Manufacturing Accounts

Test Your Knowledge on Manufacturing account:

1. Is the Manufacturing account an internal management account? If yes,what is the purpose of producing such report?
2. What types of cost are included in a manufacturing account?
3. What is "prime cost" What is factory cost?
4. What is the purpose of apportioning overheads?
5. What is a profit centre
   

Revision Note On Manufacturing Accounts

SALIENT POINTS on the topic of Manufacturing Accounts:

1.0 Manufacturing accounts are prepared for internal management purpose only. This report helps management to distinguish between the costs and profitability associated with the manufacturing operations and those associated with trading ( shown in the trading account)


2.0 In a manufacturing account, we have:

• PRIME COST= Cost of raw materials + direct labor employed in production

• FACTORY COST OF GOODS PRODUCED= Prime Cost+Indirect facoty expenses plus or minus any movement over the period in the cost of work in progress

• FACTORY PROFIT=a notional profit earned in the manufacturing operation, reflecting the relative cheapness of manufacturing goods compared with buying them from outsiders

• TRANSFER PRICE OF FINISHED GOODS PRODUCED=Factory Cost+ Factory Profit. This transfer price appears in the trading account as part of the cost of goods sold.

How To Prepare the Financial Statements For A Manufacturing Company

Append below are:

(a) The following financial statements for a manufacturing company:

• Statement of Cost Of Goods Manufactured
• Income Statement
• Balance Sheet

(b) Salient points to note in a manufacturing company:

There are three (3) types of inventories namely:

• Raw materials, work in progress and finished goods
• Remember that:

Cost of Goods Manufactured = Beginning Work in progress Plus Total current manufacturing cost( direct labor + factory overheads) Minus Ending work in progress

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FORMAT of Statement of Cost Of Goods Manufactured for year ended 31 st December 2008

	$		$
Opening work in progress			XXX
Direct material
Opening inventories	XXX
+ Purchases	XXX
Raw material available for use	XXX
-Closing inventories	(XX)
Raw material consumed/used		XXX
Direct labor		XXX
Factory overhead:
Indirect material	XX
Indirect labor	XX
Others	XX
Total factory overhead		XXX
			XXX
Less: Closing work in progress			(XXX)
Total current manufacturing cost			XXX

FORMAT of Income Statement for the year ended 31st Dec 2008

		$	$
Sales Revenue			XXXX
Less: Cost of Goods Sold
Beginning Finished Goods Inventory		XXX
Cost of Goods Manufactured		XXX
Cost of Goods Available for Sale		XXX
-Ending Finished Goods Inventory		(XXX)
Cost of Goods Sold			(XXX)
Gross Profit			XXXX
Less: Operating Expenses			XXXX
Selling Expenses			XXX
Administrative Expenses			XXX
Net Income/(loss)			XXX

Format of Balance Sheet As At 31 st December 2008 ( extracted only Current Asset portion )

		$	$
Current Assets
Cash			XXX
Accounts Receivable			XXX
Inventories:
Raw Materials		XX
Work in progress		XX
Finished goods		XX	XXX
Sundry deposits and prepayment			XXX
Total Current Assets			XXX

How To Prepare The Financial Statements

The following are simple snapshot to prepare the following financial statements:

(a) Income Statement
(b) Owner's Equity Statement
(c) Balance Sheet

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(a) How to prepare the Income Statement:

• All temporary or nominal accounts relating to incomes and expenses are closed by using closing entries and transferred to the Income Statement/Summary

Journalize the closing entries as follows:

For all Revenue accounts:

• Debit Revenue Account Credit Income Summary

For all Expenses accounts:

• Debit Income Summary Credit Expense Account
  

(b) How to prepare Owner's Equity Statement:

• From (a) the Income statement is transferred to the Owner's Equity Statement

For Profit in the Income Summary:

• Debit Income Summary Credit Owner's Capital

For Loss in the Income Summary:

• Debit Owner's Capital Credit Income Summary
  

• The Owner's drawing account which is part of temporary/nominal account is similarly closed by using closing entry and transferred to the Owner's Equity Statement

Accounting entries:

• Debit Owner's Capital Credit Drawings Account
  

(c) How to prepare the Balance Sheet:

• All permanent or real accounts like all asset accounts, all liability accounts and owner's capital account are not closed and transfer to the Balance Sheet(refer to vertical and horizontal format)