Manufacturing Account (With answers) A) Modified Trading and Profit and Loss Account A company imported transistor radios from Britain, however, the radios must be modified to meet Hong Kong specifications with the help of some equipment. The trial balance at year end 31st December, 1993 is as follows: $ $ Sales 12000 Purchases 4500 Radios 3000 Carriage inwards 200 Carriage outwards 300 Returns inwards 600 Returns outwards 500 Wages for modifications 400 Motor vans 10 000 Equipment 2 000 Selling expenses 500 Capital _ 9 000 21 500 21 500 It is the company's policy to depreciate fixed assets at 10% p.a. and increase the stock held by 10% each year. Prepare the Trading and Profit and Loss Account for the year ended 31st December 1993. Trading and profit and loss account for the year ended 31-12-1993 Sales 12000 Less: Returns Inwards 600 Net Sales 11400 Less: Cost of goods sold Opening stock 3000 Less: Purchases 4500 Less: Returns Outwards 500 Net Purchases 4000 Add: Carriage inwards 200 4200 7200 Less: Closing stock 3300 3900 Add: Wages for modifications 400 Depreciation expense on equipment 200 600 4500 1
Gross Profit 6900 Less: Expenses Carriage outwards 300 Selling expenses 500 Depreciation expense on motor van 1000 1800 Net Profit 5100 B) Elements of manufacturing cost In general four elements of manufacturing cost are usually recognised in a manufacturing account. These are: 1. Direct materials / Raw materials 2. Direct labour / Direct wages / Factory wages 3. Other direct expenses Prime cost (total of 1, 2 and 3) 4. Factory overhead expenses Manufacturing or factory cost (total of 1, 2, 3 and 4) The word 'direct' indicates the relationship of the cost element to the actual goods being produced. Direct materials are materials which become a physical part of the goods produced. Direct labour is the cost of labour actually working on the goods produced and excludes costs of supervision and other labour costs which cannot be associated with actual work on the product. There are rarely any other direct expenses which can be related directly to the goods produced, though a royalty calculated per unit of goods produced would be an example of this type of expense. Factory overhead includes all factory costs which are not direct. These include indirect labour costs such as the wages of foremen, cleaners, maintenance men, indirect materials such as factory cleaning materials, lubricants, and general factory overheads such as depreciation, rent, rates, 2
electricity, etc. In a manufacturing account, the direct costs are largely variable while the factory overhead expenses will tend to be either fixed or semi-variable. C. Special points to be noted 1) Work in progress If the 'work in progress' is valued at 'prime cost', the adjustment for the different value of the work in progress at the beginning and at the end of the accounting period should be shown after all the direct expenses have been totalled, and before factory overhead expenses are added. Manufacturing Accounts (Extract) Prime Cost 100 Add: work in progress at begin (valued at prime cost) 50 150 Less: work in progress at end (valued at prime cost) 20 130 2) Manufacturing profit In order to assess the efficiency and performance of the production process in the factory, a manufacturing profit is calculated either by: i) Market value of goods produced - Manufacturing cost of goods produced OR ii) applying a fixed mark-up on manufacturing cost of goods produced Example one The information extracted from the books of the company is: Raw materials consumed $1000 Direct labour 1000 Factory overhead 700 Work in progress, at prime cost: At the beginning 500 At the end 200 Selling expenses 300 Show the Manufacturing and Trading and Profit and Loss Account under different assumptions. 3
Assumption One All the goods manufactured are transferred at cost to the selling office. i.e. no manufacturing profit, and all of them are sold at $3 200. Manufacturing and trading and profit and loss account $ $ Raw material consumed 1000 Cost of goods manufactured Direct labour 1000 transferred to trading 3000 Prime cost 2000 Add: work-in-progress at beg 500 2500 Less: work-in-progress at end 200 2300 Factory overhead 700 Cost of finished goods manufactured 3000 3000 Production cost 3000 Sales 3200 Gross profit c/d 200 3200 3200 Selling expenses 300 Gross Profit b/d 200 Net Loss 100 300 300 4
Assumption Two All the goods manufactured are transferred at market price of $3 300 to the selling office and all of them are sold at $3 200. Manufacturing and trading and profit and loss account $ $ Raw material consumed 1000 Goods transferred at market value 3300 Direct labour 1000 Prime cost 2000 Add: work-in-progress at beg 500 2500 Less: work-in-progress at end 200 2300 Factory overhead 700 Cost of finished goods manufactured 3000 Manufacturing profit 300 3300 3300 Goods manufactured at market value 3300 Sales 3200 Gross loss 100 3300 3300 Gross loss 100 Manufacturing profit 300 Selling expenses 300 Net Loss 100 400 400 Double entry Dr. Manufacturing a/c- Manufacturing profit 300 Cr. Profit and Loss Manufacturing profit 300 5
Assumption Three All the goods manufactured are transferred at market price of $3 300 but none or them are sold at year end. No selling expenses incurred. Manufacturing and trading and profit and loss account $ $ Raw material consumed 1000 Goods transferred at market value 3300 Direct labour 1000 Prime cost 2000 Add: work-in-progress at beg 500 2500 Less: work-in-progress at end 200 2300 Factory overhead 700 Cost of finished goods manufactured 3000 Manufacturing profit 300 3300 3300 Goods manufactured at market value 3300 Less: closing stock 3300 Cost of goods sold 0 Gross profit 0 0 0 0 Provision for unrealised profit 300 Manufacturing profit 300 Stock (Year One) Stock (Year One) Trading- closing 3000 Trading- Closing 3300 Provision for unrealised profits (Year One) Trading (Year Two) P & L 300 Stock 3000 Sales 3200 Gross profit 200 Trading (Year Two) Stock 3300 Sales 3200 Gross Loss 100 Gross Loss 100 Dec in prov 300 Selling expenses 300 Net Loss 100 6
Example Two Cost of production for the year $10 000 Finished goods, at cost: At the beginning of year 6 000 At the end of year 2 000 The goods are transferred from factory to sales office at 10% mark up. Show the balance sheet (extract) at the beginning and the end of the year and also the provision for unrealized profit on stock account. Balance Sheet (Extract) Beginning Ending Finished goods 6600 2200 Less: Provision for unrealised profit 600 200 6000 2000 Provision for unrealised profit Profit and Loss 400 Balance b/d 600 Balance c/d 200 3) Abnormal and normal stock loss Example One Beginning stock $10 000 Purchases 5 000 Ending stock (after stock loss) 7 000 Sales 12 000 Prepare the trading account if: i) There was a normal loss of damaged stock of $10, and ii) There was a fire during the year and the loss amounted to $2 000. 7
(i) Trading Beginning stock 10000 Sales 12000 Add: Purchases 5000 15000 Less: Ending stock 7000 Cost of goods sold 8000 Gross profit 4000 12000 12000 Beginning stock + Purchases = Ending Stock + Cost of goods sold + Stock Loss 10000 5000 7000 7990 10 (ii) Trading Beginning stock 10000 Sales 12000 Add: Purchases 5000 15000 Less: Ending stock 7000 Stock loss 2000 Cost of goods sold 6000 Gross profit 6000 12000 12000 Stock loss due to fire 2000 Gross profit 6000 Beginning stock + Purchases = Ending Stock + Cost of goods sold + Stock Loss 10000 5000 7000 6000 2000 Dr. Profit and Loss: stock loss due to fire 2000 Cr. Trading account: Stock loss 2000 8
Example Two Beginning raw material $ 10 000 Purchases of raw material 10 000 Ending raw material 5 000 Raw materials stolen 6 000 Prepare the extract of the manufacturing account and the journal entry for the stock stolen. Manufacturing account Beginning raw material 10000 Transferred to trading 9000 Add: Purchases 10000 20000 Less: Ending raw material 5000 Raw materials stolen 6000 Cost of raw material consumed 9000 9000 Dr. Profit and Loss ~ Loss due to theft 6000 Cr. Manufacturing ~ Loss due to theft 6000 Manufacturing account Beginning raw material 10000 Transferred to trading 15000 Add: Purchases 10000 20000 Less: Ending raw material 5000 Cost of raw material consumed 15000 15000 Not true and fair view 9
Exercise One From the following information prepare the manufacturing, trading and profit and loss accounts for the year ending 31 December 19X6 and the balance sheet as at 31 December 19X6 for the firm of J. Jones. Purchase of raw materials 258,000 Fuel and light 21,000 Administration salaries 17,000 Factory wages 59,000 Carriage outwards 4,000 Rent and rates 21,000 Sales 482,000 Returns inward 7,000 General office expenses 9,000 Repairs to plant and machinery 9,000 Stock at 1 January 19X6 Raw materials 21,000 Work in progress 14,000 Finished goods 23,000 Sundry creditors 37,000 Capital account 457,000 Freehold premises 410,000 Plant and machinery 80,000 Debtors 20,000 Provision for depreciation on plant and Machinery at 1 January 19X6 8,000 Cash in hand 11,000 984,000 984,000 Make provision for the following: (a) Stock in hand at 31 December 19X6 Raw materials 25,000 Work in progress 11,000 Finished goods 26,000 (b) Depreciation of 10% on plant and machinery straight line method (c) 80% of fuel and light and 75% of rent and rates to be charged to manufacturing (d) Doubtful debts provision 5% of sundry debtors (e) 4,000 outstanding for fuel and light (f) Rent and rates paid in advance - 5,000 (g) Market value of finished goods - 382,000 10
Manufacturing A/C for the yr. Ended 31-12-19-6 $ $ Beginning stock 21,000 Goods transferred at market value 382,000 Add: Purchases 258,000 279,000 Less: ending stock 25,000 Cost of materials consumed 254,000 Factory Overhead 59,000 Prime cost 313,000 Fuel & light 20,000 Rent & Rates 12,000 Repairs to plant 9,000 Depreciation 8,000 49000 362,000 Add: Work-in-progress 14,000 376,000 Less: Work-in-progress 11,000 365,000 Manufacturing profit 17,000 Market value of goods manufactured 382,000 382,000 Trading & Profit & Loss A/C for the year Ended 31-12-19-6 Beginning stock 23,000 Sales 482,000 Add: Production cost 382,000 Less: Sales Returns 7,000 405,000 Net Sales 475,000 Less: ending stock 26,000 Cost of sales 379,000 Gross profit 9,6000 475,000 475,000 Fuel and light 5,000 Gross profit 96,000 Rent & Rates 4,000 Manufacturing profit 17,000 Administration salaries 17,000 Carriage outwards 4,000 General office expenses 9,000 Provision for Bad Debts 1,000 Net Profit 73,000 113,000 113000 11
Balance Sheet as at 31-12-19-6 Fixed Assets Capital 457,000 Freehold premises 410,000 Add: Net Profit 73,000 Plant & Machinery 80,000 530,000 Less: Depreciation 16,000 64,000 474,000 Current Assets Current liabilities Stock- raw materials 25,000 Creditors 37,000 - Work-in-progress 11,000 Accruals 4,000 41,000 - Finished goods 26,000 Debtors 20,000 Less:Provision for B.D. 1,000 19000 Prepayment 5,000 Cash in hand 11,000 97,000 571,000 571,000 12
M-anufacturing Profit a) The double entry for the factory profit is Dr. Manufacturing Accounts Cr. Profit and Loss Accounts b) Provision for unrealised profit on stock is calculated: Cost of production $10000 Finished good, at cost At the beginning of the year 6000 At the end of the year 2000 Sales 27000 iii) The goods are transferred from factory to sales department at 10% mark-up. i) Extract of Balance Sheet at the beginning of the year Finished goods at make-up price 6600 Less: Provision for unrealised profit on stock 600 Finished goods at cost 6000 ii) Extract of Balance Sheet at the end of the year Finished goods at make-up price 2200 Less: Provision for unrealised profit on stock 200 Finished goods at cost 2000 Provision for unrealised profit on stock Profit and Loss a/c 400 Balance b/d 600 Balance c/d 200 600 600 Provision for unrealised profit on stock Opening stock 6600 Sales 27000 Add: Manufactured at transfer price 11000 17600 Less: Closing stock 2200 Cost of goods sold 15400 Gross profit 11600 27000 27000 Gross profit 11600 13
Manufacturing profit 1000 Decrease in provision 400 Exercise Five John Cormack started in business on 1 st January 1980 as a manufacturer of gaming machines. The following figures are extracted from his records on 31 st December 1980. Sales (30,000 machines at 30 each) 900,000 Plant and machinery (bought 1 st January 1980) 80,000 Motor vans (bought 1 st January 1980) 10,000 Administrative wages 18,000 Loose tools bought 6,400 Light and power 40,000 Building repairs 20,000 Raw materials bought 273,400 Salesmen s salaries 29,000 Driver s wages 24,000 Motor van expenses 5,000 Direct wages 302,000 General administration expenses 6,000 Indirect wages 54,000 Repairs to machinery 11,000 Rates and insurance 10,000 The following information is also made available to you: (a) The work in progress on 31 st December 1980, valued at production cost was 55,000. (b) The closing stocks on 31 st December 1980 were: Raw materials 13,400, Loose tools 2,400. (c) Depreciate motor vans 20%, plant and machinery 10%. (d) Allocate expenses as follows: Factory Administration Light and power Building repairs Rates and insurance 9/10 3/5 4/5 1/10 2/5 1/5 (e) A manufacturing profit of 25% on production cost was added for the purpose of transferring finished goods to the trading account. (f) During the year 40,000 machines were completed. Value the 10,000 machines in stock at the average cost of production (subject to provision for unrealized profit). 14
You are required to draw up the manufacturing, trading and profit and loss account for the year ended 31 st December 1980. Show clearly the figures of prime cost and production cost of goods completed. Manufacturing & Trading & Profit & Loss account for the year ended 31-12-80 Purchases 273,400 Goods transferred at market value 800,000 Less: ending stock 13,400 Cost of materials consumed 260,000 Direct wages 302,000 Prime cost 562,000 Factory Overhead Depreciation 8,000 Loose tools (6400-2400) 4,000 Light & power 36,000 Building repairs 12,000 Rates & Insurance 8,000 Indirect wages 54,000 Repairs to machinery 11,000 133,000 695,000 Less: work-in-progress 55,000 640,000 Manufacturing profit 160,000 Market value of goods manufactured 800,000 800,000 Market value of goods manufactured 800,000 Sales 900,000 Less: closing stock 200,000 Cost of sales 600,000 Gross profit 300,000 900,000 900,000 Depreciation 2,000 Gross profit 300,000 Administrative wages 18,000 Manufacturing profit 160,000 Light & power 4,000 Building repairs 8,000 Rates & Insurance 2,000 Salaries 29,000 Drivers wages 24,000 Motor van expenses 5,000 General expenses 6,000 15
Provision for unrealized profit 40,000 Net profit 322,000 460,000 460,000 16
Manufacturing Account At the end of every accounting period, trading firms which buy ready-made goods and resell them at a profit, prepare the Trading and Profit and Loss Accounts. However, for those firms which manufacture the goods they sell, a Manufacturing Account is prepared in addition to these two final accounts. The Manufacturing Account is prepared to determine the total manufacturing or production cost of goods completed during the accounting period. The production cost includes all costs incurred in converting raw materials into finished goods, i.e. cost of raw materials, direct labour and direct expenses, and factory overhead expenses. Manufacturing or Production Cost Production cost can be divided into two categories, i.e. prime cost and factory overhead expenses. Both these costs are charged to the Manufacturing Account for the calculation of production cost. The following is a description of the different components which make up prime cost and factory overhead expenses. Prime Cost Prime cost includes all costs which relate directly to the manufacturing process. They include raw materials, labour and expenses which are traceable to the particular unit of goods manufactured.. These prime costs will vary with the units of output produced. Increasing output means using mere raw materials, direct labour and direct expenses, e.g. if production is increased by 50%, the cost of raw materials, manufacturing wages and direct expenses will rise by approximately the same extent. Cost of Raw Materials The cost of raw materials used to make the finished good represents one of the major prime costs. The opening and closing stock of raw materials, together with the purchase of raw materials must be taken into account when calculating the cost of raw materials. Any other costs incurred in the purchases of raw materials, like duty, freight or carriage, should be added to the net purchases of the raw materials. Direct Labour Cost These refer to the wages paid to labour which is directly involved in the manufacture of goods. These wages paid to workers who are employed on the actual production line are called direct wages. Direct Expenses Besides raw materials and labour cost, other expenses directly related to manufacturing may be incurred. These include expenses for water and electricity that can be traced by the units of goods produced, e.g. the amount of water used in the production of bottled drinks and the amount of electricity consumed in the baking of bread can be computed by each unit of goods produced. Direct expenses may include royalties which are payments made to the patentee for the right to use the patent for each unit of goods produced. 17
A patent confers upon its holder, the right to be the only producer of a certain product for a particular period of time. Factory Overhead Expenses These costs are not directly related to the actual manufacturing of goods but more so to the general operations of running of the factory where production is carried on. Overhead expenses do not vary with output. Even if output is increased or decreased, the overhead expenses remain relatively fixed. Factory overhead costs include: rent and rates of factory insurance of factory factory power and lighting repairs and maintenance of plant and machinery depreciation of tools, plant and machinery indirect labour cost - wages and salaries paid to those employed in the general operations of the factory and who are indirectly associated with actual production, e.g. factory engineer, supervisor, manager, forklift and crane drivers, cleaners and security personnel. Production Cost Production cost measures the total cost of goods produced during the period and is made up of prime cost and factory overhead expenses used in production. Work in Progress 18
In the above example, it is assumed that all the work that started in the factory was finished by the end of the year and that there was no partly finished goods. It is possible for a manufacturing firm to have work-in-progress which is partly completed goods at the end of the accounting period. Where there is work-in-progress, production cost incurred during the accounting period will cover both the finished and unfinished goods. If we wish to know the cost of manufacturing only the finished goods during the year, we must deduct the work-in-progress at the end of the year from the production cost. The work-in-progress is valued according to the cost of materials, labour, factory overhead expenses and other expenses that have gone into it. Where there is work-in-progress at the beginning of the accounting period, this must be added to the production cost before deducting the work-in-progress at the end of the year to give the cost value of finished goods for the year. Cost Flows in the Manufacturing Account and the Determination of the Manufacturing Profit Summary The following steps are taken by the manufacturer to arrive at his net profit figure: 19
Calculation of production cost by setting up a Manufacturing Account: Production Cost = Prime Costs (raw materials cost + direct labour and direct expenses) + Factory Overhead Expenses Calculation of gross manufacturing profit by comparing the market price of goods manufactured with the production cost in the Manufacturing Account: Gross Manufacturing Profit = Market Price of Goods Manufactured - Production Cost Calculation of gross trading profit by setting up a Trading Account: Gross Trading Profit = Net Sales - Cost of Sales Calculation of net profit by setting up a Profit and Loss Account: Net Profit = Gross Manufacturing Profit + Gross Trading Profit + Any Gains - Expenses To the Manufacturing Account, charge all manufacturing expenses incurred in the production of finished goods. To the Trading Account, charge all buying expenses incurred in the purchase of goods for resale. To the Profit and Loss Account, charge all selling expenses incurred in the sale and distribution of goods including all administrative expenses. 20
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