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 Business which buy raw materials and convert these into finished products which then sold 3

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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 6

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 7

3. Direct expenses They refer to the expenses paid according to each unit of production. Examples: Royalties 8

 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 ◦ Indirect labour  wages, salaries, bonus or commission to cleaners, crane drivers, foremen, supervisors and production managers. 9

◦ 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 10

Production cost = Prime cost / Direct cost + Factory overhead expenses / Indirect cost 11

 It refers to the semi-finished goods, which should be included in the cost of goods manufactured. 12

 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 13

 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 14

 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 15

◦ 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 16

 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 17

 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. 18

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20 Manufacturing 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 Wages X Direct Expenses: 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

21 Add: Opening Work in Progress X Less: Closing Work in Progress X Production Cost of Goods Completed X $ $ Trading Account for the year ended 31 Dec XXXX Sales X Less: Returns inwards (X) X Less: Cost of Sales Opening stock of finished goods X Production cost of Goods completed X Purchases of finished goods X Less: Returns outwards (X ) Less: Closing stock of finished goods (X) X Gross Profit X The goods are transferred to trading a/c at production cost

22 $ $ Profit & Loss Account Gross Profit X Add: Revenues Discount Received X X 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 X Net Profit X

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