Manufacturing Account – SS3 Book Keeping Lesson Note (Second Term)

A manufacturing account is an account prepared to ascertain the cost of goods manufactured during a financial year.

Behavioural objectives

By the end of the lesson, students should be able to:

1. Define manufacturing account.
2. State the purpose of the manufacturing account.
3. Explain the terms used in a manufacturing account.
4. Calculate the cost of raw materials used.
5. Calculate prime cost, factory cost and manufacturing profit.

What is a manufacturing account?

A manufacturing account is an account that shows the cost of producing the goods a business made in a period.

• Manufacturing: the change of raw materials into finished goods, for example logs into furniture or cassava into garri.
• Who prepares it: a business that makes its own goods, such as a bakery, a furniture workshop or a plastic factory.
• When it is prepared: at the end of the financial year, before the trading account.
• Where the result goes: the cost of goods manufactured is moved to the trading account in place of purchases.

What is the purpose of a manufacturing account?

The purpose of a manufacturing account is to find the cost of goods made and the profit from making them.

1. To ascertain the cost of the goods manufactured.
2. To ascertain the amount of profit from the manufacturing process.
3. To help the owner compare the cost of making goods with the price of buying the same goods.

What terms are used in a manufacturing account?

Seven main terms describe the costs of a manufacturing business. Each is explained below.

What is the cost of raw materials consumed?

The cost of raw materials consumed is the cost of raw materials used up in the manufacturing process.

1. Take the opening stock of raw materials.
2. Add the purchases of raw materials.
3. Add carriage inwards, if any.
4. Deduct the closing stock of raw materials.

• Formula: opening stock + purchases + carriage inwards − closing stock = raw materials consumed.
• Carriage inwards: cost of bringing the raw materials to the factory.

What is prime cost?

Prime cost is the total of all direct costs of production.

• Direct materials: the raw materials consumed.
• Direct labour: the factory wages paid to production workers.
• Direct expenses: any other cost tied to the product.
• Formula: prime cost = direct materials + direct labour + direct expenses.

What is work in progress?

Work in progress is goods that have been started but are not yet finished at the end of the period.

• Opening work in progress: unfinished goods at the start. It is added, because it will be finished this year.
• Closing work in progress: unfinished goods at the end. It is deducted, because it belongs to next year.

What is factory cost (cost of goods manufactured)?

Factory cost is the total cost of the goods completed in the period.

1. Start with the prime cost.
2. Add the factory overheads.
3. Add the opening work in progress.
4. Deduct the closing work in progress.

What is manufacturing profit?

Manufacturing profit is the difference between the market value of the goods made and their factory cost.

• Market value: the price the firm would pay to buy the same goods from outside.
• Formula: manufacturing profit = market value of goods − factory cost.
• Transfer: the goods are moved to the trading account at market value, and the profit goes to the income statement.
• Not every business: some firms transfer goods at cost, so no manufacturing profit appears.

What is the layout of a manufacturing account?

A manufacturing account follows a fixed order, from raw materials down to the cost of goods made.

How do we work through an example?

Use these figures for a furniture factory. All amounts are in naira.

• Raw materials: opening stock 20,000; purchases 150,000; carriage inwards 5,000; closing stock 25,000.
• Direct wages: 80,000.
• Factory overheads: rent 15,000; power 10,000; depreciation of machinery 5,000.
• Work in progress: opening 10,000; closing 15,000.
• Market value of goods made: 280,000.

What mistakes should students avoid?

• Wrong closing stock sign: closing stock of raw materials is deducted, never added.
• Wrong work in progress sign: add the opening figure and deduct the closing figure.
• Office costs in the factory: administrative and selling expenses do not belong in the manufacturing account.
• Missing carriage inwards: add it to the cost of raw materials.

Evaluation

1. Define manufacturing account.
2. State the purpose of the manufacturing account.
3. Discuss some of the terms used in a manufacturing account.
4. How do we calculate the cost of raw materials used?
5. Opening stock of raw materials is ₦12,000, purchases ₦90,000 and closing stock ₦14,000. Find the raw materials consumed.

Classwork: the evaluation questions above.

Assignment

List the seven terms used in a manufacturing account and give one example of each.

Instructional techniques and materials

Instructional techniques

• Identification
• Explanation
• Questions and answers
• Demonstration
• Videos from source

Instructional materials

• Videos
• Loudspeaker
• Textbook
• Pictures