MANUFACTURING ACCOUNTS

Direct Materials + Direct Labour + Direct Expenses   =   Prime Costs

 

Prime Costs + Production Overheads   =    Manufacturing Costs

 

 

 

Note:

 

The Production Overheads will have to account for both the

Opening Work In Progress and Closing Work In Progress.

 

 

 

Direct Materials

 

Cost of the raw materials that are used to make the finished goods.

 

 

 

Direct Labour

 

Refers to the wages of the labour who are involved in the actual production of the finished goods.

 

 

 

Direct Expenses

 

Production expenses which are directly traceable to the finished goods other than the direct materials and direct labour.

Production overheads

 

The production or factory overheads which are not directly traceable to the finished product.

 

These are not the prime costs which are incurred in the factory.

 

 

Prime Costs

 

Is the total direct production costs of finished goods.

 

 

Opening Work In Progress

 

Is the cost of uncompleted production process at the beginning of the financial period.

 

 

Closing Work In Progress

 

Is the cost of uncompleted production process at the end of the financial period.

 

 

 

 

 

Transfer of Finished Goods

 

The transfer of finished goods from the Manufacturing Account to the Trading Account are usually

made at a cost plus profit margin.

 

 

 

 

 

Cost Plus Profit Margin

 

Transferring of goods manufactured at cost plus profit margin is for the purpose of distinguishing profit made

by manufacturing finished goods from trading profit.

 

 

Journal entry:

 

Dr           Manufacturing Account

Cr                            Profit & Loss Account

 

 

 

 

 

Unrealised Profit

 

At year end, an unrealised profit will need to be accounted for in the Manufacturing Account.

 

The Manufacturing profit is in the stock valuation and must be removed.

 

An unrealised profit exist when there are stocks of finished goods not sold out to a third party at the

end of a particular financial year.

To do this adjustment, Provision For Unrealised Profit Account must be created.

 

 

 

Journal Entry:

 

Dr           Profit & Loss Account

Cr                            Provision For Unrealised Profit

 

 

Extract of Balance Sheet as at …
Current Assets
Stock - Finished goods				xxx
Less : Provision for unrealised profit				(xxx)
				xxx

 

 

 

 

 

IMPORTANT REMINDER

 

THIS IS TO PROVIDE STUDENTS A COURTESY REMINDER THAT THIS BLOG IS CATERED

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IT IS NOT MEANT TO PROVIDE A COMPLETE CONTENT OF THE SUBJECT MATTER.

 

THEREFORE, STUDENTS ARE ADVISED TO TAKE THIS INFORMATION RESOURCE AS A SUPPLEMENTARY READING ONLY.

 

THIS READING MATERIAL IS ONLY A SUMMARY OF WHAT IS ESSENTIAL IN GETTING  A GOOD

UNDERSTANDING BUT NOT AN EXHAUSTIVE ONE OF THE RELATED TOPIC.

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