The document discusses the calculation and treatment of production costs, including direct materials, direct labor, direct expenses, and factory overhead expenses. It also covers the manufacturing account, trading account, and profit and loss account. The manufacturing account shows the production cost and includes direct costs plus factory overhead. The trading account shows gross profit or loss from sales and the cost of goods sold, using the production cost from the manufacturing account. The profit and loss account includes gross profit from trading plus other income and expenses to determine net profit or loss.

1. 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. 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

5. 3. 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. 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
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 material
Direct labour
Direct Expenses
Overhead

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
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
X
The goods are transferred
to trading a/c at production
cost/ transfer price

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
Fire Loss X X
Net Profit X

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
Mark up%
100%+ Mark up(%)
21
= Stock (at transfer price) x

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:
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

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

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
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

26. Increase/ Decreased in Provision of
Unrealized Profit
Increase in Provision Decrease in Provision
Dr Profit and Loss
Cr Provision for
Unrealized Profit
Dr Provision for
Unrealized Profit
Cr Profit and Loss
26
Accounting entries