In order to ascertain the cost of producing the goods a manufacturing account is prepared. This account is also normally prepared at the end of the accounting period. Both direct and indirect expenses associated with the manufacturing process debited to the manufacturing account. The balance of this account representing cost of the goods produced is then transferred to the trading account.
2. Manufacturing Business
MANY BUSINESS ENTITIES
ENGAGE IN MANUFACTURING
ACTIVITIES AND THIS INVOLVES:
The purchasing of raw
materials
Incurring labor
and other cost
IN CONVERTING THE RAW
MATERIALS INTO FINISHED
GOODS.
3. Manufacturing Business
In order to ascertain the cost of producing the
goods a manufacturing account is prepared.
This account is also normally prepared at the
end of the accounting period. Both direct and
indirect expenses associated with the
manufacturing process debited to the
manufacturing account. The balance of this
account representing cost of the goods
produced is then transferred to the trading
account.
4. Manufacturing Business
The order of presentation of the final accounts is
as under:
(a) Manufacturing Account Part
(b) Trading Account Part
(c) Profit and Loss Account Part
(d) Balance Sheet Part.
5. Division of Costs
Direct Materials
Direct Labour Prime
Cost Production
Direct Expenses
Cost
Plus
Factory Overhead Total
Cost
Plus
Administrative Expenses
Selling & Distribution Expenses
Financial Charges
6. Production Cost
Prime Cost xxxxx
Add: Factory Overhead xxxxx
Production cost xxxxx
(Production Cost = Prime cost (Direct Cost)+
Factory overhead expenses (Indirect cost)
7. Prime Cost
Direct Material xxxxx
Add: Direct Labour xxxxx
Direct Expenses xxxxx
Prime Cost xxxxx
(Prime Cost = Direct Material+ Direct Labour + Direct Expenses)
8. 1. Direct materials
• Costs of the materials used during the period.
• Include Opening Inventory of Raw Materials
• + Purchase price of the raw materials and the acquisition costs related to the
purchase.
• - Closing Inventory of Raw Materials
• Examples:
Opening Inventory of Raw Materials xxxxx
Add: Purchase of raw materials xxxxx
Carriage inwards / freight charges xxxxx
Available for use xxxxx
Less: Closing Inventory of Raw Materials (xxxx)
Direct Material used xxxxx
9. 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
• Wages of a machine operator making a particular item
3. Direct Expenses
• They refer to the expenses paid according to each unit of production.
• Examples: Royalties
11. Factory Overhead
(Indirect Manufacturing Costs)
Factory Overhead or Indirect Manufacturing Costs are all
those costs which occur in the factory or other place
where production is being done, but which cannot be
traced to the items being manufactured.
Example:
Wages of Cleaner
Wages of Crane operator
Wages of Supervisors
Rent and Rates of Factory
Depreciation of Plant and Machinery
Factory Power
Factory Lighting
12. Factory Overhead
(Indirect Manufacturing Costs)
Factory Overhead or Indirect Manufacturing Costs are all
those costs which occur in the factory or other place where
production is being done, but which cannot be traced to the
items being manufactured.
14. Work in Process
It refers to the semi-finished goods, which should be included in the cost of goods
manufactured.
The opening inventory of the Work In Process should be added
And
The closing inventory of the Work In Process should be subtracted
Direct Materials
Direct Labour Prime
Direct Expenses Cost Production
Total Cost of Goods
Plus Cost Manufactured
Factory Overhead
Plus Work in Process (opening)
Less Work in Process (Closing)
16. (b) Trading Account
This includes:
Production cost brought down from Manufacturing Account
Opening and Closing Stock of Finished Goods
Sales
17. (c) Profit & Loss Account
This includes:
Gross Profit brought down from Trading Account
All administrative expenses
All selling and distribution Expenses
All Financial Charges
18. (d) Balance Sheet
This includes:
All Assets (Current & Fixed)
All Liabilities (Current & Long-term)
All Capital & Drawing and Net Profit or Loss