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 Manufacturing-account[1]
 

Manufacturing-account[1]

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     Manufacturing-account[1] Manufacturing-account[1] Presentation Transcript

    • Manufacturing Account 1
    • Production CostProduction cost= Prime cost / Direct cost + Factory overhead expenses / Indirect cost 2
    • 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. • Examples: Purchase of raw materials Carriage inwards / freight charges on raw materials 3
    • 2. Direct labour • Wages paid to the people who are directly involved in the manufacturing process. • Example: Direct labour, Direct wages, Factory wages, Production wages, Manufacturing wages 4
    • 3. Direct expenses • They refer to the expenses paid according to each unit of production. • Examples: Royalties 5
    • Factory Overhead Expenses / IndirectCosts 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 – Lubricants – Loose tools (opening balance + purchase – closing balance) Indirect labour – wages, salaries, bonus or commission to cleaners, crane drivers, foremen, supervisors and production managers. 6
    • Indirect expenses related to the factory, machineryand vehicles – Rent and rates – Depreciation – Insurance – Repairs and maintenance – Factory power / electricity – Internal transport – Loss on disposal 7
    • Work in Progress It refers to the semi-finished goods, which should be included in the cost of goods manufactured. 8
    • Manufacturing Account It shows the production cost or transfer price of goods completed during the accounting period. 1. Direct materials 2. Direct labour 3. Direct expenses 4. Factory overhead expenses 5. Work in progress 6. Manufacturing profit / loss 9
    • Trading Account This account shows the gross profit or loss resulted from the trading of manufactured and other purchased goods. The account includes: Sales Cost of goods sold – Manufactured goods – Other goods 10
    • Profit and Loss Account Profit or loss of the whole business during the accounting period. 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 11
    • Administration expensesSelling and distribution expensesFinancial expensesIncrease / decrease in the provision for unrealizedprofitNet abnormal loss – cash misappropriated – losses of raw materials – losses of finished goods 12
    •  Some expenses are related to both the manufacturing process and the administration of the office such as: Rent and rates Electricity Insurance Depreciation on premises Motor vehicles Motor vehicles expenses 13
    •  These expenses should be allocated to the factory and office and debited to the manufacturing account and the profit and loss account respectively. The bases of allocation are usually given in the examination questions. 14
    • Format of Manufacturing, Trading and Profit and loss account 15
    • Manufacturing, Trading and Profit and Loss Account for the year ended 31 Dec XXXX £ £Opening stock of Raw Materials XAdd: Purchases of Raw Materials X Carriage inwards XLess: Closing stock of Raw Materials (X)Cost of Raw Materials Consumed Direct material XDirect Labour XRoyalties Direct labour XPrime Cost Direct Expenses XFactory 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 Overhead Depreciation of Plant & Machinery X X 16 X
    • £ £Add: Opening Work in Progress XLess: Closing Work in Progress XProduction Cost of Goods Completed XFactory profit/(loss) XTransfer price of Goods Completed XSales XLess: Returns inwards The goods are transferred (X) to trading a/c at production X cost/ transfer priceLess: 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) XGross Profit XAdd: Factory Profit XAdd: Discount Received X X 17
    • £ £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 Fire Loss X XNet Profit X 18
    • Production Cost Vs. Transfer Priceof Goods Completed 19
    • Production cost Vs. Transfer price 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 of goods completed. Provision of unrealized profit of on stock should be made if closing stock of manufactured goods is valued at transfer price. 20
    • Provision of Unrealized Profit Be made on the closing stock valued at production cost plus a percentage of factory profit. Provision for unrealized profit Mark up% = Stock (at transfer price) x 100%+ Mark up(%) 21
    • Example 1 22
    • 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 £50Prepare manufacturing, trading and profit and lossaccount for the following 2 situations would beshown: 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. 23
    • 1. Manufacturing, trading and profit and loss account (extract) £ £Production cost of Goods completed (100 units*£1) 100Sales (80 units*£2) 160Less: COGS Production cost of Goods completed 100Less: Closing stock(at cost) (20 units*£1) 20 80Gross Profit 80Less: Expenses Expenses 50 30 24
    • 2. £ £Production cost of Gd completed (100 units*£1) 100Add: Manufacturing profit (100*0.2) 20Transfer price of Gds completed 120Sales (80 units*£2) 160Less: Cost of goods sold Transfer price of Gd completed 120Less: Closing stock(at transfer price) (20+20*0.2) 24 96Gross Profit Cost + profit 64Add: Manufacturing profit 20 84Less: Expenses Expenses 50 Provision for unrealized profit (24*20/120) 4 54Net Profit 30 25
    • Increase/ Decreased in Provisionof Unrealized Profit Accounting entries Increase in Provision Decrease in Provision Dr Profit and Loss Dr Provision for Cr Provision for Unrealized Profit Unrealized Profit Cr Profit and Loss 26
    • Example 2 27
    •  Goods manufactured are to be transferred to sales department at factory cost plus 20%. 1994 1995 1996 £ £ £ Stock at 1 Jan (at transfer price) - 2,400 3,600 Stock at 31 Dec (at transfer price)2,400 3,600 3,000Prepare the provision for unrealized profit account, profitand loss account and balance sheet respectively for thethree years 28
    • 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 £ £Gross Profit XLess: Expenses Increase in provision for unrealized profit 400 29
    • 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 Jan 1 Bal b/d 400 (3600*20/120) 600 Dec 31 P/L 200 600 600 Profit and Loss account (extract) 94 95 £ £ £ £Gross Profit X XLess: Expenses Increase in provision for unrealized profit 400 200 30
    • Provision for unrealized profit1994 £ 1994 £Dec 31 Bal c/d (2400*20/120) 400 Dec 31 P/L 4001995 1995 Dec 31 Bal c/d Jan 1 Bal b/d 400 (3600*20/120) 600 Dec 31 P/L 200 600 6001996 1996Dec 31 P/L 100 Jan 1 bal b/d 600Dec 31 Bal c/d (3000*20/120) 500 600 600 31
    • Profit and Loss account (extract) 94 95 96 £ £ £ £ £ £Gross Profit X X XAdd: Decrease in provision for unrealized profit 100Less: Expenses Increase in provision for unrealized profit 400 200 32
    • Stock Loss 33
    • Stock Lossi. Normal loss • Normal losses refer to losses related to the ordinary activities of the business/ • Examples: damaged / spoiled stock, obsolete stock • No entry is required for normal loss 34
    • ii. Abnormal loss • Abnormal losses refer to losses not related to the ordinary activities of the business. • Examples: fire loss, burglary loss 35
    • Accounting entries Loss of raw materials without an insurance claimDr Profit and Loss With the total lossCr Manufacturing Loss of finished goods without an insurance claimDr Profit and Loss With the total lossCr Trading 36
    • Loss of raw materials with an insurance claimDr Bank/Insurance Company With the insurance claimDr Profit and Loss With the net lossCr Manufacturing With the total loss Loss of finished goods with an insurance claimDr Bank/Insurance Company With the insurance claimDr Profit and Loss With the net lossCr Trading With the total loss 37
    • Cheung Kong Enterprises Manufacturing, Trading and Profit and Loss Account for the year ended 30 April 2004Cost of raw materials consumedOpening stock 160,000Purchase 1,640,000 1,800,000Closing stock 200,000 1,600,000Manufacturing wages 800,000Prime cost 2,400,000 38
    • Prime cost 2,400,000Factory overheadsManufacturing expenses 416,000Depreciation 192,000 608,000 3,008,000Opening work in progress 126,000 3,134,000Closing work in progress 120,000Cost of goods completed 3,014,000 39
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    • Depreciation Total 2,400,000 x 10% = 240,000Manufacturing 80% = 192,000Administration 10% = 24,000Selling and distribution 10% = 24,000 50