2 Manufacturing Business Many business entities engage in manufacturing activities and this involves:The purchasing of raw materialsIncurring laborand other costin converting the raw materials into finished goods.
3 Manufacturing Business In order to ascertain the cost of producing the goods a manufacturing account is prepared. This account is also normally prepared at the end of the accounting period. Both direct and indirect expenses associated with the manufacturing process debited to the manufacturing account. The balance of this account representing cost of the goods produced is then transferred to the trading account.
4 (a)Manufacturing Business The order of presentation of the final accounts is as under: (a) Manufacturing Account Part (b) Income Statement (Trading AC Part) (c) Income Statement (Profit and Loss AC Part) (d) Balance Sheet Part.
5 Division of CostsDirect Materials Direct Labour Direct Expenses Plus Factory Overhead Administrative Expenses Selling & Distribution Expenses Financial ChargesPrimeCostProductionCostTotal Cost
6 Production CostPrime Cost xxxxx Add: Factory Overhead xxxxx Production cost xxxxx (Production Cost = Prime cost (Direct Cost)+ Factory overhead expenses (Indirect cost)
7 Prime Cost Direct Material xxxxx Add: Direct Labour xxxxx Direct Expenses xxxxxPrime Cost xxxxx(Prime Cost = Direct Material+ Direct Labour + Direct Expenses)
8 1. Direct materials Opening Inventory of Raw Materials xxxxx Costs of the materials used during the period.Include Opening Inventory of Raw Materials+ Purchase price of the raw materials and the acquisition costs related to the purchase.- Closing Inventory of Raw MaterialsExamples:Opening Inventory of Raw Materials xxxxxAdd: Purchase of raw materials xxxxxCarriage inwards / freight charges xxxxxAvailable for use xxxxxLess: Closing Inventory of Raw Materials (xxxx)Direct Material used xxxxx
9 2. Direct labour 3. Direct Expenses Wages paid to the people who are directly involved in the manufacturing process.Example: Direct labour, Direct wages, Factory wages, Production wages, Manufacturing wagesWages of a machine operator making a particular item3. Direct ExpensesThey refer to the expenses paid according to each unit of production.Examples: Royalties
10 Prime CostDirect Material xxxxx Add: Direct Labour xxxxx Direct Expenses xxxxx Prime Cost xxxxx
11 Factory Overhead (Indirect Manufacturing Costs) Factory Overhead or Indirect Manufacturing Costs are all those costs which occur in the factory or other place where production is being done, but which cannot be traced to the items being manufactured.Example:Wages of CleanerWages of Crane operatorWages of SupervisorsRent and Rates of FactoryDepreciation of Plant and MachineryFactory PowerFactory Lighting
12 Factory Overhead (Indirect Manufacturing Costs) Factory Overhead or Indirect Manufacturing Costs are all those costs which occur in the factory or other place where production is being done, but which cannot be traced to the items being manufactured.
13 Production Cost Direct Materials Direct Labour Prime Direct Expenses PlusFactory OverheadPrimeCostProductionCost
14 Work in ProcessIt refers to the semi-finished goods, which should be included in the cost of goods manufactured.The opening inventory of the Work In Process should be addedAndThe closing inventory of the Work In Process should be subtractedDirect MaterialsDirect LabourDirect ExpensesPlusFactory OverheadPlus Work in Process (opening)Less Work in Process (Closing)PrimeCostProductionCostTotal Cost of Goods Manufactured