2 Production Cost Production cost = Prime cost / Direct cost + Factory overhead expenses / Indirect cost
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
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
5 3. Direct expenses They 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 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.
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
8 Work in Progress It 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. 1. Direct materials 2. Direct labour 3. Direct expenses 4. Factory overhead expenses 5. Work in progress 6. Manufacturing profit / loss
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
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
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
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
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 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 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 $ $ 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