1

Manufacturing Account

2

Production Cost

Production cost

= Prime cost / Direct cost + Factory overhead

expenses / Indirect cost

3

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

4

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

5

3. Direct expenses

• They refer to the expenses paid according to each

unit of production.

• Examples: Royalties

6

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.

7

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

8

Work in Progress

It refers to the semi-finished goods, which should

be included in the cost of goods manufactured.

9

Manufacturing Account

It shows the production cost or transfer price of

goods completed during the accounting period.

1. Direct materials

2. Direct labour

3. Direct expenses

4. Factory overhead expenses

5. Work in progress

6. Manufacturing profit / loss

10

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

11

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

12

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

13

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

14

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.

15

Format of Manufacturing, Trading

and Profit and loss account

16

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 Labour X

Royalties X

Prime Cost X

Factory Overhead Expenses:

Loose Tools (opening bal. + purchases –closing bal.) X

Rent (e.g. 25%) X

Production Manager’s salaries X

Factory Power X

Maintenance of plant & Machinery X

Depreciation of Plant & Machinery X X

X

Direct material

Direct labour

Direct Expenses

Overhead

17

Add: Opening Work in Progress X

Less: Closing Work in Progress X

Production Cost of Goods Completed X

Factory profit/(loss) X

Transfer price of Goods Completed X

$ $

Sales X

Less: Returns inwards (X)

X

Less: COGS

Opening stock of finished goods X

Production cost/Transfer price of Gds completed X

Less: Returns outwards (X)

Fire Loss (X)

Less: Closing stock of finished goods (X) X

Gross Profit X

Add: Factory Profit X

Add: Discount Received X

X

The goods are transferred

to trading a/c at production

cost/ transfer price

18

$ $ Less: Expenses

Carriage Outwards X

Rent (e.g. 75%) X

Discount allowed X

Administration Expenses X

Distribution Expenses X

Selling Expenses X

Depreciation of Delivery Van X

Provision for Unrealized Profit X

Fire Loss X X

Net Profit X

19

Production Cost

Vs.

Transfer Price

of Goods Completed

20

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.

Production cost Vs. Transfer price

21

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%

100%+ Mark up(%) = Stock (at transfer price) x

22

Example 1

23

A company manufactures and sells it own products.

It also purchases and sells other finished goods.

Production 100 units $1@ $100

Sales 80 units $2@ $160

Closing stock 20 units $1@ $20

Expenses for this period $50

Prepare manufacturing, trading and profit and loss

account for the following 2 situations would be

shown: 1. The factory output is transferred to the trading account at

factory cost.

2. The factory output is transferred to the trading account at factory cost plus 20% factory profit, and the stock of manufactured goods is valued at transfer price.

24

1.

$ $

Production cost of Gd completed (100 units*$1) 100

Sales (80 units*$2) 160

Less: COGS

Production cost of Gd completed 100

Less: Closing stock(at cost) (20 units*$1) 20 80

Gross Profit 80

Less: Expenses

Expenses 50

30

Manufacturing, trading and profit and loss account (extract)

25

2.

$ $

Production cost of Gd completed (100 units*$1) 100

Add: Manufacturing profit (100*0.2) 20

Transfer price of Gds completed 120

Sales (80 units*$2) 160

Less: Cost of goods sold

Transfer price of Gd completed 120

Less: Closing stock(at transfer price) (20+20*0.2) 24 96

Gross Profit 64

Add: Manufacturing profit 20

84

Less: Expenses

Expenses 50

Provision for unrealized profit (24*20/120) 4 54

Net Profit 30

Cost + profit

26

Increase in Provision Decrease in Provision

Dr Profit and Loss

Cr Provision for Unrealized Profit

Dr Provision for Unrealized Profit Cr Profit and Loss

Accounting entries

Increase/ Decreased in Provision

of Unrealized Profit

27

Example 2

28

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

Prepare the provision for unrealized profit account, profit

and loss account and balance sheet respectively for the

three years

29

Provision for unrealized profit 1994 $ 1994 $

Dec 31 Bal c/d

(2400*20/120) 400 Dec 31 P/L 400

Profit and Loss account (extract)

94

$ $ Gross Profit X

Less: Expenses

Increase in provision for unrealized profit

400

30

Provision for unrealized profit 1994 $ 1994 $

Dec 31 Bal c/d

(2400*20/120) 400 Dec 31 P/L 400

1995 1995 Dec 31 Bal c/d

(3600*20/120) 600

Jan 1 Bal b/d 400

Dec 31 P/L 200

600 600

Profit and Loss account (extract)

94

$ $ Gross Profit X X

Less: Expenses

Increase in provision for unrealized profit

95

$ $

400 200

31

Provision for unrealized profit 1994 $ 1994 $

Dec 31 Bal c/d

(2400*20/120) 400 Dec 31 P/L 400

1995 1995 Dec 31 Bal c/d

(3600*20/120) 600

Jan 1 Bal b/d 400

Dec 31 P/L 200

1996 1996

600 600

Jan 1 bal b/d 600

Dec 31 Bal c/d

(3000*20/120) 500

Dec 31 P/L 100

600 600

32

Profit and Loss account (extract)

94

$ $ Gross Profit X X X Add: Decrease in provision for unrealized profit 100

Less: Expenses

Increase in provision for unrealized profit

95

$ $

96

$ $

400 200

33

Stock Loss

34

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

35

ii. Abnormal loss

• Abnormal losses refer to losses not related to the

ordinary activities of the business.

• Examples: fire loss, burglary loss

36

Loss of raw materials without an insurance claim

Dr Profit and Loss

Cr Manufacturing

With the total loss

Loss of finished goods without an insurance claim

Dr Profit and Loss

Cr Trading

With the total loss

Accounting entries

37

Loss of raw materials with an insurance claim

Dr Bank/Insurance Company

Dr Profit and Loss

Cr Manufacturing

With the insurance claim

With the net loss

With the total loss

Loss of finished goods with an insurance claim

Dr Bank/Insurance Company

Dr Profit and Loss

Cr Trading

With the insurance claim

With the net loss

With the total loss

38

Cheung Kong Enterprises

Manufacturing, Trading and Profit and Loss Account for the year

ended 30 April 2004

Cost of raw materials consumed

Opening stock 160,000

Purchase 1,640,000

1,800,000

Closing stock 200,000 1,600,000

Manufacturing wages 800,000

Prime cost 2,400,000

39

Prime cost 2,400,000

Factory overheads

Manufacturing expenses 416,000

Depreciation 192,000 608,000

3,008,000

Opening work in progress 126,000

3,134,000

Closing work in progress 120,000

Cost of goods completed 3,014,000

40

41

42

43

44

45

46

47

48

49

50

Depreciation Total 2,400,000 x 10% = 240,000

Manufacturing 80% = 192,000

Administration 10% = 24,000

Selling and distribution 10% = 24,000