Week MANUFACTURING ACCOUNT Learning Objectives 1 Statement of

Week MANUFACTURING ACCOUNT Learning Objectives 1. Statement of Cost of Production P 3

MANUFACTURING ACCOUNT • Some companies involved in business of buying and selling of goods. • Some companies involved in business that actually manufacture the goods. • Thus, in order to determine the income of such companies, first need to determine the total cost of producing or manufacturing goods. • Also referred as Production Cost / Cost of Goods Manufactured (COGM) • The main component of manufacturing account is 1. Direct Material (DM) Cost 2. Direct Labour (DL) Cost 2 3. Factory/Manufacturing Overhead (MOH)

1. DIRECT MATERIAL (DM) Direct materials Ø 3 To calculate total costs of the raw materials used during the period to produce goods Ø Include the purchase price of the raw materials Ø Includes all costs needed to bring the raw materials to the factory Examples Ø Purchase of raw materials Ø Carriage inwards / freight-in charges on raw materials / transportation of raw material purchased Ø Custom duties on raw materials Ø Import charges on raw materials Ø Insurance on the raw material Ø Taxes on raw materials

2. DIRECT LABOUR (DL) Direct labour Ø 4 Wages paid to the people who are directly involved in the manufacturing or production of goods. Labor costs are needed to convert raw materials to manufactured goods or semimanufactured goods. Example : Ø Direct labour Ø Direct wages Ø Factory wages Ø Production wages Ø Manufacturing wages Ø Productive labor cost Ø Wages to operator of equipment used in making products Ø Wages paid to workers having to mince meat in making of sausages in factory

3. FACTORY OVERHEAD COSTS (MOH) Ø Cost incurred in the manufacturing process, but they cannot be traced directly to the goods being produced (indirect cost) Ø Include indirect materials/factory supplies, indirect labour and other manufacturing expenses. Examples: ØIndirect materials ØProduction of wooden chairs, the sandpapers used to smoothen the wood is part of factory overhead 5 ØIndirect labour ØWages, salaries, bonus or commission to cleaners of factory ØWages, salaries, bonus or commission to crane drivers, foremen, supervisors and production managers.

6 ØIndirect expenses related to the factory, machinery and vehicles used in production ØFactory rent and rates expense ØFactory manager salary ØFactory supervisor salary ØFactory clerk salary ØLubricants and oils ØDepreciation of plant and machinery ØInsurance of factory ØRepairs and maintenance of factory ØFactory power / electricity

COMPARISON PRIME COST AND CONVERSION COST PRIME COST CONVERSION COST • Combination of direct material (DM) and direct labor (DL) cost. • Combination of direct labor (DL) and factory overhead cost (MOH).

CURRENT ASSETS IN MANUFACTURING ACC Ø Raw Materials (RM) Ending Balance Materials used in the production line to produce product. CA : If there is any balance of Raw Materials at the end of financial period Ø Work In Progress (WIP) Ending Balance Product that still in the production line which still in progress to produce end product/finished product. CA : If there is any balance of Raw Materials at the end of financial period Ø Finished Goods (FG) Ending Balance End product, product that already completed. 8 CA : If there is any balance of Finished Goods and still not yet sold

COST OF PRODUCTION STATEMENT • Also known as Manufacturing Account • The components included in Cost of Production Statement is as follows: 9 Refer exhibit 20. 4, 20. 5, 20. 8, 20. 10, 20. 13