MANUFACTURING
ACCOUNTS
Manufacturing
of goods involves the transformation of raw materials into finished goods and
it must be recorded. Therefore, manufacturing account is the final accounts of
a business that manufactures goods.
Difference between manufacturing
accounts and trading, profit and loss account
A
manufacturing account shows the concern produces from raw materials or semi
manufactured goods into finished goods and sells them. Whereas a trading
account shows the concern buys from the finished goods and resale.
Manufacturing
account is usually prepared by firms to show the cost of production and gross
profit on manufacture when the market value is given. Whereas a trading account
is prepared to show the gross profit on the finished goods.
Purpose of
manufacturing account
- To ascertain the cost of production;
- To ascertain the amount of any profit on manufacturing process.
TERMINOLOGIES
IN MANUFACTURING ACCOUNT
- Cost of production. It is the sum of the cost of raw materials used, cost of carriage, prime cost and factory overheads. It is otherwise called cost of goods manufactured.
- Prime cost. These are cost that can be traced to a particular production unit. It also consists of cost of raw materials consumed, direct wages, carriage inwards and other expenses directly concerned with the manufacturing process. Prime cost is otherwise called direct expenses and it includes direct materials, direct labour and direct expenses.
- Factory overheads. These are expenses that do not necessarily vary with output; that is, they do not increase or decrease in direct proportion to the volume of goods produced. Factory overhead includes the indirect materials, indirect labour and indirect expenses. Examples; factory fuel, factory salaries, lighting, heating, depreciation on plant and machinery etc. It is otherwise known as overhead cost.
- Work in progress. These are goods which the factory has not completed at the time of preparing the final accounts. That is, partly finished goods, semi manufactured goods or incomplete work at the end of a financial period.
- Market price. This is the price the manufacturing department will charge (sell) to marketing department (as if the finished goods were bought from outside). Therefore, the goods produced are charged at market price.
Note:
a.
When
goods produced at a cheaper rate and valued at market price, there will be
gross profit on manufacture;
b.
If
goods produced at a higher rate, there will be gross loss on manufacture;
c.
The
gross profit on manufacture and gross on manufacture are chargeable to profit
and loss account.
- Stock. A manufacturing has three categories of stock which are valued at beginning and at the end of the operating year. They include:
a.
Stock
of raw materials. These are the quantity of unused portion of raw materials
bought;
b.
Stock
of work in progress. It is the quantity of partly completed goods available;
c.
Stock
of finished goods. It is the quantity of completed goods available for sales.
NB: The stock at
the end of the operating year will be added and the addition will be taking to
the balance sheet as stock under current asset. That is, the closing
stock of raw materials + closing stock of work in progress + closing stock of
finished goods = Stock.
Test your
understanding
- Explain the difference between direct factory wages and iindirect factory wages.
- Give two examples of direct expenses.
- For each of the following state whether it is direct material, direct labour, or a factory overhead of a clothing factory:
(a)
Electricity
used in the factory
(b)
Purchase
of suiting fabric
(c)
Wages
of factory supervision
(d)
Wages
of sewing machinists
(e)
Purchase
of spare parts for machine
Compiled
by: Akerele Adedayo E.
Enquires
contact:
08162875768, 08057415945
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