O Level Notes : Accounts - Manufacturing account

There are three types of business:

1. Trading
2. Services
3. Manufacturing

Manufacturing accounts are used by the 3^rd type of business, as suggested by the name.

If manufacturing accounts are used then in the profit and loss account,instead of cost of purchasing finished goods cost of manufacturing goods is taken into account.

There are 3 elements of cost:

Direct Material : the main raw material eg wood in  furniture industry. Other materials like polish, nails, paint,etc are not raw materials.

Direct labour : the cost of people involved in an industry e.g carpenters in furniture industry.

Factory overheads:     indirect material (e.g polish, nails, etc) + indirect labour (e.g polish boy, painters,etc) +indirect expenses (e.g transportation cost, electric bill).

Factory overheads are also known as indirect manufacturing cost.

 Prime cost : ALL DIRECT COSTS (raw materials, labour, direct expenses). Direct expenses include depreciation on machinery.

Indirect Cost: cost of expenses which cannot be directly linked to manufacturing that good e.g factory power, rent and rate, depreciation of plant ,etc.

FORMAT

Opening stock                                                 XXXX

add purchase of materials                              XXXX

                                                                        _______

MATERIAL FOR USE                                       YYYY

Less closing stock                                            XXXX

                                                                        _______

MATERIAL USED                                             YYYY

Add direct labour                                            XXXX

Add direct expenses                                        XXXX

                                                                        ______

PRIME COST :                                                 YYYY

Add factory overheads                                                XXXX

                                                                        _______

TOTAL MANUFACTURING COST:                  YYYY   

Add work in progress (opening)                                 XXXX

                                                                        _______

AVAILABLE FOR MANUFACTUING:               YYYY

Less work in progress (closing)                                   XXXX

                                                                        ______

COST OF GOODS MANUFACTURED              YYYY

Add finished goods (opening)                         XXXX

Less finished goods (closing)                          XXXX

                                                                        _____

COST OF GOODS MANUFACTURED              YYYY   

Methods for depreciation for manufacting accounts

Manufacturers use 4 kinds of depreciation according to the goods they are manufacturing. The 4 types of depreciation methods are as follows:

Revalution method (for small items like tins, etc)

Value at start of period

Add purchases                         __________________

Less value at end of period

Depletion method (for quarry and mines)

Cost of fixed assets X No. of taken out in a period

                    Expected total contents

Machine Hour method

Cost of asset

Expected life

Sum of years method

cost – salvage cost X Production in a specific period

                 Total expected production