The Hong Kong Management Association
HK Hong Kong Polytechnic Joint Diploma s::tA
MA in Management Studies tttl
LECTURE 9 - Manufacturing Accounts
1. Elements of Cost
The elements of the total cost of a product may be analysed as:-
Direct material cost X
Direct wages X
Direct expenses X
Prime cost X
Production ( manuracturing ) overhead X
Production ( factory ) cost X
Administration overhead x
Selling and distribution overhead x x
Total Cost x
Direct Material Cost
The necessary ingredients in the production of the goods and the costs of materials used in
making a product.
Direct Wages
They are the specific costs of the workforce used to make a product or can be accurately
identified with the product.
Direct Expenses
Expenses incurred in full as a direct consequence of making a product and capable of direct
Identification with production.
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1. Elements of Cost Continued.
Production Overhead
All indirect material cost, direct wages and indirect expense incurred in the course of
making a product, but which cannot be traced directly to specific units of product.
Administration Expense
Expenses incurred in the direction, control and administration of the firm as a whole and
not directly related to the manufacturing or selling and distribution functions.
Selling and Distribution
Expenses incurred in advertising and other promotional activities, and those concerned with
delivering the goods to customers.
Prime Cost - The aggregate of all direct costs.
Overhead - The aggregate of all indirect costs.
Total Cost - The sum of prime cost and overhead.
2. Purpose of Mannfact.uring Accounts
The Manufacturing Account is an extension of the Trading Account, being prepared by
those firms engaged in a manufacturing process.
The purpose is twofold:-
1. To find the cost of goods manufactured
2. To ascertain the amount of any profit on the manufacturing process.
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3. Cost of Manufacturing
This is obtained by taking into account all those items of expense which relate to the
manufacturing process.
For convenience of comparison and analysis the items making up the total cost are
separated in the Manufacturing Account as:-
1. Direct Costs -
Those which can be attributed to a particular unit of production and will normally be.
I. Direct materials
2. Direct wages
3. Direct expenses
2. Production or manufacturing overhead -
These are production expenses which cannot be attributed to a particular unit or
production, but which are incurred to keep the factory running. Examples may include.
1. salaries of supervisors
2. factory power
3. plant repairs
4. factory rent
5. depreciation of the factory building
6. depreciation or plant and machinery
7. factory rates
8. cleaning materials
9. other general expenses relating to the factory.
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4. Apportionment of overheads
Some items of expense relate not only to manufacturing, bu. also to selling and
administration. In such cases, these costs should be apportioned among manufacturing
overhead; selling and administration expenses.
Examples may include.
1. rent and rates of premises, where the same building is used as a factory,
administration office and sales office.
2. heating and lighting or shared premises.
3. canteen costs
4. telephone expenses ( unless telephone are separately metered and invoked.)
5. depreciation of equipment and building.
5. Stocks - A manufacturing firm has three forms of stocks.
l. Direct materials
Items of raw materials purchased from suppliers and held in store, but not yet used for
producing any manufacturing goods.
'
2. Work-in-progress
Items of partially completed goods, and still bring worked on in the factory at the end of
the period.
3. F1nished Goods
Items which are completed but not yet sold to customers and so held in store.
In calculating the cost of production during a period, account must be taken of the
opening and closing stock levels, both of raw materials and also of work in progress.
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6. Transfer to Trading Account
It is usual to regard the factory as quite distinct from the warehouse, thus the total
production cost is transferred to the Trading Account:
Method 1.
The transfer can be made at the actual factory cost or
Method 2.
Sometimes the transfer is made at a "loaded" price ( price at which the finished goods
could be obtained if purchased elsewhere at wholesale prices ) in order to obtain a separate
profit OR loss in the manufacturing process.
The douhle entry in the accounts is for
Method t. - The transfer of finished goods is
Debit Trading Account
Credit Manufacturing Account
Method 2. - The factory profit
Debit Manufacturing Account
Credit Profit and Loss Account
7. Provision for unr~alized profit account
When the goods produced are charged out from the factory to the selling department at a
price in excess of manufacturing cost, it will be necessary at the end of each accounting
period in order to arrive at the true profit, to provide in the accounts for the unrealized
profit included in the valuation of the stock of finished goods carried forward.
Provision for unrealized profit account
Dec 31 Provision on stocks at elf Jan I Provision on stocks at b/f
December 31 X January I X
Profit and Loss Account X
x x
N.B. 1. The provision for unrealized profit account is prepared in the same way as a
provision for Bad Debts Account.
N .B. 2. The balance on the provision for unrealiz<'Al Profit Account will be deducted from
the closing stock of finished goods on the Balance Sheet.
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8. Detailed layout of manufacturing account
PROFORMA MANUFACTURING ACCOUNT
Direct Materials consumed
Opening stock of raw materials x
Purchases of raw materials x
x
Less: Closing stock of raw materials x x
Direct wages x
Direct expenses x
Prime cost x
Production ( Manufacturing ) overhead
Factory power x
Factory rent/rates x
Factory insurance x
Factory light and heat x
Plant repairs x
Plant depreciation x x
x
Add: Opening work in progress x
Deduct: Closing work in progress (X)
Factory cost of goods produced x
Add: Factory Profit x
Transfer Price of Finished Goods Produced x
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Example 1
David Chow owns and manages a small manufacturing business.
Shown below are the balances that have been extracted from his books of account as at
31 March l 9X2:
Dr.$ Cr. $
Administration expenses 18, 795
Advertising 1,500
Bank and cash in hand 675
Capital (as at l April 19XI) 6,390
Creditors 10,750
Debtors 11,500
Drawings 7,500
Factory direct wages 8,500
Factory indirect wages 2,000
Factory power 4,500
Furniture and fittings ( all office ) 2,300
Heat and light 2,000
Plant and equipment 34,600
Plant hire 500
Provision for bad debts 400
Provision for depreciation ( at l April I 9X 1 ) :
Furniture and fittings I, 150
Plant and equipment 17,300
Raw material purchases 28,500
Rent and rates 2,500
Sales 103,680
Selling and distribution expenses 8,300
Stocks at cost ( at 1 April l 9X 1 ):
Raw materials 1,000
Work in progress 2,000
Finished goods 3,000
------~--- ----------
139,670 139,670
---------- ----------
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Example 1 Continued.
The following additional information has also been obtained:
Note I.
Expenditure on heat and light, and rent and rates is to be apportioned between the factory
and the office in the ratio of 9 to 1, and 3 to 2 respectively.
Note 2. Accruals at 31 March 19X2 were:
Factory power $200
Rent and rates $500
There was also a prepayment of $100 for salesmen's car insurance.
None of these items had been included in the list of balances shown above.
Note 3. Stocks at 31 March 19X2 were valued at cost as follows:
Raw materials $1,900
Work in progress $3,800
Finished goods $5,700
Note 4. Depreciation
Is to be charged on plant and equipment at a rate of 50% per annum using the reducing
balance method, and at a rate of 10% per annum on furniture and fittings using the
straight-line method of depreciation.
Note 5. The provision for bad debts
Is to be equal to 5% of debtors outstanding at 31 March 19X2.
You are required to prepare
Chow's manufacturing, trading profit and loss account for the year to
31 March 19X2, and a Balance sheet as at that date.
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Exercise 1
The following year-end balances were eJCtracted from the books of Allan, a manufacturing
concern whose accounting year ended 31 December 19X6.
Dr.$ Cr. $
Factory eJCpenses 4,181
Carriage outwards 2,279
Selling expenses 6,164
Office eJCpenses 5, 188
Discount received 919
Discount allowed 1,722
Sales 217,190
Provision for unrealised profit 2,196
Manufacturing wages 36,190
Raw materials purchased 92,331
Stock at I January I 9X6:
Raw materials 3,250
Work in progress 6,276
Finished goods 13,176
Carriage inwards 1,986
Heating and lighting 1,410
Fuel and power 7,188
Rates and insurance 2,190
The following notes should be taken into consideration when preparing the accounts:
I. The output of manufactured goods is transferred to trading account at a figure
of ractory cost plus 20% profit. loading.
2. The expenditure on heating and lighting and rates and insurance is chargeable as
two thirds to the factory and the balance to the warehouse.
3. Depreciation is to be provided as follows:
Plant and machinery $ 3,900
Office furniture and equipment $ 1,870
4. Closing stocks are
Raw materials $ 4, 170
Work in progress $ 7,172
Finished goods $13,860
5. All eJCpenses are indirect.
You are required to prepare Allan's manufacturing, trading and profit and loss
account for the year ended 31 December 19X6.
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Example 1 - Solution
David Chow Manufacturing, Trading a11d Profit and Loss Account
for the Year E11ding 31 March 19X2
Sales 103,680
Factory productio11 cost:
Opening stock of raw materials 1,000
Purchases 28,500
-------- 29,500
Less: Closing stock of materials 1,900
--------
Direct materials consumed 27,600
Direct factory wages 8,500
--------
Prime cost 36,100
Factory overhead
Depreciation: plant and equipment 8,650
Heat and light 1,800
Indirect wages 2,000
Plant hire 500
Power 4,700
Rent and rates 1,800
--------
Total factory overhead 19,450 19,450 55,550
-------- ------ --
Add: Opening stock of work-in-progress 2,000
Less: Closing stock of work-in-progress (3,800) (l,800)
-------- --------
Total factory cost 53,750
Add: Opening stock of finished goods 3,000
Less: Closing stock of finished goods (5,700) (2,700) 51,050
--------- -------- ---------
Gross profit 52,630
l.ess: Other expenses -
Administration 18,795
Advertising 1,500
Depreciation: Furniture and fittings 230
Heat & light 200
Increase in provision for bad debts 175
Rent & rates 1,200
Selling and distribution 8,200 30,300
-------- --------
Net profit 22,330
--------
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Example 1 - Solution
David Chow
Balance Sheet at 31 March 19X2
Fixed assets Cost Depreciation Net Book Value
Plant & equipment 34,600 25,950 8,650
Furniture & fittings 2,300 1,380 920
--------- ---------
36,900 27,330 9,570
--------- ---------
Current assets
Stocks at cost:
Raw materials 1,900
Work-in-progress 3,800
Finished goods 5,700 11,400
---------
Debtors 11,500
Less Provision for bad debts 575 10,925
----~----
Prepayment 100
Bank and cash in hand 675
--------
23,100
Less: Current liabilities
Creditors 10,750
Accruals 700 11,450 11,650
--------- -------- --------
21,220
--------
Financed by:
Capit.al 6,390
Net profit for the year 22,330
Less: Drawings 7,500 14,830
-------- --------
21,220
--------
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Exercise 1 - Solution
Allan Manufacturing Account
for Year Ended 31 December 19X6
Materials consumed
Opening stock of raw materials 3,250
Purchases of raw materials 94,317
97,567
Closing stock of raw materials (4, 170)
93,397
Direct wages 36,190
Prime cost 129,587
Production ( Manufacturing ) overhead
Factory fuel and power 7, 188
Factory heating and lighting 940
Factory rates and insurance l,460
Factory expenses 4, 181
Depreciation on plant and machinery 3,900
17,669
147,256
Add: Opening 111ork in progress 6,276
Deduct: Closing work in progress (7' 172) ( 896)
Factory cost of goods prodm:ed 146,360
Profit loading ( 20% ) 29,272
Transfers to trading account 175,632
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Exercise 1 - Solution
Allan Trading and Profit and Loss Account
for the Year Ended 31 December 19X6
Sales 217, 190
Less: Cost or goods sold
Opening stock 13, 176
Transfer from manufacturing account 175,362
----------
188,808
Closing stock 13,860
----------
Cost of goods sold 174,948 174,948
---------- ----------
Gross profit 42,242
Factory proli! 29,272
Discount received 919
----------
72,433
Less: Office expenses 5,188
Depreciation of office equipment 1,870
Heating and lighting 470
Rates and insurance 730
Carriage outwards 2,279
Selling expenses 6,164
Discount allowed 1,722
Provision for unrealized profit 114 18,537
---------
Net profit 53,896
---~ -----
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