-             1000

Office insurance prepaid —————————-             200

Salaries outstanding (31-12-2003)————-                 2000

Power charges outstanding(31-12-2003) —–                 5000

Rates & taxes prepaid   (31-12-2003)———-               1000

Required to prepare at 31^st Dec 2003:-

a. The manufacturing account clearly showing the prime cost and the cost of production

b. The trading and Profit & Loss account showing the gross profit or loss and net  profit or loss.

Q 4. From the following items appeared in the books of a manufacturer, for the year ended 31^st March 2003, prepare the Manufacturing account and the trading & profit and loss account for the same date. 

Items	$
Stocks on 1-4-2002:- Raw materials	16000
Work in progress	1000
Finished goods	8640
Purchase of raw materials	142620
Factory wages	148000
Indirect wages	8000
Rent, rates & taxes (factory)	7200
Lighting & heating (factory)	600
Electricity	9400
Repairs to factory buildings	800
Carriage outwards	2320
Carriage inwards	12000
Salaries	22000
General expenses	19310
Cash discount allowed	5100
Sales	400000
Advertisement	2500
Depreciation on fixed assets:- Plant	16000
Factory building	600
Office furniture	500
Stocks on 31-3-2003:- Raw materials	6860
Finished goods	12000
Work in progress	2000

 *Electricity expenses are to be charged to Factory and Office in the ratio of 3:2.

*Salaries owing on 31-3-2003 was $ 2400

*Rent, rates and taxes include rent paid in advance $ 200.

*There was an item of cash discount received $ 300 which did not appear in the books

of the business.

*During the year, the owner had taken finished goods costing $ 4000 for his own use.

*This transaction was not recorded in the books of the business.

Q 5. Prepare Manufacturing, trading and profit & loss account from the following balances extracted

form the books of Berten, a Manufacturer, for the year ended 31^st Dec 2003:

$

Stock at 1^st Jan 2003:-   Raw materials   ————-          17450

Work in progress————                                                17500

Finished goods ————–                                                20300

Purchases of raw materials  ——————————      73480

Carriage on raw materials   ——————————–      1280

Direct labour cost          ———————————–      64350

Office salaries  ———————————————–   15400

Rent     ———————————————————    3000

Office lighting &n heating            ————————      5300

Depreciation on :-   Works  Machinery —————–     6000

office equipment ——————-                                    1900

Sale of finished goods ———————————— 202000

Factory fuel & power —————————————- 3250

Insurance  —————————————————–  2500

*Rent and insurance are to be apportioned: Factory   3/5, Office  2/5

*Fuel & power unpaid on 31^st Dec 2003 amounted to $ 300.

*The stock figures on 31^st Dec 2003 were;-

Raw materials        18300

Work in progress   16700

Finished goods       22465

Q 6. Jo Towbury is a manufacturer and the following balances appeared in her books at 31^st Dec 2003, the end of her business financial year.

Stock at 1^st January 2003:-

Raw materials                              15000

Work in progress                           2000

Finished goods                             20500

Wages:

direct manufacturing                  300200

factory supervisors                       40000

general office                               20200

warehouse                                    25500

Heating & lighting                       12000

Carriage outwards                           920

Purchase of raw materials         212000

Administrative expenses               2500

Sales                                          950000

Stock at 31^st Dec 2003:-

Raw materials                             12500

Work in progress                          3100

Finished goods                            20000

Notes

Heating & lighting is to be apportioned:-

Factory                  ½

Warehouse            1/3

Office                   1/6

Warehouse costs are to be included in the trading account.

Prepare for Jo Towbury, for the year ended 31^st Dec 2003:

a. The manufacturing account, clearly showing the prime cost and the cost of production.

b. The trading account, showing the gross profit or gross loss.

Q 7. Fred Dyer, a manufacturer of furniture, rents premises which consist of a workshop in which the furniture is made and a shop through which the furniture is sold. For the year ended 31^st Dec 2003, the following information is available:-

Stocks on 1^st Jan 2003:-

Raw materials                           2450

Work in progress                      2000

Finished goods                          6700

Stocks on 31^st Dec 2003:-

Raw materials                           1900

Work in progress                      2460

Finished goods                         5320

 During the year ended 31^st December 2003:-

Purchase of raw materials                        15300

Purchase of readymade handles& locks       850

Sales of finished goods                             81900

Rent of premises                                         1500

Wages (work shop)                                   24000

Wages (shop)                                              6200

Electricity                                                   1350

Motor vehicle expenses for delivery of

Finished goods to customers                      1500

Depreciation of workshop machinery        2500

Purchase of new workshop machinery      3000

Fred Dyer apportions the cost of the rent and the electricity between the workshop and the shop in the ratio of 2:1. He does not maintain any readymade handles and locks.

Prepare for the year ended 31^st Dec 2003:-

i. A manufacturing account showing clearly the prime cost and the cost of production.

ii. A trading account showing the gross profit or gross loss.

iii. Calculate the % of gross profit on sales.

Q 8. Mann is a manufacturer of minicomputer, provides you the following information for the year ended  30^th June 2002

Stocks	1-7-2001	30-6-2002
Raw materials	$ 19 000	$ 24 500
Work in progress	$ 40 000	$ 15 000
Finished goods	160 units	?

The following details are also available for the year ended 30^th June 2002:-

	$
Purchase of raw materials	199000
Carriage inwards	14000
Return inwards	1590
Carriage outwards	4100
Return outwards	600
Rent and rates	14000
Lighting and hearting	7600
Direct factory expenses	10900
Factory labour ($38 000 direct and $ 4000 indirect)	42000
Factory machinery (cost)	60000
Office machinery(cost)	96000
Indirect expenses	3600
Office staff salary	14600
License and taxes	3910
Factory supervisors salary	9000

Notes:-

1. Lighting charges unpaid by $ 400 on 30^th June 2002.
2. Allocate lighting & heating and rent & rates in the ratio of 3:2 between factory and office.
3. Depreciate all the fixed assets @ 20% p.a. on cost.
4. During the year 620 computers were produced and 480 computers were sold for $ 590 each.

Prepare the manufacturing account for the year ended 30^th June 2002 showing clearly the prime cost and cost of production.

Q 9. James is a manufacturer of a single product. He provides the following information relating to his business for the years ended 31^st December 2003.

Stocks	On 1-1-2003	0n 31-12-2003
Raw materials	$    13500	$   14800
Work in progress	$      1000	$      730
Finished goods(at factory cost)	85 units	?

For the year ended 31st December 2003	$
Purchase of raw materials	97150
Carriage inwards	1200
Manufacturing wages	32100
Factory power	5310
Rent and rates	4000
Direct factory expenses	985
General expenses(factory)	1835
Returns outwards	850
Plant and machinery at cost	44800

 Additional information

1. Manufacturing wages outstanding $ 300
2. Depreciate plant and machinery at 10% p.a. on cost
3. Rent rates are to apportioned to the factory and to the office in the ration of 3:1
4. The cost of production for the year ended 31^st December 2002 was $125per unit
5. During the year 2003, 1120 units were produced and 1095 units were sold for $ 210 each.

Prepare the manufacturing account and trading account for the year ended 31^st December 2003, clearly showing the cost of raw materials consumed, prime cost and cost of production per unit.

One day in life you will thank me for putting you in extreme pressure!