Manufacturing Account Notes

Manufacturing Account
There are some businesses that make, create, produce or manufacture their own products. In addition
there are other businesses that both buy and manufacture goods at the same time. Any business that is
involved in some form of production will need to prepare a manufacturing account to calculate cost
of production. The business will therefore will be able to determine if they are making a profit or not
by comparing the cost of production and their sales.
Information found in a Manufacturing Account.

1. Direct Cost
2. Indirect Cost
Direct Cost
These are cost that can be traced to the production of each unit or item. They are:
● Direct Material – Raw Material
● Direct Labour – Wages paid to workers who make the products
● Direct Expenses – Royalties and Legal fees
In the manufacturing account all Direct Cost are added together. The total of these cost is called
Prime Cost.
⮚ Direct Material
+ = Prime Cost
⮚ Direct Labour
+
⮚ Direct Expenses
Indirect Cost/ Factory Overheads

These are other costs that are related to the factory; however, they cannot be traced to the production
of one unit. Examples of these costs are:
Factory Power Factory Rent and Rates

Factory Insurance Factory supervisor/manager salaries or wages
Factory Lighting Wages of factory ; cleaners, forklift operators
Depreciation of factory fixed assets packers
Total of direct cost (Prime Cost) and indirect cost is called Production Cost.
Page 1
Production Cost
⮚ Direct Material
+
⮚ Direct Labour
+
⮚ Direct Expenses Prime Cost
+ = Production Cost
Indirect Cost
There are times, however, when a business will have incomplete or unfinished products at the
beginning and or at the end of the accounting period. These unfinished products are called Work- In-
Progress (WIP).
Adjustment(s) must be made with work-in-progress in order to determine the value of the production
cost.
● Add opening stock of work-in-progress, (WIP at the beginning of the accounting
period).
● Subtract closing stock of work-in-progress, (WIP at the end of the accounting period).
⮚ Direct Material
+
⮚ Direct Labour = Prime Cost
+
⮚ Direct Expense +
= Manufacturing Cost
Indirect Cost
+
Opening Stock of WIP = Production Cost
-
Closing Stock of WIP
Page 2
Manufacturing Account for the year ended September30, 2020

$ $ $
Opening Stock of Raw Materials 20 000
Add Purchases of Raw Materials 50 000
Add Carriage- Inwards 2 000
52 000
Less Return-Outwards 1 500
Net Purchases 50 500
Cost of Raw Materials Available 70 500
Less Closing Stock of Raw Materials 15 000
Cost of Raw Materials Consumed/Used 55 500
Add Direct Wages 30 000
Add Direct Expenses 10 000
Prime Cost 95 500
Add Indirect Cost/ Factory Overheads:
Factory Power 8 000
Factory Insurance 4 000
Depreciation of Factory Machinery 3 000
15 000
Manufacturing Cost 110 500
Add Opening Stock of WIP 12 000
122 500
Less Closing Stock of WIP 7 500
Production Cost c/d 115 000
Final Accounts
Businesses which manufacture their own products also prepare the following final accounts:
(1) Trading, Profit and Loss Account

(2) Balance Sheet
Trading Account
The Trading Account deals with the sale of goods manufactured and or purchased.
Items found in the Trading Account
Sales Opening Stock of Finished Goods

Return Inwards Closing Stock of Finished Goods
Production Cost b/d
Page 3
Trading Account for the year ended September 30, 2020
$ $ $
Sales 200 000

Less Return- Inwards 10 000
Net Sales 190 000
Less Cost of Goods Sold:
Opening Stock of Finished Goods 9 000
Add Production Cost b/d 115 000
Cost of Goods Available for Sale 124 000
Less Closing Stock of Finished Goods 13 000
Cost of Goods Sold 111 000
Gross Profit 79 000
NB: If it is a business that is both manufacturing and buying goods to sell, additional
information that would be found in the Trading Account are:
● Purchases of Finished Goods

● Carriage Inwards on Finished Goods
● Return Outwards of Goods Purchased
Trading Account for the year ended September 30, 2020

$ $ $
Sales 200 000
Less Return – Inwards 10 000
Net Sales 190 000
Less Cost of Goods Sold:
Opening Stock of Finished Goods 9 000
Add Purchases of Finished Goods Only if the business 40 000
Add Carriage-Inwards is also buying and 5 000
selling goods. 45 000
Less Return-Outwards 3000
Net Purchases 42 000
Add Production Cost b/d 115 000
Cost of Goods Available 166 000
Less Closing Stock 13 000
Cost of Goods Sold 153 000
Gross Profit 37 000
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Profit and Loss Account
Expenses and revenues are treated in the Profit and Loss Account. Expenses are mainly divided
into two (2) categories:
1. Administrative (related to the office)
2. Selling and Distribution
Administrative Expenses Selling and Distribution Expenses

Office Manager Salary Commission Paid
Office Rent Carriage-Outwards
Office Lighting Salaries/Wages of Sales Representatives
Office Insurance Discount Allowed
Depreciation of Office Fixed Assets Depreciation of Delivery Van
Salaries/Wages paid to other office workers
Profit and Loss Account for the year ended September 30, 2020
$ $ $
Gross Profit 37 000
Less Administrative Expenses:
Office Salaries 6 000
Office Rent 10 000
16 000
Less Selling and Distribution Expenses:

Carriage Outwards 2 500
Discount Allowed 4 000
Depreciation of Delivery Van 3 500
10 000
26 000
Net Profit 11 000
NB: 1. Students may be required to apportion or share expenses between the Manufacturing and
Profit and Loss Account.
Example:
Trial Balance Rent $5 000
Footnote Rent is to be apportioned: Office 1/5; Factory 4/5
1/5 X $5 000 = $1 000 – In the profit and Loss Account under Administrative Expenses.
4/5 X $5 000 = $4 000 – In the Manufacturing Account under Indirect Cost.
Page 5
NB: 2. Students may also be required to make adjustments in the final accounts with:
● Accruals
● Prepayments
● Depreciation
● Provisions for Bad Debts
Balance Sheet
Unlike the other Balance Sheet prepared before, there will now three (3) closing stock listed under the
heading Current Assets:
1. Closing Stock of Raw Material

2. Closing Stock of Work-In-Progress
3. Closing Stock of Finished Goods
Balance sheet (Extract) as at September 30, 2020

$ $ $
Current Assets
Sock: Raw Material 15 000
Work-In-Progress 7 500
Finished Goods 13 000
35 500
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Manufacturing Account

Information found in a Manufacturing Account.

Indirect Cost/ Factory Overheads

Factory Power Factory Rent and Rates

Manufacturing Account for the year ended September30, 2020

(1) Trading, Profit and Loss Account

Items found in the Trading Account

Sales Opening Stock of Finished Goods

Sales 200 000

● Purchases of Finished Goods

Trading Account for the year ended September 30, 2020

Administrative Expenses Selling and Distribution Expenses

Less Selling and Distribution Expenses:

1. Closing Stock of Raw Material

Balance sheet (Extract) as at September 30, 2020

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