Manufacturing of goods is the transformation of raw materials into finished or semi finished goods. Some firms have to manufacture their goods before selling them to the general public e.g Coca-Cola, Nestle etc., while some merely sell products which are acquired in finished form.
A manufacturing organisation will acquire raw materials, engage labour, and other inputs necessary to change the raw materials into finished goods. The main aim of preparing the manufacturing account is to ascertain the cost of goods manufactured during the financial year. It is an extension of the trading account.
PURPOSE OF MANUFACTURING ACCOUNTS
The purpose of manufacturing accounts are as follows
- To ascertain the cost of goods manufactured.
- To ascertain the amount of any profit or loss on the manufacturing process.
In manufacturing account, there are three types of cost, they are listed below;
- raw materials,
- finished goods
- work in progress.
In the case of a manufacturing enterprise, the manufacturing costs are divided into the following types, which are listed below:
i) Direct material costs
These types of costs are those materials which are used directly in the manufacture of products or goods. They are the materials that can be identified in the final products. Example; During the manufacturing process of tables, direct materials consists of timber, nails, glue, paints etc.
ii) Direct labor costs
Direct labor are wages paid to those who are directly involved in the manufacturing processes of a product. Example: During the manufacturing processes of tables; direct labor consists of wage paid to those workers who saw, shape of join the piece of timber into table.
iii) Direct expenses
Direct expenses are expenses that must be incurred in the manufacture of a product. I.e, they can be directly allocated a particular unit of a product e.g. live charges for a special equipment used in the process of manufacture, royalties
NB: You have to note that the sum of all the direct costs is known as PRIME COSTS
iv) Indirect manufacturing costs / factory overheads
Indirect manufacturing costs are also known as Factory overheads. They are any other expenses (apart from the direct costs) for items being produced. Examples are: cleaners’ wages, factory rents, depreciation of plant and equipment, factory power and lighting.
Note that: prime cost + indirect manufacturing costs = PRODUCTION COSTS
v) Administrative Expenses
Administrative expenses are expenses that are administrative in nature. I.e, they are expenses which are incurred in the process of planning, controlling and directing the business organization. e.g. office rents, office electricity, depreciation of office machinery, secretarial salaries.
vi) Selling and distribution expenses
Selling and distribution expenses are expenses which are incurred in the process of selling, promoting and distributing the goods manufactured. Examples are; advertising expenses, carriage outwards, depreciation of motor van, salesmen salaries etc.
vii) Finance Costs
These are expenses such as bank charges, discount allowed and every other monetary expenses.
FINAL ACCOUNTS OF A MANUFACTURER
The three processes involved in the final account of a manufacturer includes
- Manufacturing accounts – The manufacturing account is prepared to determine the cost of production.
- Trading account- The aim of preparing Trading Account is to determine the gross profit or loss on trading.
- Balance sheets- The balance sheet is the statement that shows the assets and liabilities of a business.
PREPARING A MANUFACTURING ACCOUNT
The steps involved in preparing a manufacturing account include the following:
- Add opening stock of raw materials to purchases and subtract the stock of raw materials. This is to get the cost of materials used during the period.
- Add in all the direct costs to get the prime costs
- Add all the indirect manufacturing costs.
- Add the opening stock of Work In Progress and subtract the closing stock WIP to get the production cost of all goods completed in the period. This is because WIP cannot be sold and therefore should not be included in the trading account.
- The manufacturing account when completed shows the total that is available for sale during the period.
- This will be used in trading account in place for purchases.
- The total cost of production = Prime cost + Factory overhead
- The Prime cost = Direct material + Direct labor + Direct expenses
- Direct material cost = Opening stock of raw materials + purchase of raw materials + carriage inwards – returns outwards – closing stock of raw materials.
- Factory overhead expenses = All expenses related to the factory (indirect expenses)
SHORT QUESTION AND ANSWERS IN MANUFACTURING ACCOUNTS
1. What is the meaning of manufacturing concern?
Manufacturing concern are those business organisations which manufacture goods or products. These organisations usually involved in the purchase of raw materials and make finished goods. For example, sugar mills purchase sugarcane and sale sugar.
2. What is the meaning of trading concern.
Trading concern are those merchants who sell goods in the small quantities and condition in which they had purchased them such as general store, medical store etc.
3. What is direct material.
These are the material used in the course of manufacturing which enters into and becomes part of the product i.e. wheat used in milling flour, wood used in the manufacturing of chair, etc.
4. What is direct labour cost.
Direct labour cost are the labour force employed by an enterprise will generally fall in two categories i.e. direct labour and indirect labour.
5. Explain direct labour.
The labour employed is performing work directly upon an article which can be sold is called direct labour.
6. Explain the meaning of indirect labour.
Labour employed on such work as sweeping and clearing, supervising and inspecting, issuing materials and internal transportation, empowering the plant and machinery and other work not directly concerned with physical production is called indirect labour.
7. What is factory overhead.
Factory overhead may be defined as those costs which are indirectly related with production' They are indirect costs consumed during production processes e.g
a. Factory rents and rates
b. Depreciation of plants and machinery
c. Indirect wages
d. Upkeep of factory wages.
8. What is prime cost?
According to some cost accountants the prime cost is the sum of direct materials, direct labour and direct factory overhead costs.
9. What is conversion cost?
It is the cost of converting raw materials into prepared material or finished goods exclusive of the cost of raw materials. The direct labour and factory overhead.
10. What is factory cost?
It is the figure by which completed goods are shown in the factory. This is also known as total work cost, or total manufacturing cost.
11. What is Work in progress
These can be define as the partly finished goods or in complete work. The cost of production must be adjusted for work in progress at the beginning and end of the year.
12. What is Cost of raw material consume?
This is the cost of raw materials which have been used up in the manufacturing process. This will be found by:
(a) Taking Opening Stock at raw materials
(b) Adding purchases of raw materials
(c) Deducting closing stock of raw materials
13. What is Non manufacturing cost
These are selling, distribution and administrative expenses which are used up in the production process. The expenses will appear on the debit side of profit and loss account for the period.
Manufacturing companies prepare manufacturing accounting to ascertain the cost of production. Small businesses in this sector can use the best manufacturing accounting software for small businesses to simplify the process.