Manufacturing Accounts SS2 Financial Accounting Lesson Note

The manufacturing account is an account that is prepared to identify all the manufacturing costs incurred in bringing the product to a marketable state.

Manufacturing is the process of making goods by hand or by machine. The costs involved in the manufacturing process are principally in two main divisions. 

1. The cost of raw materials; and 
2. The cost of converting raw materials into finished goods and this cost is in two main categories:
3. Manufacturing costs and 
4. Non – manufacturing costs

MANUFACTURING COSTS: Manufacturing costs are of two main types:

1. Direct costs; and 
2. Indirect costs (also called factory overheads)

Direct costs apply to these costs which can be readily tractor to the products and are further broken down into: 

a) Direct material cost

b) Direct labour cost

c) Direct expenses

a) Direct Material Cost: Direct materials are basic substances or raw materials from which a product is made. Examples: Soya beans for vegetable oil, palm oil for soaps, animal skin for shoes etc.

Costs that are directly associated with these raw materials in the finished product are called the direct material cost.

b) Direct Labour Cost: It will take human effort to change the form of direct materials into finished goods. The wages of those employees (factory workers who perform this task are considered a direct labour cost). An example of a direct labour cost is the wage of a machine operator.

c) Direct Expenses: There are expenses other than direct materials cost and direct labour cost that are incurred solely in producing the goods. They include the cost of special designs and a line of specialized equipment for a particular job.

d) Indirect Costs: These are costs which cannot be traced directly to the product but which all the same are part of the cost of the product. In determining which costs to treat as direct costs materiality of such items must be taken into cognisance.

Manufacturing overhead costs include indirect material costs such as used in furniture making, lubrication and supplies of materials for repairs and maintenance. Indirect labour costs such as the wages of factory foremen and supervisors.

2. NON-MANUFACTURING COSTS: These are administrative and marketing costs and are not included in the cost of manufacturing the product. These costs are not relevant in the manufacturing section of the account but are approximately treated in the profit and loss section.

TERMINOLOGIES USED IN MANUFACTURING ACCOUNTS

1. Prime Cost: This is the total cost of direct materials, direct wages and direct expenses.
2. Total Factory Cost (Cost Of Production): This represents prime cost plus indirect factory costs (manufacturing overheads)
3. Inventory: This refers to stock. A manufacturing concern has three categories of inventories:
4. Stock Of Raw Materials: This is the quantity of unused portion of raw materials bought.
5. Stock Of Work-in-progress: These are partly finished goods, semi-manufactured goods and incomplete work at the end of a financial period. They are goods that have not been completed in the factory at the time of preparing the final accounts. There could be opening work-in-progress and or closing work-in-progress. This is valued at the start and the end of the trading period
6. Stock Of Finished Goods: This is the quality of completed goods. It is also valued at the beginning and the end of the trading period.
7. Consumables: These are supplies and components purchased for incorporation into the final products and maintenance of machines.
8. Financial Charges: These are expenses and interest incurred in servicing loans e.g. interest on overdraft, discount allowed and interest on loan
9. Total Cost: This represents all the costs involved in bringing the finished goods down to the consumers which include prime costs, factory overheads, administrative, selling and distribution expenses and financial charges.

NOTE:

The following items are included in manufacturing or factory overheads

Indirect wages

1. Heat and power
2. Lubricants
3.  General factory expenses
4. Rent and rates on factory
5. Depreciation of plants and machinery.
6. Depreciation of factory buildings and tools
7.  First and expenses
8. Factory consumables or supplies
9. Indirect materials 
10. Small tools used
11. Grease and oil
12. Other utilities

PREPARATION OF THE MANUFACTURING ACCOUNT

The accounting divisions of manufacturing concerns are in three main segments which are:

1. Manufacturing Account Or Production Account Section: Under this section the three main components of the cost of goods manufactured can be seen at a glance. It is therefore used in ascertaining the cost of production for the period.
2. Trading Account Section: This is principally used for determining the gross profit resulting from trading operations during the period.
3. Profit And Loss Account Section: This is prepared mainly for ascertaining the net profit of the enterprises for the given period.

FORMAT