Manufacturing Accounts

CONTENT

• Meaning of Manufacturing Accounts
• Purpose of Manufacturing Account
• Element of Cost of Production
• Layout of Manufacturing Account
• Transfer Pricing
• Practical Illustration

MEANING OF MANUFACTURING ACCOUNTS

Manufacturing can simply be described as the transformation of raw materials into finished goods e.g. manufacturing companies like Nestle, Cadbury, PZ e.tc. These manufacturing firms do manufacture their goods or product before they are sold to their customer. They do not buy to sell but produce what they sell.

There manufacturing companies prepare a final accounts called Manufacturing Account.

PURPOSE OF MANUFACTURING ACCOUNTS

Manufacturing Account are prepared to ascertain the cost of goods manufactured during the financial

year. Therefore manufacturing accounts have the following purposes.

1. To ascertain the cost of production
2. To determine the profit on the manufacturing process.

ELEMENTS OF COST OF PRODUCTION

1. COST OF PRODUCTION: This is the total expenditure incurred in the production of goods. Production costs include PRIME COST + FACTORY OVERHEADS
2. PRIME COST: These are cost directly related in the production process. It is also called Direct Cost which include: Direct materials, direct labour, direct expenses and any other direct expenditure.
3. Direct materials cost: These are cost of raw materials
4. Direct labour cost: These are cost of labour wages paid
5. Direct expenses: These are cost of other expenditure incurred in the production process.

3. FACTORY OVERHEADS: These are cost incurred in the running of the factory but not directly related to the production process. It is also called INDIRECT COST.  They include; factory rent and rates, depreciation of plant and machinery. Indirect wages, upkeep of factory building

TRANSFER PRICING

In the trading account, the cost of production is charged to determine profit on sales. The changing of cost of production of goods may be done in two ways.

1. Actual factory cost
2. Current market values

When goods manufactured are charged at the current market value to the trading account,  the main objective is obtain  profit on the manufacturing process. The manufacturing accounts will then have to show a balance which represents a profit or loss on production and this is transferred to profit and loss account.

EVALUATION

1.      State four classifications of costs revealed by manufacturing accounts.

2.      State two reasons for the preparation of manufacturing accounts.

GENERAL EVALUATION QUESTIONS

1. Explain three differences between a trial balance and a balance sheet
2. State four reasons for disagreement between a bank statement balance and cash book balance
3. List five methods of providing for depreciation
4. State five reasons for making provision for depreciation
5. List six factors to be considered in computing the depreciation on fixed assets  

READING ASSIGMENT

Essential Financial Accounting for S.S. by O.A. Longe page 160-171

WEEKEND ASSIGNMENT

1.      The following is the main objective of a manufacturing account (a) to         ascertain gross profit (b) to ascertain net profit (c) to ascertain profit on asset (d) to ascertain cost of production

2.      The cost components of manufacturing directly related in the per unit of     good produced is called (a) factory cost (b) cost of production (c) prime cost (d) fixed cost.

3.      Cost of production is also called (a) factory overhead (b) factory     expenses (c) manufacturing cost (d) prime cost

4.      Prime cost can also be described as (a) indirect cost (b) direct cost

         (c) fixed cost (d) variable cost

5.      Royalties is an example of ________ cost (a) factory cost (b)  indirect        cost (c) prime cost (d) selling and distribution

THEORY

1.      Write short note on:   

a.  Prime cost 

b.  Factory overhead

2.      Distinguish between

a.         Work in progress (W.I.P) and finished goods

b.         Prime cost and factory overhead.