1. Manufacturing Account

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 materials
Carriage inwards / freight charges on raw materials

4. 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. 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.
Direct materials
Direct labour
Direct expenses
Factory overhead expenses
Work in progress
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
$ $
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
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

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 profit
Mark up%
100%+ Mark up(%)
= Stock (at transfer price) x

22. Example 1

23. A company manufactures and sells it own products.
It also purchases and sells other finished goods.
Production 100 units $100
Sales 80 units $160
Closing stock 20 units $20
Expenses for this period $50
Prepare manufacturing, trading and profit and loss
account for the following 2 situations would be
shown:
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: COGS
Production cost of Gd completed
Less: Closing stock(at cost) (20 units*$1)
Gross Profit
Less: Expenses
Expenses 30

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 completed
Sales (80 units*$2)
Less: Cost of goods sold
Transfer price of Gd completed
Less: Closing stock(at transfer price) (20+20*0.2)
Gross Profit
Add: Manufacturing profit 84
Less: Expenses
Expenses
Provision for unrealized profit (24*20/120)
Net Profit
Cost + profit

26. Increase/ Decreased in Provision of Unrealized Profit
Accounting entries
Increase in Provision
Decrease in Provision
Dr Profit and Loss
Cr Provision for
Unrealized Profit
Dr Provision for
Cr Profit and Loss

27. Example 2

28. Goods manufactured are to be transferred to sales department at factory cost plus 20%.
$ $ $
Stock at 1 Jan (at transfer price) ,400 3,600
Stock at 31 Dec (at transfer price)2,400 3,600 3,000
Prepare the provision for unrealized profit account, profit
and loss account and balance sheet respectively for the
three years

29. Provision for unrealized profit
$ $
Dec 31 Bal c/d
(2400*20/120)
Dec P/L
Profit and Loss account (extract) 94
$ $
Gross Profit X
Less: Expenses
Increase in provision for unrealized profit
400

30. Provision for unrealized profit
$ $
Dec 31 Bal c/d
(2400*20/120)
Dec P/L
Dec 31 Bal c/d
(3600*20/120)
Jan 1 Bal b/d
Dec P/L
Profit and Loss account (extract) 94
$ $ 95
$ $
Gross Profit X X
Less: Expenses
Increase in provision for unrealized profit
400
200

31. Provision for unrealized profit
$ $
Dec 31 Bal c/d
(2400*20/120)
Dec P/L
Dec 31 Bal c/d
(3600*20/120)
Jan 1 Bal b/d
Dec P/L
Dec P/L
Jan 1 bal b/d
Dec 31 Bal c/d
(3000*20/120)

32. Profit and Loss account (extract)94
$ $ 95
$ $ 96
$ $
Gross Profit X X X
Add: Decrease in provision for unrealized profit
Less: Expenses
Increase in provision for unrealized profit
400
200

33. Stock Loss

34. Stock Loss
Normal loss
Normal losses refer to losses related to the ordinary activities of the business/
Examples: damaged / spoiled stock, obsolete stock
No entry is required for normal loss

35. Abnormal loss
Abnormal 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 entries
Loss of raw materials without an insurance claim
Dr Profit and Loss
Cr Manufacturing
With the total loss
Loss of finished goods without an insurance claim
Cr Trading

37. Loss of raw materials with an insurance claim
Dr Bank/Insurance Company
Dr Profit and Loss
Cr Manufacturing
With the insurance claim
With the net loss
With the total loss
Loss of finished goods with an insurance claim
Cr Trading

38. Cheung Kong Enterprises
Manufacturing, Trading and Profit and Loss Account for the year ended 30 April 2004
Cost of raw materials consumed
Opening stock ,000
Purchase ,640,000
1,800,000
Closing stock ,000
1,600,000
Manufacturing wages ,000
Prime cost ,400,000

39. Prime cost ,400,000
Factory overheads
Manufacturing expenses ,000
Depreciation ,000
608,000
3,008,000
Opening work in progress ,000
3,134,000
Closing work in progress ,000
Cost of goods completed ,014,000

50. Depreciation Total 2,400,000 x 10% = 240,000
Manufacturing % = 192,000
Administration % = 24,000
Selling and distribution % = 24,000