This document outlines the accounting treatment for manufacturing costs, including direct materials, direct labor, factory overhead, and work-in-progress. It discusses how manufacturing costs are used to determine the production cost of goods completed, which can then be transferred to the trading account either at production cost or a transfer price that includes a markup for profit. The manufacturing, trading, and profit and loss accounts are presented to illustrate how costs and revenues flow through each statement.

1. Manufacturing Account
1

2. Production Cost
Production cost
= Prime cost / Direct cost + Factory overhead
expenses / Indirect cost
2

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.
• Examples: Purchase of raw materials
Carriage inwards / freight charges
on raw materials
3

4. 1. 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

5. 1. Direct expenses
• They refer to the expenses paid according to each
unit of production.
• Examples: Royalties
5

6. 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
 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

7.  Indirect expenses related to the factory,
machinery and vehicles
 Rent and rates
 Depreciation
 Insurance
 Repairs and maintenance
 Factory power / electricity
 Internal transport
 Loss on disposal
7

8. Work in Progress
 It refers to the semi-finished goods, which
should be included in the cost of goods
manufactured.
8

9. 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

10. 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

11. 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

12.  Administration expenses
 Selling and distribution expenses
 Financial expenses
 Increase / decrease in the provision for unrealized
profit
 Net abnormal loss
 cash misappropriated
 losses of raw materials
 losses of finished goods 12

13.  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

14.  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

15. Format of Manufacturing,
Trading and Profit and loss
account
15

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 Direct material X
Direct Labour X
Royalties Direct labour X
Prime Cost Direct Expenses 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 Overhead
Depreciation of Plant & Machinery X X
16
X

17. $ $
Add: Opening Work in Progress
Less: Closing Work in Progress
Production Cost of Goods Completed
Factory profit/(loss)
Transfer price of Goods Completed
Sales
Less: Returns inwardsThe goods are transferred
to trading a/c at production
cost/ transfer price
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
Add: Factory Profit
Add: Discount Received 17
X

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
Fire Loss X X
Net Profit
18

19. Production Cost
Vs.
Transfer Price
of Goods Completed
19

20. 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

21. Provision of Unrealized Profit
 Be made on the closing stock valued at
production cost plus a percentage of factory
profit.
 Provision for unrealized profit
= Stock (at Mark up% x
transfer price)
100%+ Mark
up(%)
21

22. Example 1
22

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
account for the following 2 situations would be
shown:
The factory output is transferred to the trading account at
23
factory cost.

24. 1. Manufacturing, trading and profit and loss account (extrac
$ $
Production cost of Gd completed (100 units*$1) 100
Sales (80 units*$2) 160
Less: COGS
Production cost of Gd completed 100
Less: Closing stock(at cost) (20 units*$1) 20 80
Gross Profit 80
Less: Expenses
Expenses 50
30 24

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
Less: Closing stock(at transfer price) (20+20*0.2) 24 96
Gross Profit 64
Cost + profit
Add: Manufacturing profit 20
84
Less: Expenses
Expenses 50
Provision for unrealized profit (24*20/120) 4 54
Net Profit 30 25

26. Increase/ Decreased in Provision of
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

27. Example 2
27

28.  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
3,000
28
Prepare the provision for unrealized profit account,

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
$ $
Gross Profit X
Less: Expenses
Increase in provision for unrealized profit
400
29

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 Jan 1 Bal b/d 400
(3600*20/120) 600 Dec 31 P/L 200
600 6
Profit and Loss account (extract)
94 95
$ $ $ $
Gross Profit X X
Less: Expenses
Increase in provision for unrealized profit
400 200 30

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 Jan 1 Bal b/d 400
(3600*20/120) 600 Dec 31 P/L 200
600 6
1996 1996
Dec 31 P/L 100 Jan 1 bal b/d 60
Dec 31 Bal c/d
(3000*20/120) 500
600 6
31

32. Profit and Loss account (extract)
94 95 96
$ $ $ $ $ $
Gross Profit X X
Add: Decrease in provision for unrealized profit
Less: Expenses
Increase in provision for unrealized profit
400 200
32

33. Stock Loss
33

34. Stock Loss
i. 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

35. i. Abnormal loss
• Abnormal losses refer to losses not related to the
ordinary activities of the business.
• Examples: fire loss, burglary loss
35

36. Accounting entries
Loss of raw materials without an insurance claim
Dr Profit and Loss With the total loss
Cr Manufacturing
Loss of finished goods without an insurance claim
Dr Profit and Loss With the total loss
Cr Trading
36

37. Loss of raw materials with an insurance claim
Dr Bank/Insurance Company With the insurance claim
Dr Profit and Loss With the net loss
Cr Manufacturing With the total loss
Loss of finished goods with an insurance claim
Dr Bank/Insurance Company With the insurance claim
Dr Profit and Loss With the net loss
Cr Trading With the total loss
37

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
1,800,000
Closing stock 200,000 1,600,000
Manufacturing wages 800,000
Prime cost 2,400,000
38

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
3,134,000
Closing work in progress 120,000
Cost of goods completed 3,014,000
39

40. Depreciation Total 2,400,000 x 10% = 240,000
Manufacturing 80% = 192,000
Administration 10% = 24,000
Selling and distribution 10% = 24,000
40