The businesses which produce and sell the items prepare the following accounts at the end of its

accounting year:a. The Manufacturing account (to calculate the total cost of production) b. The Trading and profit & loss account (to find out the net profit or loss) c. The balance sheet.(to show the financial position of the business) The total cost of production = Prime cost + Factory overhead The Prime cost = Direct material + Direct labour + Direct expenses Direct material cost = Opening stock of raw materials + purchase of raw materials + Carriage inwards returns outwards closing stock of raw materials. Factory overhead expenses = All expenses related to the factory (indirect expenses) In a manufacturing concern, usually there are three kinds of stocks: Stock of Raw materials (the materials which are mainly used for production of the item) Stock of Work in progress (the materials on which some work process have been completed) Stock of Finished goods (The materials on which all the production processes are completed and for sale to the customers) In the examination questions, the stock figures will be given separately. The format of a manufacturing account Manufacturing account for the year ended . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Opening stock of raw materials Add purchase of raw materials Add carriage inwards ( if any ) Less Returns outwards (of raw materials) Less Goods drawings ( if any ) Less Closing stock of raw materials Cost of Direct Materials Add Direct labour Add Direct expenses Prime Cost Add Factory overhead expenses Factory lighting Factory heating Factory insurance Factory rent xxxx xxxxx Xxxx Xxxxx xxxx Xxxxx xxxx xxxxx xxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxx xxxxxx xxxxxx xxxxxx ready

Factory maintenance Factory indirect wages Factory supervisors wages Depreciation on plant & machinery Depreciation on factory building Depreciation on factory furniture Depreciation on factory motor van Depreciation on other factory fixed assets Add Opening stock of work in progress Less Closing stock of work in progress Cost of production

xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx (+)

XXXXXXX XXXXXXX xxxxxx XXXXXXX xxxxxx XXXXXXX

Format of trading account of a manufacturing concern Sales of finished goods Less Returns inwards Less Production cost of goods sold Opening stock of finished goods Add Cost of production Less closing stock of finished goods Less finished goods drawings by the owner Gross profit or Gross loss xxxxx xxxxx xxxxxx xxxxx xxxxxxx xxxxxx xxxxx xxxxxxx xxxxx

(-)

xxxxxxx XXXXXX

The profit & loss account and the balance sheet preparations will be the same as that of a sole traders. So the students have to follow the previous method for the preparation of these. Fixed expenses and Variable expenses Some expenses will remain constant whether the level of activity increases or falls. These expenses are called fixed expenses E.g. rent of building The expenses which change with changes in activity are called variable expenses E.g: cost of materials. Key points:

y y y y y y

Carriage on raw materials means carriage inwards and it is a part of prime cost. Carriage outwards is shown in the profit & loss account as an expense. Royalties paid is to be treated as direct expense. Depreciation on Plant and Machinery or any other factory asset is to be treated as factory overhead expense. Stocks of raw materials and work-in-progress are taken in the manufacturing account and stock of finished goods is taken in the trading account. Stocks at the end of the year (raw materials, work-in-progress and finished goods) are shown in the balance sheet as current assets.

y y y y

Owners raw materials drawings are shown in the manufacturing account while calculating the prime cost. Finished goods drawings are shown in the trading account while calculating the cost of goods sold. The purchase of finished goods is added with cost of production in the trading account. The depreciation of any asset used in the office should be shown as an expense in the profit & loss account.

y y

Cost of readymade items bought for the production of items manufactured should be treated as direct expense. Unit cost of production = Total cost of production No of units produced MCQ. Q 1. The purpose of preparing the manufacturing account is to calculate: C. Net profit D. Cost of production

A. Gross profit B. Manufacturing profit Q 2.

What does production cost include in a manufacturing account? B. Purchase of raw materials D. All of these

A Factory power C Carriage inwards on raw materials Q 3. Prime cost includes

A. Factory direct wages C. Finished goods

B. Factory indirect wages D. Work in progress

Q 4.

The costs of a manufacturing firm are as follows:

Raw materials purchased Direct Labour Cost of Raw material consumed Factory overheads What was the prime cost? A. $10000 B. $15000

$ 5000 3000 7000 2000

C. $12000

D. $17000

Q 5.

Prime cost In a Manufacturing account is equal to B. All factory costs D. Direct materials plus direct expenses

A. All factory indirect costs B. Direct factory costs only Q 6.

Carriage outward in manufacturing concern is included in which heading? B. Factory overhead expenses D. Selling and distribution expenses

A. Direct expenses C. Administrative expenses Q 7.

Which of the following is not included in the Manufacturing account? B. Depreciation on factory machinery D. Depreciation on office equipment

A. Foremans wages C. Indirect wages Q 8.

The following table shows the cost incurred for the production of an item. $ 1200 $ 700 $ 100

Direct materials Direct wages Manufacturing expenses

Factory overhead expenses $ 300 What is the amount of prime cost? A. $ 2300 Q 9. B. $ 2 000 C. $ 1 700 D. $ 3 000

How is the production cost calculated in a manufacturing account?

A. Prime cost + administrative expenses B. Prime cost + administrative expenses C. Prime cost + Factory overhead expenses D. Raw materials + direct labour. Q 10. Which on of the following is not factory overhead expense? B. Carriage on raw materials D. Factory power

A. Wages of cleaners C. Factory lighting Q 11.

Which are the stock figures shown in the manufacturing account? B. Finished goods only D. Finished goods, working progress and

A. Finished goods and raw materials C. Raw materials and working progress raw materials.

Q 12.

In the balance sheet of a manufacturing concern, which stock is shown? B. Raw materials D. All three.

A. Finished stock C. Work in progress Q 13.

A manufacturing firms costs were as follows: 55 000 86 400 122 000 6 400 8 800

Raw materials Direct labour Factory overhead Depreciation of plant Administrative expense

Selling & distribution expense 12 000 There was closing work in progress of $ 12 400 What was the factory cost of production? A. $ 257 400 Q 14 B. $ 263 400 C. 269 800 D. 278 200

The material drawings are shown in the: B. profit & loss account D. balance sheet only

A. trading account C. manufacturing account Q 15

Royalties paid by a manufacturer is: B. a part of prime cost. D. an indirect expense.

A. shown as factory overhead C. a selling expense

Assignment questions Q 1. Jo Towbury is a manufacturer and the following balances appeared in his books for the year ended 31st Dec 2002:-

Stocks on 1-1-2002:- $ Raw materials Work in progress Finished goods Stocks on 31-12-2002:Raw materials Work in progress Finished goods Purchase of raw materials Fuel and power Direct expenses Factory insurance Depreciation of factory plant Insurance of office machinery Wages factory Carriage on raw materials Sales of finished goods Return outwards Return inwards Required to prepare: a. The Manufacturing account for the year ended 31st Dec 2002. b. The trading & profit & loss account for the year ended 31st Dec 2002. 120 38 000 250 300 300 420 150 3 970 1 250 750 1 120 8 700 990 200 2 000 850 1 280

Q 2 The following balances are available from the books of a manufacturer for the year ended 31st Dec 2002:Account balances Stocks on 1-1-2002:- Raw materials Work in progress Finished goods Purchase of raw materials Manufacturing wages Direct expenses Sales of finished goods Salaries General expenses Carriage inwards Discount allowed Depreciation on :Plant & machinery Factory building Office building Stocks on 31-12-2002:- Raw materials Work in progress Finished goods $ 4 914 300 2 592 42 786 46 800 3 600 1 20 000 6 720 5 493 696 1 530 4 800 280 450 2 058 600 3 714

General expenses include $ 592 incurred for the factory. Carriage outstanding on 31-12-2002 was $ 400. Required to prepare Manufacturing, trading and profit & loss account for the year ended 31st Dec 2002.

Q 3. On 31st Dec 2003, the following balances appeared in the books of A. Allen, a manufacturer of a specialized product::-

Stocks on Raw materials Work in progress Finished goods $

1-1-2003 1000 25000 61000

31-12-2003 6000 19000 45000

Purchase of raw materials 1 25 000 Carriage inwards 5 000 Sales less returns 4 31 220 Advertisement 4 000 Insurance of the office building 1 000

Bank charges 250 Salaries 22 000 Bad debts - 1 700 Power charges 35 000 Gas & water - 5 000 Carriage outwards 2 000 Factory rent 12 000 Factory rates & taxes 2 200

Insurance of plant 6 000 Direct wages - 75 000 Depreciation of plant 40 000 Depreciation of office furniture - 1 000 Office insurance prepaid Salaries outstanding (31-12-2003)200 2 000

Power charges outstanding(31-12-2003) 5 000 Rates & taxes prepaid (31-12-2003)- 1 000

Required to prepare at 31st Dec 2003:-

a. The manufacturing account clearly showing the prime cost and the cost of production b. The trading and Profit & Loss account showing the gross profit or loss and net profit or loss. Q 4. From the following items appeared in the books of a manufacturer, for the year ended 31stMarch 2003, prepare the Manufacturing account and the trading & profit and loss account for the same date.

Items Stocks on 1-4-2002:- Raw materials Work in progress Finished goods Purchase of raw materials Factory wages Indirect wages Rent, rates & taxes (factory) Lighting & heating (factory) Electricity Repairs to factory buildings Carriage outwards Carriage inwards Salaries General expenses Cash discount allowed Sales Advertisement Depreciation on fixed assets:- Plant Factory building Office furniture Stocks on 31-3-2003:- Raw materials Finished goods Work in progress

$ 16 000 1 000 8 1 1 8 640 42 620 48 000 000

7 200 600 9 400 800 2 320 12 000 22 000 19 310 5 100 4 00 000 2 500 16 000 600 500 6 860 12 000 2 000

*Electricity expenses are to be charged to Factory and Office in the ratio of 3:2. *Salaries owing on 31-3-2003 was $ 2 400 *Rent, rates and taxes include rent paid in advance $ 200. *There was an item of cash discount received $ 300 which did not appear in the books of the business. *During the year, the owner had taken finished goods costing $ 4 000 for his own use. *This transaction was not recorded in the books of the business. Q 5. Prepare Manufacturing, trading and profit & loss account from the following balances extracted

form the books of Berten, a Manufacturer, for the year ended 31st Dec 2003: $ Stock at 1st Jan 2003:Work in progress Finished goods Raw materials 17 500 20 300 73 480 1 280 64 350 15 400 3 000 5 300 6 000 17 450

Purchases of raw materials Carriage on raw materials Direct labour cost

Office salaries Rent

Office lighting &n heating Depreciation on :-

Works Machinery 1 900

office equipment -

Sale of finished goods 2 02 000 Factory fuel & power Insurance 3 250 2 500

*Rent and insurance are to be apportioned: Factory

3/5, Office 2/5

*Fuel & power unpaid on 31st Dec 2003 amounted to $ 300. *The stock figures on 31st Dec 2003 were;Raw materials Work in progress Finished goods 18 300 16 700 22 465

Q 6. Jo Towbury is a manufacturer and the following balances appeared in her books at 31st Dec 2003, the end of her business financial year. $ Stock at 1st January 2003:-

Raw materials 15 000 Work in progress Finished goods Wages: direct manufacturing factory supervisors general office warehouse Heating & lighting Carriage outwards Purchase of raw materials Administrative expenses Sales Stock at 31st Dec 2003:Raw materials Work in progress Finished goods 12 500 3 100 20 000 9 50 000 3 00 200 40 000 20 200 25 500 12 000 920 2 12 000 2 500 2 000 20 500

Notes Heating & lighting is to be apportioned:Factory Warehouse Office 1/3 1/6

Warehouse costs are to be included in the trading account. Prepare for Jo Towbury, for the year ended 31st Dec 2003: a. The manufacturing account, clearly showing the prime cost and the cost of production. b. The trading account, showing the gross profit or gross loss.

Q 7. Fred Dyer, a manufacturer of furniture, rents premises which consist of a workshop in which the furniture is made and a shop through which the furniture is sold. For the year ended 31st Dec 2003, the following information is available:$ Stocks on 1st Jan 2003:Raw materials Work in progress Finished goods Stocks on 31st Dec 2003:Raw materials Work in progress Finished goods 1 900 2 460 5 320 2 450 2 000 6 700

During the year ended 31st December 2003:Purchase of raw materials Purchase of readymade handles& locks Sales of finished goods Rent of premises Wages (work shop) Wages (shop) Electricity Motor vehicle expenses for delivery of Finished goods to customers Depreciation of workshop machinery Purchase of new workshop machinery 1 500 2 500 3 000 15 300 850 81 900 1 500 24 000 6 200 1 350

Fred Dyer apportions the cost of the rent and the electricity between the workshop and the shop in the ratio of 2:1. He does not maintain any readymade handles and locks.

Prepare for the year ended 31st Dec 2003:i. A manufacturing account showing clearly the prime cost and the cost of production. ii. A trading account showing the gross profit or gross loss. iii. Calculate the % of gross profit on sales. Q 8. Mann is a manufacturer of mini computer, provides you the following information for the year ended 30th June 2002 Stocks Raw materials Work in progress Finished goods 1-7-2001 $ 19 000 $ 40 000 160 units 30-6-2002 $ 24 500 $ 15 000 ?

The following details are also available for the year ended 30th June 2002:$ 1 99 000 1 4000 1 590 4 100 600 14 000 7600 10 900 42 000 60 000 96 000 3 600 14 600 3 910 9 000

Purchase of raw materials Carriage inwards Return inwards Carriage outwards Return outwards Rent and rates Lighting and hearting Direct factory expenses Factory labour ($38 000 direct and $ 4000 indirect) Factory machinery (cost) Office machinery(cost) Indirect expenses Office staff salary License and taxes Factory supervisors salary 1. 2. 3. 4.

otes:Lighting charges unpaid by $ 400 on 30th June 2002. Allocate lighting & heating and rent & rates in the ratio of 3:2 between factory and office. Depreciate all the fixed assets @ 20% p.a. on cost. During the year 620 computers were produced and 480 computers were sold for $ 590 each.

Prepare the manufacturing account for the year ended 30th June 2002 showing clearly the prime cost and cost of production.

Q 9. James is a manufacturer of a single product. He provides the following information relating to his business for the years ended 31st December 2003. Stocks On 1-1-2003 0n 31-12-2003

Raw materials Work in progress Finished goods(at factory cost) For the year ended 31st December 2003 Purchase of raw materials Carriage inwards Manufacturing wages Factory power Rent and rates Direct factory expenses General expenses(factory) Returns outwards Plant and machinery at cost

$ 13 500 $ 1 000 85 units

$ 14 800 $ 730 ? $ 97 150 1 200 32 100 5 310 4 000 985 1 835 850 44 800

Additional information 1. Manufacturing wages outstanding $ 300 2. Depreciate plant and machinery at 10% p.a. on cost 3. Rent rates are to apportioned to the factory and to the office in the ration of 3:1 4. The cost of production for the year ended 31st December 2002 was $125per unit 5. During the year 2003, 1120 units were produced and 1095 units were sold for $ 210 each. Prepare the manufacturing account and trading account for the year ended 31st December 2003, clearly showing the cost of raw materials consumed, prime cost and cost of production per unit