Professional Documents
Culture Documents
Production Cost
Production cost = Prime cost / Direct cost + Factory overhead expenses / Indirect cost
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
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
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3.
Direct expenses
They refer to the expenses paid according to each unit of production. Examples: Royalties
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.
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Work in Progress
It
refers to the semi-finished goods, which should be included in the cost of goods manufactured.
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
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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
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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
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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
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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
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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.
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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 material Direct Labour X Direct labour Royalties X Prime Cost X Direct Expenses Factory Overhead Expenses: Loose Tools (opening bal. + purchases closing bal.) X Rent (e.g. 25%) X Production Managers salaries X Factory Power X Maintenance of plant & Machinery X Overhead Depreciation of Plant & Machinery X X 16 X
Add: Opening Work in Progress Less: Closing Work in Progress Production Cost of Goods Completed Factory profit/(loss) Transfer price of Goods Completed Sales The goods are transferred Less: Returns inwards
Less: COGS Opening stock of finished goods Production cost/Transfer price of Gds completed Less: Returns outwards Fire Loss Less: Closing stock of finished goods Gross Profit Add: Factory Profit Add: Discount Received
$ X X X X X X (X) X
X X X X 17 X
Less: Expenses Carriage Outwards Rent (e.g. 75%) Discount allowed Administration Expenses Distribution Expenses Selling Expenses Depreciation of Delivery Van Provision for Unrealized Profit Fire Loss Net Profit
$ X X X X X X X X X
X X
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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
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Be
Example 1
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A company manufactures and sells it own products. It also purchases and sells other finished goods.
Production 100 units Sales 80 units $2@ Closing stock 20 units Expenses for this period $1@ $100 $160 $1@ $20 $50
Prepare manufacturing, trading and profit and loss account for the following 2 situations would be shown:
1.
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1.
Manufacturing, trading and profit and loss account (extract) $ $ 100 160
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 100 20
80 80
50 30
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2.
$ 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 120 Less: Closing stock(at transfer price) (20+20*0.2) 24 Gross Profit Cost + profit Add: Manufacturing profit Less: Expenses Expenses Provision for unrealized profit (24*20/120) Net Profit $ 100 20 120 160
96 64 20 84
50 4
54 30
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Example 2
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Goods
Provision for unrealized profit 1994 $ 1994 Dec 31 Bal c/d (2400*20/120) 400 Dec 31 P/L Profit and Loss account (extract) 94 $ $ X
$ 400
400
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Provision for unrealized profit 1994 $ 1994 Dec 31 Bal c/d (2400*20/120) 400 Dec 31 P/L 1995 Dec 31 Bal c/d (3600*20/120) 1995 Jan 1 Bal b/d Dec 31 P/L
400
200
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Provision for unrealized profit 1994 $ 1994 Dec 31 Bal c/d (2400*20/120) 400 Dec 31 P/L 1995 Dec 31 Bal c/d (3600*20/120) 1996 Dec 31 1995 Jan 1 Bal b/d Dec 31 P/L 1996 Jan 1 bal b/d
P/L
600
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Gross Profit Add: Decrease in provision for unrealized profit Less: Expenses Increase in provision for unrealized profit
200
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Stock Loss
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Stock Loss
i.
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
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ii.
Abnormal loss
Abnormal losses refer to losses not related to the ordinary activities of the business. Examples: fire loss, burglary loss
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Accounting entries Loss of raw materials without an insurance claim Dr Profit and Loss With the total loss Cr Manufacturing Loss of finished goods without an insurance claim Dr Profit and Loss Cr Trading With the total loss
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Cheung Kong Enterprises Manufacturing, Trading and Profit and Loss Account for the year ended 30 April 2004 Cost of raw materials consumed Opening stock Purchase Closing stock Manufacturing wages Prime cost 160,000 1,640,000 1,800,000 200,000 1,600,000 800,000 2,400,000
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Prime cost Factory overheads Manufacturing expenses Depreciation Opening work in progress Closing work in progress Cost of goods completed 416,000 192,000
2,400,000
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Administration
10% = 24,000
10% = 24,000
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