2 Production Cost Production cost = Prime cost / Direct cost + Factory overhead expenses / Indirect cost
3 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 materialsCarriage inwards / freight charges on raw materials
4 Direct labourWages paid to the people who are directly involved in the manufacturing process.Example: Direct labour, Direct wages, Factory wages, Production wages,Manufacturing wages
5 Direct expensesThey refer to the expenses paid according to each unit of production.Examples: Royalties
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 materialsLubricantsLoose tools (opening balance + purchase – closing balance)Indirect labourwages, salaries, bonus or commission to cleaners, crane drivers, foremen, supervisors and production managers.
7 Indirect expenses related to the factory, machinery and vehicles Rent and ratesDepreciationInsuranceRepairs and maintenanceFactory power / electricityInternal transportLoss on disposal
8 Work in ProgressIt refers to the semi-finished goods, which should be included in the cost of goods manufactured.
9 Manufacturing Account It shows the production cost or transfer price of goods completed during the accounting period.Direct materialsDirect labourDirect expensesFactory overhead expensesWork in progressManufacturing profit / loss
10 Trading AccountThis account shows the gross profit or loss resulted from the trading of manufactured and other purchased goods.The account includes:SalesCost of goods soldManufactured goodsOther goods
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 accountManufacturing profit / loss
12 Administration expenses Selling and distribution expenses Financial expensesIncrease / decrease in the provision for unrealized profitNet abnormal losscash misappropriatedlosses of raw materialslosses of finished goods
13 Some expenses are related to both the manufacturing process and the administration of the office such as:Rent and ratesElectricityInsuranceDepreciation on premisesMotor vehiclesMotor vehicles expenses
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.
15 Format of Manufacturing, Trading and Profit and loss account
16 Manufacturing, Trading and Profit and Loss Account for the year ended 31 Dec XXXX$ $Opening stock of Raw Materials XAdd: Purchases of Raw Materials XCarriage inwards XLess: Closing stock of Raw Materials (X)Cost of Raw Materials Consumed XDirect Labour XRoyalties XPrime Cost XFactory Overhead Expenses:Loose Tools (opening bal. + purchases –closing bal.) XRent (e.g. 25%) XProduction Manager’s salaries XFactory Power XMaintenance of plant & Machinery XDepreciation of Plant & Machinery X XXDirect materialDirect labourDirect ExpensesOverhead
17 Add: Opening Work in Progress X Less: Closing Work in Progress 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 (X)XLess: COGSOpening stock of finished goods XProduction cost/Transfer price of Gds completed XLess: Returns outwards (X)Fire Loss (X)Less: Closing stock of finished goods (X) XGross Profit XAdd: Factory Profit XAdd: Discount Received XThe goods are transferredto trading a/c at productioncost/ transfer price
18 $ $Less: ExpensesCarriage Outwards XRent (e.g. 75%) XDiscount allowed XAdministration Expenses XDistribution Expenses XSelling Expenses XDepreciation of Delivery Van XProvision for Unrealized Profit XFire Loss X XNet Profit X
19 Production Cost Vs. Transfer Price of Goods Completed
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.
21 Provision of Unrealized Profit Be made on the closing stock valued at production cost plus a percentage of factory profit.Provision for unrealized profitMark up%100%+ Mark up(%)= Stock (at transfer price) x
23 A company manufactures and sells it own products. It also purchases and sells other finished goods.Production 100 units $100Sales 80 units $160Closing stock 20 units $20Expenses for this period $50Prepare manufacturing, trading and profit and lossaccount for the following 2 situations would beshown:The factory output is transferred to the trading account at factory cost.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.
24 1. Manufacturing, trading and profit and loss account (extract) $ $ $ $Production cost of Gd completed (100 units*$1)Sales (80 units*$2)Less: COGSProduction cost of Gd completedLess: Closing stock(at cost) (20 units*$1)Gross ProfitLess: ExpensesExpenses30
25 2. $ $ Production cost of Gd completed (100 units*$1) 100 $ $Production cost of Gd completed (100 units*$1)Add: Manufacturing profit (100*0.2)Transfer price of Gds completedSales (80 units*$2)Less: Cost of goods soldTransfer price of Gd completedLess: Closing stock(at transfer price) (20+20*0.2)Gross ProfitAdd: Manufacturing profit84Less: ExpensesExpensesProvision for unrealized profit (24*20/120)Net ProfitCost + profit
26 Increase/ Decreased in Provision of Unrealized Profit Accounting entriesIncrease in ProvisionDecrease in ProvisionDr Profit and LossCr Provision forUnrealized ProfitDr Provision forCr Profit and Loss
28 Goods manufactured are to be transferred to sales department at factory cost plus 20%. $ $ $Stock at 1 Jan (at transfer price) ,400 3,600Stock 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
29 Provision for unrealized profit $ $Dec 31 Bal c/d(2400*20/120)Dec P/LProfit and Loss account (extract)94$ $Gross Profit XLess: ExpensesIncrease in provision for unrealized profit400
30 Provision for unrealized profit $ $Dec 31 Bal c/d(2400*20/120)Dec P/LDec 31 Bal c/d(3600*20/120)Jan 1 Bal b/dDec P/LProfit and Loss account (extract)94$ $95$ $Gross Profit X XLess: ExpensesIncrease in provision for unrealized profit400200
31 Provision for unrealized profit $ $Dec 31 Bal c/d(2400*20/120)Dec P/LDec 31 Bal c/d(3600*20/120)Jan 1 Bal b/dDec P/LDec P/LJan 1 bal b/dDec 31 Bal c/d(3000*20/120)
32 Profit and Loss account (extract) 94$ $95$ $96$ $Gross Profit X X XAdd: Decrease in provision for unrealized profitLess: ExpensesIncrease in provision for unrealized profit400200
34 Stock LossNormal lossNormal losses refer to losses related to the ordinary activities of the business/Examples: damaged / spoiled stock, obsolete stockNo entry is required for normal loss
35 Abnormal lossAbnormal losses refer to losses not related to the ordinary activities of the business.Examples: fire loss, burglary loss
36 Loss of raw materials without an insurance claim Dr Profit and Loss Accounting entriesLoss of raw materials without an insurance claimDr Profit and LossCr ManufacturingWith the total lossLoss of finished goods without an insurance claimCr Trading
37 Loss of raw materials with an insurance claim Dr Bank/Insurance CompanyDr Profit and LossCr ManufacturingWith the insurance claimWith the net lossWith the total lossLoss of finished goods with an insurance claimCr Trading
38 Cheung Kong Enterprises Manufacturing, Trading and Profit and Loss Account for the year ended 30 April 2004Cost of raw materials consumedOpening stock ,000Purchase ,640,0001,800,000Closing stock ,0001,600,000Manufacturing wages ,000Prime cost ,400,000
39 Prime cost ,400,000Factory overheadsManufacturing expenses ,000Depreciation ,000608,0003,008,000Opening work in progress ,0003,134,000Closing work in progress ,000Cost of goods completed ,014,000