Manufacturing Accounts

Manufacturing Accounts 🏭📊

A Manufacturing Account is an account that collects together all the costs involved in production to determine the production cost of goods completed. To ascertain the production cost of the goods completed, charge all elements of production cost (direct materials, direct labour, direct expenses, and production overheads) to the Manufacturing Account. 💰

Direct materials, labour, and expenses are all costs involved in production that are traceable to units of goods produced. The total of all direct costs incurred in a year is called the Prime Cost. Production overheads are costs incurred in a factory that cannot be easily traced to units of goods produced. 📈

Manufacturing Costs 💼

Manufacturing organizations are firms involved in the manufacturing process, where raw materials are worked on and converted into finished products. These products are then sold. In such organizations, the trading profit and loss account may not be sufficient, hence the need to prepare a Manufacturing Account as an additional statement. 📑

Classification of Manufacturing Costs 📊

Direct Costs: Costs that can be directly related (easily traced) to the product manufactured, such as direct materials, direct labour, direct wages, and direct expenses. The total of direct costs is called the Prime Cost. 🔍

Manufacturing Account Layout 🗂️

The following layout incorporates the calculation of Prime Cost:

Item	Amount (K)
Opening Stock of Raw Materials 🏷️	X
Purchases of Raw Materials 🛒	X
Add: Carriage Inwards of Raw Materials 🚚	X
Total Stock of Raw Materials Available for Production 📦	X
Less: Closing Stock of Raw Materials 📉	X
Cost of Raw Materials Consumed 💵	X
Add: Direct Wages 💼	X
Add: Direct Expenses 💰	X
Prime Cost 📊	X

Overheads 💡

If the cost cannot be directly traced to the product or products being manufactured, it is said to be an indirect cost or overhead. These costs enable business operations and are often shared by the entire output. Overheads are classified into:

Production Overheads 🏭
Administrative Overheads 🗃️
Selling and Distribution Overheads 🚚

Example: Manufacturing Account 📋

Item	Amount (K)
Opening Stock of Raw Materials 🏷️	XX
Purchases of Raw Materials 🛒	XX
Add: Carriage Inwards of Raw Materials 🚚	XX
Total Stock of Raw Materials Available for Production 📦	XX
Less: Closing Stock of Raw Materials 📉	XX
Cost of Raw Materials Consumed 💵	XX
Add: Direct Wages 💼	XX
Add: Direct Expenses 💰	XX
Prime Cost 📊	XX
Add: Overheads (Factory Lights, Factory Wages) 💡	XX
Depreciation of Plant and Machinery 🏭	XX
Total Cost of Production 📊	XX

Work in Progress (WIP) 🔄

WIP refers to incomplete production or partly finished goods. At the beginning of the period, there will be opening work in progress, and closing work in progress at the end of the period. WIP is incorporated in the manufacturing account by adding the opening WIP to the production cost and subtracting closing WIP. 📉

Application Exercise 1 📝

B Sure owns a small manufacturing business. In addition to the goods made by the firm, Sure buys finished goods to increase the product range. Below are the balances taken from the books on 31st December 2014. 📅

Item	Amount (K)
Stock 1st January 2014 (Raw Materials) 🏷️	15,300
Stock 1st January 2014 (Finished Goods) 📦	18,700
Stock 31st December 2014 (Raw Materials) 🏷️	14,100
Stock 31st December 2014 (Finished Goods) 📦	19,600
Bad Debts 🚫	400
Factory Wages 💼	66,000
Factory Overheads 💡	19,900
Carriage on Sales 🚚	2,800
Purchases of Raw Materials 🛒	175,200
Purchases of Finished Goods 🛒	45,100
Carriage on Raw Materials 🚚	2,100
Depreciation of Factory Equipment 🏭	9,300
Sales Office Expenses 🏢	5,800
Factory Direct Expenses 💰	2,700
Sales of Finished Goods 📦	445,100

Required:

Name the accounts which should not be included in Sure’s manufacturing accounts or trading account. Then prepare the manufacturing account for the year ended 31st December 2014, naming clearly the cost of raw materials consumed, prime cost, and cost of production. 📊

Solution 💡

Excluded Accounts: Bad debts, carriage on sales, and sales office expenses. 🚫

Manufacturing Account for B Sure 🏭

For the year ended 31st December 2014 📅

Item	Amount (K)
Opening Stock of Raw Materials 🏷️	15,300
Purchases of Raw Materials 🛒	175,200
Add: Carriage Inwards on Raw Materials 🚚	2,100
Total Stock of Raw Materials Available 📦	192,600
Less: Closing Stock of Raw Materials 📉	14,100
Cost of Raw Materials Consumed 💵	178,500
Add: Direct Costs (Factory Direct Expenses) 💰	2,700
Add: Factory Wages 💼	66,000
Prime Cost 📊	147,200
Add: Overhead Expenses (Factory Overheads) 💡	19,900
Add: Depreciation of Factory Equipment 🏭	9,300
Total Cost of Production 📊	176,400

Application Exercise 2 📝

Annie Zimba is a manufacturer. Below are the balances extracted from the books as at 31 December 2010. 📅

Item	Amount (K)
Stock at 1 January 2010 (Raw Materials) 🏷️	26,700
Stock at 1 January 2010 (Work in Progress) 🔄	7,900
Stock at 1 January 2010 (Finished Goods) 📦	2,450
Purchases of Raw Materials 🛒	213,200
Purchases of Finished Goods 🛒	15,800
Direct Factory Wages 💼	145,300
Factory Manager's Salary 💼	14,800
Indirect Factory Expenses 💡	23,200
Office Salaries 💼	36,200
Office Expenses 🏢	18,600
Distribution Cost 🚚	23,400

Additional Information 📋

Stock at 31 December 2010: Raw Materials (K30,640) 🏷️, Work in Progress (K8,200) 🔄, Finished Goods (K2,150) 📦.
Annual direct factory wages are K157,400. 💵
Depreciation on factory plant and machinery is to be charged at 25% per annum using the straight-line method. The residual value is estimated at K8,000. 📉
Depreciation on office equipment is to be charged at 40% per annum using the reducing balance method. 🏢

Manufacturing Account for Annie Zimba 🏭

For the year ended 31 December 2010 📅

Item	Amount (K)	Total (K)
Opening Stock of Raw Materials 🏷️	26,700
Add: Purchases of Raw Materials 🛒	213,200	239,900
Less: Closing Stock of Raw Materials 📉	30,640	209,260
Cost of Raw Materials Consumed 💵	209,260
Add: Direct Wages 💼	157,400
Prime Cost 📊	366,660
Add: Overhead Expenses (Factory Manager's Salary, Indirect Factory, Depreciation) 💡	56,000
Total Cost of Production 📊	422,360

Application Exercise 3 📝

Chanda is a manufacturer. Below are the balances extracted from the books after the preparation of the manufacturing account for the year ended 31st December 2012. 📅

Item	Amount (K)
Cost of Goods Manufactured 🏭	913,200
Sales 💰	1,120,000
Cost of Finished Goods at 1st January 2012 📦	82,200
Stock at 31st December 2012 (Raw Materials) 🏷️	74,500
Stock at 31st December 2012 (Work in Progress) 🔄	94,000
Freehold Premises 🏢	300,000
Furniture and Fittings 🪑	11,000
Plant and Machinery at 31st December 2012 (After Depreciation) 🏭	233,800
Cash at Bank 💵	97,300
Debtors 💳	103,000
Creditors 💳	131,800
Selling Expenses 🚚	91,700
Provision for Bad Debts (1st January 2012) 🚫	4,700
General Expenses 🏢	59,500
Factory Wages Outstanding 💼	4,200
Drawings 💵	50,000
Capital 💰	849,500

Additional Information 📋

The stock of finished goods at 31st December 2012 was valued at K86,000. 📦
Depreciation of plant and machinery (K41,000) has already been charged in the manufacturing account but should have been K49,000. Adjustments are to be made. ⚖️
Depreciation of furniture and fittings is to be at 10%. 🪑
Provision for bad debts is to be 5% of the adjusted balance for debtors. 💳
General expenses (K59,000) include an annual insurance premium of K12,000, of which K300 has been paid in advance. 🏢

Trading and Profit and Loss Account for Chanda 📊

For the year ended 31st December 2012 📅

Item	Amount (K)
Sales 💰	1,120,000
Opening Stock of Finished Goods 📦	82,200
Cost of Production 🏭	913,200
Purchases of Finished Goods 🛒	45,100
Total Stock Available 📦	1,040,500
Less: Closing Stock of Finished Goods 📉	86,000
Cost of Sales 💵	954,500
Gross Profit 💰	165,500
Add: Discount Received 💵	5,100
Less: General Expenses 🏢	59,500
Less: Selling Expenses 🚚	91,700
Net Profit 💵	19,400