2 What is manufacturing account? A manufacturing account is prepared in addition to the income statement. It is produced for internal use only. People other than the owners and managers of the organisation concerned rarely see a manufacturing account.
3 Divisions of costsIn a manufacturing business the costs are divided into different types.Direct materialsDirect labourDirect expensesPrime costProduction costPlusTotal costIndirect manufacturing costsPlusAdministration expensesSelling and distribution expensesFinancial chargesThe prime cost item and the production cost item are shown in the manufacturing account. The administration expenses, selling and distribution expenses and financial charges appear in the income statement.
4 Direct and indirect costs Direct costs (or prime cost) are costs that can be traced to the item being manufactured. E.g. cost of raw material including carriage inwards on those raw material, hiring of special machinery for a job.Indirect manufacturing costs (or indirect costs or sometimes known as factory overhead expenses) are those costs which occur in the factory or other place where production is being done, but which cannot easily be economically traced to the item being manufactured. E.g. wages of cleaners, rent of factory, factory power/lighting, depreciation of machinery, cost of operating forklift trucks.
5 Administration expenses Administration expenses consist of such items such as managers’ salaries, legal and accountancy charges, the depreciation of accounting machinery and secretarial salaries.
6 Selling and distribution expenses Selling and distribution expenses are items such as sales staff’s salaries and commission, carriage outwards, depreciation of delivery vans, advertising and display expenses.
7 Financial chargesFinancial charges are expense items such as bank charges and discount allowed.
8 From the explanation above, tick in the appropriate column for each of the following cost…
9 Indirect manufacturing costs Administration expenses Direct materialDirect labourDirect expensesIndirect manufacturing costsAdministration expensesSelling and distribution expensesFinancial charges1).Purchases of raw material2).Direct wages3).General factory expenses4).Depreciation of machinery5).Commission on sales6).Factory rent7).Carriage inwards of raw material8).Royalties paid9).Inventory of raw material10).Administration salaries11).Indirect labour12).Bank charges13).Carriage outwards14).Discount allowed15).Factory lighting
10 Format of financial statements Manufacturing account sectionPut into series of steps by:Add opening inventory of raw materials to purchases and subtract the closing inventory or raw materialAdd in all the direct costs to get the prime costAdd in all the indirect manufacturing costs.Add the opening inventory of work-in-progress and subtract the closing inventory of work-in-progress to get the production cost of all goods complete in the period.
11 Trading account section of the income statement IncludesSalesLess: COGS-Opening inventory of finished goodAdd: Production cost of goods complete b/dLess: Closing inventory of finished good=Gross profit
12 Profit and Loss section of the income statement Includes:All administration expensesAdd all selling and distribution expensesAdd all financial chargesThe gross profit then subtract by the total of the calculation above. This calculation will become net profit.
13 Example and activity for manufacturing account and income statement are provide in the manufacturing account example & activity document. (as a work sheet)