MANUFACTURING ACCOUNT
Manufacturing
means the transformation of raw materials into finished products. An account
prepared to determine the cost of producing these finished products/goods is
called Manufacturing Account.
The
principal purpose of preparing a manufacturing account is for the business to
determine whether it will be profitable for them to manufacture their products
or to purchase them from other producers.
If
the cost of production is less than the amount required to purchase similar
quantities of the same products from other manufacturers, it is economical for
a business to manufacture its products but if the cost is higher than the cost
of buying the product, it is advisable to halt the production and buy the
products from outside.
A manufacturing account is just an extension of a trading account.
Manufacturing Costs/Expenses
These refer to the various costs involved in
the production of manufacturing goods/products. These costs can be grouped
under the manufacturing account as:
1. Prime
cost
2. Overhead
cost
3. Work in progress (W.I.P)
1. Prime Cost
These
are expenses that can be directly linked to the goods being manufactured.
Without any of these costs, the production of goods may not be possible. It
includes:
i.
Direct materials
ii.
Direct labour
iii.
Direct expenses
i. Direct
Materials: this refers to the cost of acquiring raw materials
used in the production of goods. For example; in the production of bread, the
cost of flour, sugar, baking powder, and butter, among other ingredients required
are regarded as direct materials required in the production of bread.
ii. Direct
Labour: This refers to the wages and salaries of workers
who are directly involved in the manufacturing of goods in the production
process. For example, the mixer who is in charge of mixing materials in the
production of bread, and the worker who is in charge of the oven during the baking,
are good examples of direct labour because their absence in the line of
production may halt the production process.
iii. Direct
Expenses: These are expenses that are directly related to the
manufacturing process. This cost usually varies with the level of output.
Manufacturing industries only incur this expense when there is production and
the value increases or decreases with the level of output. For example, Royalty is paid to the land owner for extracting resources like gold, diamond, limestone,
etc. from their land. The cost is different from rent as it is based on the
volume of extractions of the resources from the land.
Note: It is the
addition of all direct costs (direct materials, direct labour, and direct
expenses) explained above that form the Prime
Cost.
2.
Factory
Overhead
These are all indirect
expenses incurred in the manufacturing of goods. They include those expenses
that can not be directly traced to the goods being manufactured but are required
for production to take place e.g wages and salaries of factory workers not
directly linked with the goods like the workers in charge of product packaging,
store, cleaners, among other; payments for rent, electricity, depreciation on
plant and machinery, etc.
3.
Work-In-Progress
This refers to the
partly finished goods available in the factory. These are items that cannot be
categorized as materials or complete goods. It includes processed materials that
have not been passed through all the stages of production. These semi-finished
goods could be classified as open work in progress and closing work in
progress. The amount of partly finish goods available at the beginning of the financial year is termed Open Work-In-Progress while
the amount of partly finished goods available at the end of the year is called Closing
Work-In-Progress.
Cost of Production
The
cost of producing goods includes the addition of prime cost (direct materials,
direct labour, and direct expenses), factory overhead, and net work in progress
(open work in progress – closing work in progress).
Key Terms in
Manufacturing Account
- Open Stock of Raw Materials: This is the cost of raw materials available in the factory at the beginning of the financial period.
- Purchase of Raw Materials: This is the cost of raw materials purchased during the financial year.
- Carriage Inward on Raw Materials: This includes all expenses in getting the purchased materials to the factory. For example, expenses incurred in loading the raw materials, cost of transporting the raw materials, and other relevant costs in getting the raw materials to the factory.
- Cost of Raw Materials Available: This refers to the cost of raw materials available for use in the production process.
- Closing Stock of Raw Materials: This is the amount of raw materials remaining in the factory at the end of the financial period. That is when the factory is closing business for the year.
- Return Outward of Raw Materials: This is the cost of raw materials returned by the factory due to some defects like, damage in transit, expiration of the materials, wrong selection, etc. back to the supplier.
- Cost of Raw Materials Consumed (Used): This is the total cost of raw materials used in the production process.
- Work-In-Progress: As explained earlier, it is the cost of semi-finished goods at the time of preparing the financial account of a manufacturing company. It includes materials that are already been processing but have yet to complete the processing stages at the end of the period. This cost is of two types which are: Open Work-In-Progress which refers to the amount of partly finished goods at the beginning of the financial period and Closing Work-In-Progress which is the cost of available semi-finished goods at the end of the financial year.
- Manufacturing Profit: This is the amount saved by a company for manufacturing its products instead of buying them. It is calculated by removing the cost of production of the company from the market value of those goods.
- Market Value: This is the amount that will be required to buy equivalent goods produced in the market. In simple terms, it is the sum of the cost of production and the manufacturing profit of a company.
ILLUSTRATION
FADWORLD
Enterprises, a manufacturer of school bags operating in Ibadan city, Nigeria
has the following balances for the year ended, 31st December, 2022.
N
Raw
materials 01/01/2022 10,000
Work
in progress 01/01/2022 4,000
Purchase
of raw materials 45,000
Manufacturing
wages 20,000
Carriage
inward on raw materials 3,500
Return
outwards on raw materials 2,000
Manufacturing
wages 5,000
Factory
rent 2,000
Depreciation
on plant and machinery 6,000
Advertising 5,000
Foreman
salary 3,000
Raw
materials as at 31st December, 2022 7,000
Work
in progress as at 31st December, 2022 2,500
Office
salaries 6,000
You
are required to prepare a manufacturing account for the year ended, 31st
December, 2022.
SOLUTION
Manufacturing Account
for the Year Ended, 31st December, 20222
N N
Open
stock of raw materials 10,500
Purchase
of raw materials 45,000
Carriage
inward on raw materials 3,500
48,500
Less:
Return outwards on raw materials (2,000) 46,500
Cost
of Raw Materials Available 57,000
Less:
Closing stock of raw materials (7,000)
Cost of Raw Materials Consumed 50,000
Manufacturing wages 5,000
Prime Cost 55,000
Factory Overhead Cost
Depreciation
of plant and machinery 6,000
Factory
foreman 3,000
Factory
power 2,000
Rent
and rate 5,000 16,000
Open
work in progress 4,000
Less:
Closing work in progress (2,500) 1,500
Cost
of Production 72,500
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