Manufacturing accounts

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Manufacturing accounts

  1. 1. Manufacturing AccountsManufacturing Accounts 1Contributed By : KAMLESHWAR PANDEY
  2. 2. Production CostProduction Cost Production cost = Prime cost / Direct cost + Factory overhead expenses / Indirect cost 2 expenses / Indirect cost Contributed By : KAMLESHWAR PANDEY
  3. 3. 1. Direct materials • Costs of the materials used during the period. • Include the purchase price of the raw materials and the acquisition costs related to the purchase. 3 and the acquisition costs related to the purchase. • Examples: Purchase of raw materials Carriage inwards / freight charges on raw materials Contributed By : KAMLESHWAR PANDEY
  4. 4. 2. Direct labour • Wages paid to the people who are directly involved in the manufacturing process. 4 in the manufacturing process. • Example: Direct labour, Direct wages, Factory wages, Production wages, Manufacturing wages Contributed By : KAMLESHWAR PANDEY
  5. 5. 3. Direct expenses • They refer to the expenses paid according to each unit of production. 5 unit of production. • Examples: Royalties Contributed By : KAMLESHWAR PANDEY
  6. 6. Factory Overhead Expenses / Indirect Costs Factory Overhead Expenses / Indirect Costs Cost incurred in the manufacturing process, but they cannot be traced directly to the goods being produced. Include indirect materials, indirect labour and indirect expenses. Examples: Indirect materials 6 Indirect materials – Lubricants – Loose tools (opening balance + purchase – closing balance) Indirect labour – wages, salaries, bonus or commission to cleaners, crane drivers, foremen, supervisors and production managers. Contributed By : KAMLESHWAR PANDEY
  7. 7. Indirect expenses related to the factory, machinery and vehicles – Rent and rates – Depreciation – Insurance 7 – Insurance – Repairs and maintenance – Factory power / electricity – Internal transport – Loss on disposal Contributed By : KAMLESHWAR PANDEY
  8. 8. Work in ProgressWork in Progress It refers to the semi-finished goods, which should be included in the cost of goods manufactured. 8Contributed By : KAMLESHWAR PANDEY
  9. 9. Manufacturing AccountManufacturing Account It shows the production cost or transfer price of goods completed during the accounting period. 1. Direct materials 2. Direct labour 9 2. Direct labour 3. Direct expenses 4. Factory overhead expenses 5. Work in progress 6. Manufacturing profit / loss Contributed By : KAMLESHWAR PANDEY
  10. 10. Trading AccountTrading Account This account shows the gross profit or loss resulted from the trading of manufactured and other purchased goods. 10 other purchased goods. The account includes: Sales Cost of goods sold – Manufactured goods – Other goods Contributed By : KAMLESHWAR PANDEY
  11. 11. Profit and Loss AccountProfit and Loss Account Profit or loss of the whole business during the accounting period. Includes all the expenses and income related to 11 Includes all the expenses and income related to the office and the running of the whole business such as: Gross profit / loss from the trading account Manufacturing profit / loss Contributed By : KAMLESHWAR PANDEY
  12. 12. Administration expenses Selling and distribution expenses Financial expenses Increase / decrease in the provision for unrealized profit 12 Net abnormal loss – cash misappropriated – losses of raw materials – losses of finished goods Contributed By : KAMLESHWAR PANDEY
  13. 13. Some expenses are related to both the manufacturing process and the administration of the office such as: Rent and rates Electricity 13 Electricity Insurance Depreciation on premises Motor vehicles Motor vehicles expenses Contributed By : KAMLESHWAR PANDEY
  14. 14. These expenses should be allocated to the factory and office and debited to the manufacturing account and the profit and loss account respectively. 14 account respectively. The bases of allocation are usually given in the examination questions. Contributed By : KAMLESHWAR PANDEY
  15. 15. Format of Manufacturing, Trading and Profit and loss account Format of Manufacturing, Trading and Profit and loss account 15 and Profit and loss accountand Profit and loss account Contributed By : KAMLESHWAR PANDEY
  16. 16. Manufacturing, Trading and Profit and Loss Account for the year ended 31 Dec XXXX $ $ Opening stock of Raw Materials X Add: Purchases of Raw Materials X Carriage inwards X Less: Closing stock of Raw Materials (X) Cost of Raw Materials Consumed X Direct Labour X Royalties X Direct material Direct labour 16 Royalties X Prime Cost X Factory Overhead Expenses: Loose Tools (opening bal. + purchases –closing bal.) X Rent (e.g. 25%) X Production Manager’s salaries X Factory Power X Maintenance of plant & Machinery X Depreciation of Plant & Machinery X X X Direct Expenses Overhead Contributed By : KAMLESHWAR PANDEY
  17. 17. Add: Opening Work in Progress X Less: Closing Work in Progress X Production Cost of Goods Completed X Factory profit/(loss) X Transfer price of Goods Completed X $ $ Sales X Less: Returns inwards (X) X Less: COGS The goods are transferred to trading a/c at production cost/ transfer price 17 Less: COGS Opening stock of finished goods X Production cost/Transfer price of Gds completed X Less: Returns outwards (X) Fire Loss (X) Less: Closing stock of finished goods (X) X Gross Profit X Add: Factory Profit X Add: Discount Received X XContributed By : KAMLESHWAR PANDEY
  18. 18. $ $ Less: Expenses Carriage Outwards X Rent (e.g. 75%) X Discount allowed X Administration Expenses X Distribution Expenses X Selling Expenses X Depreciation of Delivery Van X Provision for Unrealized Profit X 18 Provision for Unrealized Profit X Fire Loss X X Net Profit X Contributed By : KAMLESHWAR PANDEY
  19. 19. Production Cost Vs. Transfer Price Production Cost Vs. Transfer Price 19 Transfer Price of Goods Completed Transfer Price of Goods Completed Contributed By : KAMLESHWAR PANDEY
  20. 20. Stock of raw materials, work in progress and other finished goods are valued at cost. However, the stock of manufactured goods can be valued at production cost or the transfer price Production cost Vs. Transfer priceProduction cost Vs. Transfer price 20 be valued at production cost or the transfer price of goods completed. Provision of unrealized profit of on stock should be made if closing stock of manufactured goods is valued at transfer price. Contributed By : KAMLESHWAR PANDEY
  21. 21. Provision of Unrealized ProfitProvision of Unrealized Profit Be made on the closing stock valued at production cost plus a percentage of factory profit. Provision for unrealized profit 21 Provision for unrealized profit Mark up% 100%+ Mark up(%) = Stock (at transfer price) x Contributed By : KAMLESHWAR PANDEY
  22. 22. Example 1Example 1 22 Example 1Example 1 Contributed By : KAMLESHWAR PANDEY
  23. 23. A company manufactures and sells it own products. It also purchases and sells other finished goods. Production 100 units $1@ $100 Sales 80 units $2@ $160 Closing stock 20 units $1@ $20 Expenses for this period $50 Prepare manufacturing, trading and profit and loss 23 Prepare manufacturing, trading and profit and loss account for the following 2 situations would be shown: 1. The factory output is transferred to the trading account at factory cost. 2. The factory output is transferred to the trading account at factory cost plus 20% factory profit, and the stock of manufactured goods is valued at transfer price. Contributed By : KAMLESHWAR PANDEY
  24. 24. 1. $ $ Production cost of Gd completed (100 units*$1) 100 Sales (80 units*$2) 160 Less: COGS Production cost of Gd completed 100 Manufacturing, trading and profit and loss account (extract) 24 Production cost of Gd completed 100 Less: Closing stock(at cost) (20 units*$1) 20 80 Gross Profit 80 Less: Expenses Expenses 50 30 Contributed By : KAMLESHWAR PANDEY
  25. 25. 2. $ $ Production cost of Gd completed (100 units*$1) 100 Add: Manufacturing profit (100*0.2) 20 Transfer price of Gds completed 120 Sales (80 units*$2) 160 Less: Cost of goods sold Transfer price of Gd completed 120 25 Transfer price of Gd completed 120 Less: Closing stock(at transfer price) (20+20*0.2) 24 96 Gross Profit 64 Add: Manufacturing profit 20 84 Less: Expenses Expenses 50 Provision for unrealized profit (24*20/120) 4 54 Net Profit 30 Cost + profit Contributed By : KAMLESHWAR PANDEY
  26. 26. Increase in Provision Decrease in Provision Accounting entries Increase/ Decreased in Provision of Unrealized Profit Increase/ Decreased in Provision of Unrealized Profit 26 Decrease in Provision Dr Profit and Loss Cr Provision for Unrealized Profit Dr Provision for Unrealized Profit Cr Profit and Loss Contributed By : KAMLESHWAR PANDEY
  27. 27. Example 2Example 2 27 Example 2Example 2 Contributed By : KAMLESHWAR PANDEY
  28. 28. Goods manufactured are to be transferred to sales department at factory cost plus 20%. 2004 2005 2006 $ $ $ Stock at 1 Jan (at transfer price) - 2,400 3,600 28 Stock at 1 Jan (at transfer price) - 2,400 3,600 Stock at 31 Dec (at transfer price)2,400 3,600 3,000 Prepare the provision for unrealized profit account, profit and loss account and balance sheet respectively for the three years. Contributed By : KAMLESHWAR PANDEY
  29. 29. Provision for unrealized profit 1994 $ 1994 $ Dec 31 Bal c/d (2400*20/120) 400 Dec 31 P/L 400 Profit and Loss account (extract) 94 $ $ 29 $ $ Gross Profit X Less: Expenses Increase in provision for unrealized profit 400 Contributed By : KAMLESHWAR PANDEY
  30. 30. Provision for unrealized profit 1994 $ 1994 $ Dec 31 Bal c/d (2400*20/120) 400 Dec 31 P/L 400 1995 1995 Dec 31 Bal c/d (3600*20/120) 600 Jan 1 Bal b/d 400 Dec 31 P/L 200 600 600 Profit and Loss account (extract) 30 Profit and Loss account (extract) 94 $ $ Gross Profit X X Less: Expenses Increase in provision for unrealized profit 95 $ $ 400 200 Contributed By : KAMLESHWAR PANDEY
  31. 31. Provision for unrealized profit 1994 $ 1994 $ Dec 31 Bal c/d (2400*20/120) 400 Dec 31 P/L 400 1995 1995 Dec 31 Bal c/d (3600*20/120) 600 Jan 1 Bal b/d 400 Dec 31 P/L 200 600 600 31 1996 1996 Jan 1 bal b/d 600 Dec 31 Bal c/d (3000*20/120) 500 Dec 31 P/L 100 600 600 Contributed By : KAMLESHWAR PANDEY
  32. 32. Profit and Loss account (extract) 94 $ $ Gross Profit X X X Add: Decrease in provision for unrealized profit 100 Less: Expenses Increase in provision for unrealized profit 95 $ $ 96 $ $ 400 200 32 200 Contributed By : KAMLESHWAR PANDEY
  33. 33. Stock LossStock Loss 33 Stock LossStock Loss Contributed By : KAMLESHWAR PANDEY
  34. 34. Stock LossStock Loss i. Normal loss • Normal losses refer to losses related to the ordinary activities of the business/ 34 ordinary activities of the business/ • Examples: damaged / spoiled stock, obsolete stock • No entry is required for normal loss Contributed By : KAMLESHWAR PANDEY
  35. 35. ii. Abnormal loss • Abnormal losses refer to losses not related to the ordinary activities of the business. 35 ordinary activities of the business. • Examples: fire loss, burglary loss Contributed By : KAMLESHWAR PANDEY
  36. 36. Loss of raw materials without an insurance claim Dr Profit and Loss Cr Manufacturing With the total loss Accounting entries 36 Cr Manufacturing Loss of finished goods without an insurance claim Dr Profit and Loss Cr Trading With the total loss Contributed By : KAMLESHWAR PANDEY
  37. 37. Loss of raw materials with an insurance claim Dr Bank/Insurance Company Dr Profit and Loss Cr Manufacturing With the insurance claim With the net loss With the total loss 37 Loss of finished goods with an insurance claim Dr Bank/Insurance Company Dr Profit and Loss Cr Trading With the insurance claim With the net loss With the total loss Contributed By : KAMLESHWAR PANDEY
  38. 38. Cheung Kong Enterprises Manufacturing, Trading and Profit and Loss Account for the year ended 30 April 2004 Cost of raw materials consumed Opening stock 160,000 Purchase 1,640,000 38 1,800,000 Closing stock 200,000 1,600,000 Manufacturing wages 800,000 Prime cost 2,400,000 Contributed By : KAMLESHWAR PANDEY
  39. 39. Prime cost 2,400,000 Factory overheads Manufacturing expenses 416,000 Depreciation 192,000 608,000 3,008,000 Opening work in progress 126,000 39 Opening work in progress 126,000 3,134,000 Closing work in progress 120,000 Cost of goods completed 3,014,000 Contributed By : KAMLESHWAR PANDEY
  40. 40. Depreciation Total 2,400,000 x 10% = 240,000 Manufacturing 80% = 192,000 Administration 10% = 24,000 40 Selling and distribution 10% = 24,000 Contributed By : KAMLESHWAR PANDEY

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