ACCOUNTS FOR MANUFACTURING FIRMS

Business can be classified into two types, which are merchandising and manufacturing.

Merchandising is a trading firm / business deals with the buying and selling of manufactured
goods while manufacturing deals with the processing of Raw – materials into finished goods.
E.g. Food processing, cement making.

While Manufacturing firm use labor, plant and equipment to convert Raw – materials to finished
goods.

Both mechanizing and manufacturing firms required to prepare final account at the end of
trading period to show whether they are making profit or loss.

In manufacturing firm, a statement of manufacturing cost is prepared in addition to Income

statement, This statement shows the cost of manufacturing goods (cost of production of
completed goods).

The aim of preparing the statement of manufacturing cost is to determine the cost of a particular
project

Manufacturing costs

In manufacturing business, the costs are divided into different types as follows;

a) Prime costs: These include all direct costs attributed to the production of any commodity
which are Direct materials, Direct labor, direct expenses.
b) Factory overheads/ Indirect manufacturing costs: All indirect costs attributed to the
production are called factory overheads, good example are factory power, factory rent,
depreciation of production machinery etc.
c) Total Factory costs/ Production costs: This is the sum of prime cost and production
overhead, It includes all direct and indirect costs involve in production, therefore
production cost is equal to Prime cost plus factory overheads.

Other costs under manufacturing firms:

a) Administration expenses; Consist of such items as manager’s salaries, legal and

accountancy charges, secretarial salaries and depreciation of accounting machinery.
b) Selling and distribution expenses; Consists of items such as sales staffs, salaries and
commission, carriage outwards, depreciation of delivery vans, advertising and display
expenses etc.
c) Financial charges: These are expenses items such as bank charges and discount allowed.

Types of Stock in Manufacturing firms

 There are three types of stocks involved in manufacturing firms:

i) Stock of Raw materials: These are unprocessed materials in the production process
such as cotton, coffee, tea etc.
ii) Work in Progress: There are partly finished goods, are the goods which are not yet
completely produced, they are at the time of annual stock taking, neither in form of
raw materials nor in finished product state.
iii) Stock of finished goods: These are goods which are ready for use, like motor car,
Shirt, Mobile phones etc. There is no any further processing of such goods.

Statement of Manufacturing Costs:

As explained earlier, the main purpose of preparing the statement of manufacturing costs
is to determine the production cost of goods completed, this figure is then transferred to the
income statement where it will replace the entry for purchases.

THE FORMAT OF THE STATEMENT OF MANUFACTUING COSTS

Inventory of Raw materials at start…………………………………………….. xxxx

Add: Purchases of Raw materials ……………………………………………... xxxx

Add: Carriage inwards for raw materials……………………………………… xxxx

Less: Return outwards of raw materials ………………………………………. xxxx

Cost of Raw materials Available for Use …………………………………… xxxx

Less: Inventory of Raw material at close…………………………………..… (xxxx)

Cost of Raw materials consumed………………………………………….... xxxx

Add: Direct wages………………………………………….. xxx

Other direct expenses ………………………………… xxx xxxx

Prime Costs xxxx

Add: Indirect Manufacturing Costs:

Fuel and power xxx

Indirect wages xxx

Rent of factory xxx

 General factory expenses xxx

Insurance of factory building xxx

Depreciation of plant and machinery xxx xxxx

xxxx

Add: Opening Inventory of work in progress xxxx

Less: Closing Inventory of work in progress xxxx

Production cost of goods completed c/d xxxx

Example 1:

From the following information prepare the statement of manufacturing cost for the year ended
31 Dec 2008.

1st Jan; stock of Raw materials…………………………………………......8,000/=

31st Dec: Stock of Raw – material………………………………………...10,500/=

Jan; Work in progress…………………………………………………… 3,500/=

Dec:. Work in Progress………………………………………………….. ..4,200/=

During the year:

Wages: Direct………………………………………………………….... 39,600/=

Indirect………………………………………………………….. 35,500/=

Purchases of Raw - material………………………………………….. .. 87,000/=

Direct expenses………………………………………………………….... 1,400/=

Lubricants……………………………………………………………….... 3,000/=

Rent of factory…………………………………………………………..... 7,200/=

Fuel and power………………………………………………………........ 9,900/=

Depreciation of factory plant and machine…………………………......... 4,200/=

Internal transport expenses………………………………………….......... 1,800/=

Insurance of a factory building and plant…………………………….......… 1,500/=

General factory expenses…………………………………………........ 3,300/=

Solution:

STATEMENT OF MANUFACTURING COST FOR THE YEAR ENDED 31ST

DECEMBER 2008

Opening Inventory of Raw materials 8,000

Add: Purchases of Raw materials 87,000

Cost of Raw materials available of use 95,000

Less: Closing inventory of Raw materials 10,500

Cost of Raw materials used 84,500

Add: Direct wages 39,600

Direct expenses 1,400 41,000

Prime costs 125,500

Add: Indirect manufacturing costs

Indirect wages 35,500

Lubricants 3,000

Rent of factory 7,200

Fuel and power 9,900

Depreciation of factory plant and machine 4,200

Internal transport expenses 1,800

Insurance of a factory building and plant 1,500 63,100

188,600

Add: Opening Inventory of Work in progress 3,500

192,100
Less: Closing Inventory of Work in progress 4,200

Production cost of goods completed c/d 187,900

FINANCIAL STATEMENTS OF MANUFACTURING FIRMS

1. Income Statement;
This is prepared at the end of accounting period, the same way as it is prepared
under other merchandising firms, it includes the following items
i) Production cost of completed goods as brought forward from the
statement of manufacturing costs
ii) Opening and closing inventories for the finished goods
iii) Sales of finished goods.
iv) Gross profit/Loss
v) All administration expenses
vi) Selling and distribution expenses
vii) All financial charges

When completed, the Income Statement will show the Net profit or Net Loss earned by
the manufacturing firm.

Example: Prepare the statement of manufacturing cost and income statement from the
following balances of W Miller for the year ended 31 December 2013.

Stocks at 1 January 2013:

Raw materials 25,400

Work in progress 31,100

Finished goods 23,260

Purchases: Raw materials 91,535

Carriage on raw materials 1,960

Direct labour 84,208

Office salaries 33,419

Rent 5,200

Office lighting and heating 4,420

Depreciation:

Works machinery 10,200

Office equipment 2,300

Sales 318,622

Factory fuel and power 8,120

Rent is to be apportioned: Factory 3/4; Office 1/4. Stocks at 31 December 2013 were: Raw
materials Tzs. 28,900; Work in progress Tzs. 24,600; Finished goods Tzs. 28,840.

SOLUTION

STATEMENT OF MANUFACTURING COST FOR THE YEAR ENDED 31ST

DECEMBER 2013

Opening inventory for Raw materials 25,400

Add: Purchases of raw materials 91,535

Add: Carriage of raw materials 1,960 93495

Cost of raw materials available for use 118,895

Less: Closing Inventory for Raw materials 28,900

89,995

Direct labour 84,208

174,203

Add: Factory overheads

Factory fuel and power 8,120

Depreciation on work machinery 10,200

Factory rent (5200 X ¾) 3,900 22,220

196,323
Add: Opening Inventory of Work in progress 31,100

227,523

Less: Closing Inventory of Work in Progress 24,600

Production cost of goods completed c/d 202,923

INCOME STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 2013

Sales 318,622

Less: Cost of goods Sold

Opening inventory of Finished goods 23,260

Add: Production costs of goods completed b/d 202,923

226,183

Less: Closing inventory of Finished goods 28,840 197,343

Gross profit 121,279

Less: Expenses:

Office salaries 33,419

Lighting and Heating 4,420

Depreciation on Office equipment 2,300

Office rent (5200 X ¼) 1,300 41,439

Net Profit 79,840

MARKET VALUE OF GOODS MANUFACTURED

Sometime manufacturing form would like to know the gross profit it would get to the goods has
been brought in their finished state, The market price of goods produced by a firm is called
market value
If the market value is grate than the cost of production then the firm will get manufacturing profit
and if the market value is less than production cost then the firm will incur the manufacturing
loss.

The manufacturing profit of loss should be transferred to income statement as an income or

expenses respectively.

Example: Prepare the Statement of Manufacturing cost and Income statement from the given
information provided from the books of John & Sons Manufacturing Company.

DR CR

Stock of Raw – material 1/1/2007 21,000/=

Stock of Finished goods 1/1/2007 38,900/=

Work in progress 1/1/ 2007 13,500/=

Wages (Direct 180,000 factory indirect 145,000) 325,000/=

Royalties 3,500/=

Carriage in wards of (R.M) 3,500/=

Purchases of Raw – material 370,000/=

Productive machinery (cost 280,000) 230,000/=

Accounting Machinery (cost 20,000) 12,000/=

General factory expenses 31,000/=

Lighting 7,500/=

Factor power 13,700/=

Administrative salaries 44,000/=

Sales men salaries 30,000/=

Commission on Sales 11,500/=

Rent 12,000/=

Insurance 4,200/=
General administration exp. 13,400/=

Bank charges 2,300/=

Discount Allowed 4,800/=

Carriage out wards 5,900/=

Sales 1,000,000/=

Account receivables and payables 142,300/=

125,000/=

Bank 56,800/=

Cash 1,500/=

Drawings 20,000/=

Capital as at 1st Jan 2007 296,800/=

NOTE: at 31/12/2007

1. Stocks: Raw material 24,000/=

Finished good 40,000/=

Work in progress 15,000/=

2. Lighting, Rent and Insurance are to be appointed:

Factory 5/6, administration 1/6

3. Depreciation on productive and accounting machinery at 10% p.a on cost.

4. Market value of finished goods Tzs. 950,000/=

SOLUTION
 JOHN & SONS

STATEMENT OF MANUFACTURING COST FOR THE YEAR ENDED 31ST

DECEMBER 2007

Stock of raw materials 1.1.2007 21,000

Add: Purchases 370,000

Carriage inwards 3,500 373,500

394,500

Less: Stock raw materials 31.12.2007 ( 24,000)

Cost of raw materials consumed 370,500

Direct labour 180,000

Royalties 7,000 187,000

Prime cost 557,500

Indirect manufacturing costs:

General factory expenses 31,000

Lighting (7,500 x 5/6) 6,250

Power 13,700

Rent (12,000 x 5/6) 10,000

Insurance ( 4,200 x 5/6) 3,500

Depreciation of productive machinery 28,000

Indirect labour 145,000 237,450

794,950
 Add: Work in progress 1.1.2007 13,500

808,450

Less: Work in progress 31.12.2007 ( 15,000)

Production cost of goods completed c/d 793,450

Market value of goods completed c/d 950,000

Gross profit on Manufacturing 156,550

JOHN & SONS

INCOME STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 2007

Sales 1,000,000

Less Cost of goods sold:

Stock of finished goods 1.1.2007 38,900

Add: Market value of goods completed b/d 950,000

988,900

Less Stock of finished goods 31.12.2007 ( 40,000) 948,900

Gross profit on trading 51,100

Add: Gross profit on Manufacturing b/d 156,550

Overall gross profit 207,650

Less: Administration expenses

Administration salaries 44,000

Rent (12,000 x 1/6) 2,000

Insurance (4,200 x 1/6) 700

General expenses 13,400

 Lighting (7,500 x 1/6) 1,250

Depreciation of administration computers 2,000 63,350

Selling and distribution expenses:

Sales reps’ salaries 30,000

Commission on sales 11,500

Carriage outwards 5,900 47,400

Financial charges:

Bank charges 2,300

Discounts allowed 4,800 7,100 (117,850)

Net profit 89,800

2. Statement of Financial position:

Any entity has to prepare the statement of financial position at the end of financial
year or at a certain particular date, the same applied to the manufacturing firms,

Example: From the previous example you are required to prepare the Statement of Financial
position of John & Sons Manufacturing Company as at 31st December 2007

Solution:

JOHN & SONS MANUFACTURING COMPANY

STATEMENT OF FINANCIAL POSITION AS AT 31ST DECEMBER 2007

Non current assets: Tzs. Tzs.

Productive machinery at cost 280,000

Less Depreciation to date ( 78,000) 202,000

Administration computers at cost 20,000

Less Depreciation to date ( 10,000) 10,000

212,000
Current assets:

Stock: Raw materials 24,000

Finished goods 40,000

Work in progress 15,000

Debtors 142,300

Bank 16,800

Cash 1,500

239,600

Less: Current liabilities

Creditors ( 64,000)

Net current assets 175,600

387,600

Financed by:

Capital Balance as at 1.1.2007 357,800

Add: Net profit 89,800

447,600

Less: Drawings ( 60,000)

387,600

Review Questions:

Question 1. From the following information provided, you are required to prepare the
Statement of Manufacturing cost and the Income statement for the year ended 31st December
2012

Stocks at 1 January 2012

Raw materials 10,500

 Goods in course of manufacture (at factory cost) 2,400

Finished goods 14,300

Stocks at 31 December 2012

Raw materials 10,200

Goods in course of manufacture (at factory cost) 2,900

Finished goods 13,200

Expenditure during the year:

Purchases of raw materials 27,200

Factory wages: direct 72,600

indirect 13,900

Carriage on purchases of raw materials 700

Rent and business rates of the factory 1,200

Power 2,000

Depreciation of machinery 3,900

Repairs to factory buildings 1,300

Sundry factory expenses 900

Sales during the year 160,400

Question 2:

The following list of balances as at 31 July 2016 has been extracted from the books of Jane
Seymour who commenced business on 1 August 2015 as a designer and manufacturer of kitchen
furniture:

TZS.

Plant and machinery, at cost on 1 August 2015 60,000

Motor vehicles, at cost on 1 August 2015 30,000

Loose tools, at cost 9,000

Sales 170,000

Raw materials purchased 43,000

Direct factory wages 39,000

Light and power 5,000

Indirect factory wages 8,000

Machinery repairs 1,600

Motor vehicle running expenses 12,000

Rent and insurances 11,600

Administrative staff salaries 31,000

Administrative expenses 9,000

Sales and distribution staff salaries 13,000

Capital at 1 August 2015 122,000

Sundry debtors 16,500 Sundry creditors 11,200

Balance at bank 8,500

Drawings 6,000

Additional information for the year ended 31 July 2016:

(i) It is estimated that the plant and machinery will be used in the business for 10 years
and the motor vehicles used for 4 years: in both cases it is estimated that the residual
value will be nil. The straight line method of providing for depreciation is to be used.
(ii) Light and power charges accrued due at 31 July 2016 amounted to Tzs.1,000 and
insurances prepaid at 31 July 2016 totaled Tzs. 800.

(iii) Stocks were valued at cost at 31 July 2016 as follows:

Raw materials Tzs. 7,000 , Finished goods Tzs. 10,000

(iv) The valuation of work in progress at 31 July 2016 included variable and fixed factory
overheads and amounted to Tzs. 12,300.

(v) Two-thirds of the light and power and rent and insurances costs are to be allocated to the
factory costs and one-third to general administration costs.

(vi) Motor vehicle costs are to be allocated equally to factory costs and general administration
costs.

(vii) Goods manufactured during the year are to be transferred to the trading account at Tzs.
95,000.

(viii)Loose tools in hand on 31 July 2016 were valued at Tzs. 5,000.

Required: (a) Prepare a manufacturing, trading and profit and loss account for the year ended 31
July 2016 of Jane Seymour.

Question 3. From the following information, prepare the Statement of manufacturing costs,
Income statement for the year ending 31 December 2016 and the Statement of Financial position
as at 31 December 2016 for the firm of J Jones Limited.

Tzs. Tzs.

Purchase of raw materials 258,000

Fuel and light 21,000
Administration salaries 17,000
Factory wages 59,000
Carriage outwards 4,000
Rent and business rates 21,000
Sales 482,000
Returns inward 7,000
General office expenses 9,000
Repairs to plant and machinery 9,000
Stock at 1 January 2016:

Raw materials 21,000

Work in progress 14,000
Finished goods 23,000
Sundry creditors 37,000
Capital account 457,000
Freehold premises 410,000
Plant and machinery 80,000
Debtors 20,000
Accumulated provision for depreciation on plant and machinery 8,000
Cost in hand 11,000

984,000 984,000

Make provision for the following:

(i) Stock in hand at 31 December 2016: Raw materials Tzs. 25,000 Work in progress Tzs.
11,000 Finished goods Tzs. 26,000.
(ii) Depreciation of 10% on plant and machinery using the straight line method.
(iii) 80% of fuel and light and 75% of rent and rates to be charged to manufacturing.

(iv) Doubtful debts provision: 5% of sundry debtors.

(iv) Tzs. 4,000 outstanding for fuel and light.

(v) Rent and business rates paid in advance: Tzs. 5,000.

(vii) Market value of finished goods: Tzs. 382,000.