Form 3 Book Keeping – MANUFACTURING ACCOUNT

Business can be classified into two types, which are merchandising and manufacturing. Merchandising, this trading firm / business deals with the buying and selling of manufactured goods while manufacturing deals with the processing of Raw – materials into finished goods.

E.g. Food processing, cement making.

Manufacturing firm use labor, plant and equipment to convert Raw – materials to finished goods.

Both mechanizing and manufacturing firms required to prepare final account at the end of trading period to show whether they are making profit or loss.

In manufacturing firm, manufacturing account is prepared in addition to Trading, profit and loss A/C.

This account shows the cost of manufacturing goods (cost of production of completed goods).

     THE FORMAT OF MANUFACTURING A/C:-                                                                                                                                                                

  DR                                  MANUFACTURING A/C                                                  CR

 

DIRECT MATERIALS:-

    These are all materials which can be traced (seen) in a single unit of a product.

    Direct materials:-

 DIRECT LABOR;

These are the cost of production which can be traced (seen) in a single unit of a product.

Example: Wages for a machine operator making a particular item.

DIRECT EXPENSES:-

These are the expenses which can be traced in a single unit of a product.

Example: Royalty, Patent, Trade mark etc

 
 

FACTORS OVERHEAD EXPENSES (INDIRECT COSTS).

Are those costs which occur in a single factory where production process is being done, but which cannot easily be traced in the  manufactured of the product directly.

Example:  Rent and Rates of a factory

                 Depreciation of plant and machinery

                 Factory power

                 Factory lighting

                 Factor maintenance

                 Depreciation of factory building and other expenses associated with manufacturing.

    Direct material + Direct labor + Direct expenses  =  PRIME COST

    Prime cost + overhead expenses =  PRODUCTION COST

 
 

WORK IN PROGRESSIVE (W.I.P PROCESS)

These are party of finished goods of the production process continuing, we shall have:-

-Opening work in progress

-Closing work in progress.

Hence Opening work in progress is added to the total cost while closing work in
progress is deducted to the total cost in order to get TOTAL PRODUCTION COST.

 
 

EXAMPLE:-

From the following information prepare manufacturing A/C for the year ended 31 Dec 2008.

1^st Jan; stock of Raw materials………………………………………………8,000/=

31^st Dec: Stock of Raw – material…………………………………………10,500/=

Jan; Work in progress……………………………………………………    3,500/=

Dec:. Work in Progress…………………………………………………..  ..4,200/=

During the year:

Wages:  Direct……………………………………………………………. 39,600/=

             Indirect………………………………………………………….. 35,500/=

Purchases of Raw – material………………………………………….. ..  87,000/=

Direct expenses……………………………………………………………. 1,400/=

Lubricants…………………………………………………………………. 3,000/=

Rent of factory…………………………………………………………….. 7,200/=

Fuel and power…………………………………………………………….. 9,900/=

Depreciation of factory plant + machine…………………………………… 4,200/=

Internal transport expenses…………………………………………………. 1,800/=

Insurance of a factory building + plant………………………………….… 1,500/=

General factory expenses………………………………………………..     3,300/=

 Solution:-

                DR                                    MANUFACTURING A/C                                           CR

 
 

After the manufacturing account you are required to prepare Trading, Profit and Loss Account

EXPENSES;–

(a)        ADMINISTRATION EXPENSES

These consists expenses such as Manager Salaries, legal and accountancy charges, the depreciation of accounting machinery and secretarial salaries.

(b)        SELLING AND DISTRIBUTION EXPENSES

They include expenses such as carriage outwards, salesmen salaries and commission, advertising and display expenses.

NOTE:-

1.  Prime cost factory overhead expenses are charged to the manufacturing A/C and are collectively known as PRODUCTION COST.

2.  Administrative and selling nglish-swahili/distribution” target=”_blank”>distribution expenses are charged in the trading, profit

And loss A/C .

A portion of expenses into factory overhead and profit and loss expenses.

                   For example: Rent paid May comprise part of manufacturing and part for office.

Hence you must apportion these expenses into two parts of Manufacturing and office:-

Example:  Rent paid 10,000:  ¾ of building is used for factory ¼ is used for office.

Thus can be calculated as:-

Manufacturing = ¾ x 10,000 = 7,500

Office   = ¼ x 10,000 = 2,500

EXAMPLE:-

                                                                                      DR                                CR

Stock of Raw – material 1/1/2007                                21,000/=

Stock of Finished goods 1/1/2007                              38,900/=

Work in progress 1/1/ 2007                                         13,500/=

Wages (Direct 180,000 factory indirect 145,000)       325,000/=

Royalties                                                                        3,500/=

Carriage in wards of (R.M)                                           3,500/=

Purchases of Raw – material                                     370,000/=

Productive machinery (cost 280,000)                        230,000/=

Accounting Machinery (cost 20,000)                          12,000/=

General factory expenses                                            31,000/=

Lighting                                                                        7,500/=

Factor power                                                               13,700/=

Administrative salaries                                                44,000/=

Sales men salaries                                                       30,000/=

Commission on Sales                                                  11,500/=

Rent                                                                             12,000/=

Insurance                                                                       4,200/=

General administration exp.                                        13,400/=

Bank charges                                                                 2,300/=

Discount Allowed                                                         4,800/=

Carriage out wards                                                        5,900/=

Sales                                                                       1,000,000/=

Debtors & Creditors                                                  142,300/=                              125,000/=

Bank                                                                            56,800/=

Cash                                                                              1,500/=

Drawings                                                                    20,000/=

Capital as at 1^st Jan 2007                                                                                         296,800/=

NOTE: at 31/12/2007

1.         Stock of Raw – material                                              24,000/=

            Finished good                                                              40,000/=

            Work in progress                                                         15,000/=

2.         Lighting, Rent and Insurance are to be appointed:

            Factory 5/6, administration 1/6

3.         Depreciation on productive and accounting machinery at 10% p.a on cost.

WORKING:–

            Lighting     = 7500                          Insurance   = 4,200

            Factory 5/6 x 7,500=6,250              Factory 5/6 x 4,200=3,500

            Office 1/6 x 7500 = 1250                  Office 1/6 x 4,200=700

           
 

Rent    = 12,000                                            Depreciation of A/C machinery

Factory 5/6 x 12000 = 10,000                      20000 x 10/100 = 2000

Office 1/6 x 12000 = 2,000                          Depreciation of productive mach.

                                                                   280,000 x 10/100 = 28,000
   MANUFACTURING TRADING PROFITS &LOSS A/C FOR YEAR ENDED 2007                     

                                                            BALANCE SHEET AS AT 2007

 MARKET VALUE

Sometime manufacturing form would like to know the gross profit it would get to the goods has been brought in their finished state.

A manufacturing account is subjected to the limitation that the respective amount of gross profit which are distributed to the manufacturing side or selling side of the firm are not known.

Techniques are sometimes used to bring out this addition information.

By this method the cost of which would have been involve if the goods has been bought in their finished state of being manufactured by the firm is brought into A/C.

This is credited to the manufacturing A/C and debited to the Trading A/C so as to throw up two figures of gross profit instead of one.  The net profit in profit and loss A/C will remain us affected.

From the previous example:

 Prepare final A/C. The marketing value is 950,000

     DR.                                         MANUFACTURING A/C                           CR

 
 

     DR                                             TRADING A/C                                               CR

      

           DR                                           PROFIT & LOSS A/C                           CR

 
 

Exercise.1

Prepare manufacture account and trading account for the year ended 31^st Dec1983   from the following balance;

     Stock of raw materials 1^st January 1983 ———————– 1,000/=

       Raw materials purchased —————————————10,000/=

     Carriage   of purchases of raw materials – ———————-200/=

       Stock of raw materials 31^st Dec 1980————————–2,000/=

       Factory   wages————————————————–500/=

       Manufacture light and heat ————————————-600/=

       Partly finished goods at 1^st January 1980———————-7,000/=

     Partly of finished goods at 31^st Dec 1980————————200

     Stock of finished goods at 1^st January 1980———————8500/=

     Sales —————————————————————9500/=    

       Purchases ——————————————————–500/=

       Stock of finished goods 31^st Dec 1980————————-2500/=

       Factory rent ——————————————————400/=

 

The trial balance has been extracted from the books of SAMWELI

 
 

1. Stock

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       Raw materials ————————2,400/=

       Finished goods ———————–4,000/=

       Work in progress ——————-1,500/=

 
 

1. Lighting and heating and rates ,rent and insurances are to be apportioned factory   ⁵_/6administrative   ¹/₆
2. Depreciation on productive and accounting machinery 10% p.a on cost.

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                           Required

1. Manufacturing account
2. Trading account
3. Balance sheet

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Workings

                 Depreciation 10% per annum for productive machine at cost

                         (10/100) X  25,000 = 2500

 

Depreciation 10% per annum for accounting machine at cost

 
 

                             (10/100)  x 2000= 200