12 manufacturing a/c 12 manufacturing a/c Examining the preparation of the manufacturing a/c.

12 12 manufacturing a/cmanufacturing a/c

Examining the preparation of the manufacturing a/c

JAN 2010 CIMA C2 YUAN LI 2

TopicsTopics

Theory Proformas


12.1 Introduction

Forms part of the income statement for a business that manufactures goods for resale

Inventories may include raw materials, work-in-progress, finished goods.

Ledger a/cs as usual but may need to apportion some expenses between ledger accounts

Manufacturing a/c = part of double entry


12.2.1 Inventories in manufacturing organisations

● raw materials;

● work in progress (partly finished goods);

● finished goods;

● bought-in goods.


Trading a/c vs. Trading a/c vs. manufacturing a/cmanufacturing a/c

trading account to show the sales revenue the cost of goods sold not the cost of goods manufactured

bring together opening inventories of

finished goods

cost of completed goods manufactured during the period

less closing inventories of finished goods


Manufacturing a/c, containing

Trading a/c vs. Trading a/c vs. manufacturing a/cmanufacturing a/c

all of the Manufacturing

costs

opening and closing inventories

of raw materials

work in progress

with adjustments forExpenses, no revenue


12.3 Costs to include in the manufacturing account

raw materialsOther direct costsPrime costIndirect costs


raw materials consumed

opening inventories of raw materials

+ purchases of raw materials (including carriage inwards and less returns)

- closing inventories of raw materials.


direct costsraw materialsDirect labour (also known as production labour)

wages and associated costs of those producing the goods

Direct expenses Other costs that can be identified with units of producti

on equipment hire for a special production run, power cos

ts for a particular machine, and royalties payable on the production of certain products


Prime costthe total of direct costs

direct materials consumed

direct labour

direct expenses (if any)

should be clearly shown as a subtotal in the manufacturing account.


Indirect costsinclude all the other costs of manufacturing that a

re not part of prime cost Also known as manufacturing overheads,

production overheads or factory overheadse.g.

factory rent; factory heating, lighting and insurance; wages and salaries paid to factory supervisors and ma

intenance engineers (also known as indirect factory labour );

depreciation of non-current assets used in manufacturing


Indirect costsonly costs associated with manufacturing

are included

not include costs associated with selling, distribution of goods sold or general administrative costs


Factory cost of productionthe total of prime cost and indirect costs

consumed in the factory

subtotal to be shown in the manufacturing account


Work in progressThe factory cost of production is the total

of new costs introduced to the factory

need to adjust the factory cost of production to add in the opening work in progress and deduct the closing work in progress


Factory cost of goods completed

the end result of the manufacturing account

its balance is incorporated into the trading account


Direct costs – attributable to product and includes material, labor and expenses

Prime cost – total of direct expensesIndirect costs – overheads Factory costs – direct costs + factory overheads Work-in-progress (WIP) – part complete unitsFactory cost of goods completed – factory cost

after adjusting for WIP. This is the figure transferred to the trading account.

Definitions Definitions


Layout of manufacturing and trading accounts

P 416


Proforma – income statement Proforma – income statement Sales X

Less returns inwards (X)

Net sales X

Opening stock of finished goods X

Opening stock – raw material X

Purchases – raw material X

Closing stock – raw material (X)

Raw material consumed X

Direct labor X

Direct expenses X

Prime cost

Production overhead e.g. factory rent, heating X

Factory cost X

Opening WIP X

Closing WIP (X)

Factory cost of goods completed X

X

Less closing inventories of finished goods (X)

Cost of goods sold X

Gross profit X


Study tip Study tip

Note carefully the layout of the manufacturing account

Note that the highlighted items are in the trading account, and the other items are in the manufacturing account


Proforma Income statementProforma Income statementThe trading account almost the same as that

for a sole trader but “purchases” are replaced by “factory cost of goods completed”


Income statement for manufacturing organisations

Two sub-sections – the manufacturing account and the trading account

Sundry revenues all other expenses incurred


Proforma Income statement Proforma Income statement Gross profit X

Less expenses, e.g.

Wages (X)

Heating and lighting (X)

Administration (X)

Rent (X)

Discounts allowed and received (X)

Carriage outwards (X)

Net profit X


Note Note

It is possible that a computer based assessment question would give a total figure for, say, heating and lighting that you would need to split across factory (thus manufacturing a/c) and warehouse/offices (S&D and Admin, in IS). This percentage split would be given in the question


Study tip Study tip From gross profit to net profit is essentially the same as for the sole trader


Statements of financial position for manufacturing organisationsraw materials;work in progress;finished goods (manufactured goods);bought-in goods for resale


Froforma – Balance sheetFroforma – Balance sheetbalance sheet as at …balance sheet as at … $’00$’00

00 $’000$’000Assets

Non-current assets

Buildings X

Equipment X

X

Current assets

Inventories – raw materials X

Inventories – WIP X

Inventories – finished goods X

Receivables X

Bank/cash X

X

X

Capital and liabilities

Capital X

Profit X

Drawings (X)

X

Non-current liabilities

bank loan X

Current liabilities

Payable X

Bank overdraft X

X

X


Study tip Study tip The major difference from the sole trader

is the inclusion of various types of inventories


12.7 The accounting system for manufacturing organisationssame as for other organisations, additional

ledger a/c include:direct factory labour indirect factory labour inventories of work in progress and finished go

ods


12.7 The accounting system for manufacturing organisationspart of the double-entry bookkeeping

system

items in it will all have an equivalent opposite entry in either the nominal ledger or the trading a/c


12.7 The accounting system for manufacturing organisationsexpenses such as direct factory labour will be de

bited to the direct factory labour ledger account during the year, at the end of the year, the balance will be transferred to the manufacturing account

Dr. manufacturing account Cr. direct factory labourbalance on the manufacturing account is transfer

red to the trading account at the end of the year Dr. trading account Cr. manufacturing account


NoteNoteAim in the manufacturing account is to arrive at

the total cost of manufacturing the finished goods completed in the year the costs directly attributable to the goods produced

(such as the raw materials they contain, and the wages of personnel directly involved in manufacturing);

the indirect factory costs (sometimes called factory overheads). These might include the costs of heating and lighting the factory, the rent on factory premises and the wages of factory supervisors;

an adjustment for opening and closing work in progress, similar to the treatment of opening and closing inventories of finished goods in a trading account


Example 12.A on P418

JAN 2010 CIMA C2 YUAN LI 33636,000


D F


28,400


A

JAN 2010 CIMA C2 YUAN LI 37169,000

12 manufacturing a/c 12 manufacturing a/c Examining the preparation of the manufacturing a/c.

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