Manufacturing Account 1 Production Cost Production cost Prime

Manufacturing Account 1

Production Cost Production cost = Prime cost / Direct cost + Factory overhead expenses / Indirect cost 2

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 3

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 4

3. Direct expenses • • They refer to the expenses paid according to each unit of production. Examples: Royalties 5

Factory Overhead Expenses / Indirect Costs Ü Cost incurred in the manufacturing process, but they cannot be traced directly to the goods being produced. Ü Include indirect materials, indirect labour and indirect expenses. Ü 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. 6

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 7

Work in Progress Ü It refers to the semi-finished goods, which should be included in the cost of goods manufactured. 8

Manufacturing Account Ü It shows the production cost or transfer price of goods completed during the accounting period. 1. 2. 3. 4. 5. 6. Direct materials Direct labour Direct expenses Factory overhead expenses Work in progress Manufacturing profit / loss 9

Trading Account Ü This account shows the gross profit or loss resulted from the trading of manufactured and other purchased goods. Ü The account includes: Sales Cost of goods sold – Manufactured goods – Other goods 10

Profit and Loss Account Ü Profit or loss of the whole business during the accounting period. Ü 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 11

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 12

Ü 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 expenses 13

Ü These expenses should be allocated to the factory and office and debited to the manufacturing account and the profit and loss account respectively. Ü The bases of allocation are usually given in the examination questions. 14

Format of Manufacturing, Trading and Profit and loss account 15

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 material Direct Labour X Direct labour Royalties X Prime Cost X Direct Expenses 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 Overhead Depreciation of Plant & Machinery X X 16 X

Add: Opening Work in Progress Less: Closing Work in Progress Production Cost of Goods Completed Factory profit/(loss) Transfer price of Goods Completed Sales The goods are transferred Less: Returns inwards $ to trading a/c at production cost/ transfer price Less: COGS Opening stock of finished goods Production cost/Transfer price of Gds completed Less: Returns outwards Fire Loss Less: Closing stock of finished goods Gross Profit Add: Factory Profit Add: Discount Received X X (X) (X) $ X X X (X) X X X 17 X

Less: Expenses Carriage Outwards Rent (e. g. 75%) Discount allowed Administration Expenses Distribution Expenses Selling Expenses Depreciation of Delivery Van Provision for Unrealized Profit Fire Loss Net Profit $ X X X X X $ X X 18

Production Cost Vs. Transfer Price of Goods Completed 19

Production cost Vs. Transfer price Ü Stock of raw materials, work in progress and other finished goods are valued at cost. Ü However, the stock of manufactured goods can be valued at production cost or the transfer price of goods completed. Ü Provision of unrealized profit of on stock should be made if closing stock of manufactured goods is valued at transfer price. 20

Provision of Unrealized Profit Ü Be made on the closing stock valued at production cost plus a percentage of factory profit. Ü Provision for unrealized profit = Stock (at transfer price) x Mark up% 100%+ Mark up(%) 21

Example 1 22

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. 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 23 transfer price.

1. Manufacturing, trading and profit and loss account (extract) $ $ Production cost of Gd completed (100 units*$1) 100 Sales (80 units*$2) 160 Less: COGS Production cost of Gd completed Less: Closing stock(at cost) (20 units*$1) Gross Profit 100 20 80 80 Less: Expenses 50 30 24

2. $ Production cost of Gd completed (100 units*$1) Add: Manufacturing profit (100*0. 2) Transfer price of Gds completed Sales (80 units*$2) Less: Cost of goods sold Transfer price of Gd completed 120 Less: Closing stock(at transfer price) (20+20*0. 2) 24 Gross Profit Cost + profit Add: Manufacturing profit Less: Expenses Provision for unrealized profit (24*20/120) Net Profit 50 4 $ 100 20 160 96 64 20 84 54 30 25

Increase/ Decreased in Provision of Unrealized Profit Accounting entries Increase in Provision Dr Profit and Loss Cr Provision for Unrealized Profit Decrease in Provision Dr Provision for Unrealized Profit Cr Profit and Loss 26

Example 2 27

Ü 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, 6003, 000 Prepare the provision for unrealized profit account, profit 28

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) Gross Profit Less: Expenses Increase in provision for unrealized profit 94 $ $ X 400 29

Provision for unrealized profit 1994 $ 1994 Dec 31 Bal c/d (2400*20/120) 400 Dec 31 P/L 1995 Dec 31 Bal c/d (3600*20/120) $ 400 1995 Jan 1 Bal b/d Dec 31 P/L 400 200 600 600 Profit and Loss account (extract) Gross Profit Less: Expenses Increase in provision for unrealized profit 94 95 $ $ X X 400 200 30

Provision for unrealized profit 1994 $ 1994 Dec 31 Bal c/d (2400*20/120) 400 Dec 31 P/L 1995 Dec 31 Bal c/d (3600*20/120) 1996 Dec 31 P/L Dec 31 Bal c/d (3000*20/120) 600 100 1995 Jan 1 Bal b/d Dec 31 P/L 1996 Jan 1 bal b/d $ 400 200 600 500 600 31

Profit and Loss account (extract) Gross Profit Add: Decrease in provision for unrealized profit Less: Expenses Increase in provision for unrealized profit 94 95 96 $ $ $ X X X 100 400 200 32

Stock Loss 33

Stock Loss Normal loss i. • • • 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 34

Abnormal loss ii. • • Abnormal losses refer to losses not related to the ordinary activities of the business. Examples: fire loss, burglary loss 35

Accounting entries Loss of raw materials without an insurance claim Dr Profit and Loss With the total loss Cr Manufacturing Loss of finished goods without an insurance claim Dr Profit and Loss With the total loss Cr Trading 36

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 37

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 Closing stock 1, 800, 000 200, 000 1, 600, 000 Manufacturing wages Prime cost 800, 000 2, 400, 000 38

Prime cost 2, 400, 000 Factory overheads Manufacturing expenses 416, 000 Depreciation 192, 000 Opening work in progress 608, 000 3, 008, 000 126, 000 Closing work in progress 3, 134, 000 120, 000 Cost of goods completed 3, 014, 000 39

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Depreciation Total 2, 400, 000 x 10% = 240, 000 Manufacturing 80% = 192, 000 Administration 10% = 24, 000 Selling and distribution 10% = 24, 000 50