MANUFACTURING ACCOUNTS

SECOND TERM SCHEME OF WORK FOR SS 2 FINANCIAL ACCOUNTING LESSON NOTE

SCHEME OF WORK WITH WEEKLY LESSON NOTES FOR SS 2 SECOND TERM FINANCIAL ACCOUNTING

SUBJECT :

FINANCIAL ACCOUNTING

CLASS :

SS 2

TOPIC :

MANUFACTURING ACCOUNTS

WEEK  :

WEEK 10

PREVIOUS LESSON :

DEPARTMENTAL ACCOUNTS

CONTENT

TOPIC: MANUFACTURING ACCOUNTS

CONTENT

• Meaning of Manufacturing Accounts
• Purpose of Manufacturing Account
• Element of Cost of Production 
• Layout of Manufacturing Account
• Transfer Pricing
• Practical Illustration 

MEANING OF MANUFACTURING ACCOUNTS 

Manufacturing can simply be described as the transformation of raw materials into finished goods e.g. manufacturing companies like Nestle, Cadbury, PZ e.tc. These manufacturing firms do manufacture their goods or product before they are sold to their customer. They do not buy to sell but produce what they sell.

The manufacturing companies prepare a final accounts called Manufacturing Account. 

The Manufacturing Account is a financial statement that shows the cost of goods produced by a manufacturing company during a particular accounting period. It is used to calculate the cost of goods sold, which is the cost of finished goods sold during the period. The Manufacturing Account includes the following items:

1. Direct materials: This includes the cost of raw materials used in the production process.
2. Direct labor: This includes the cost of wages, salaries, and other benefits paid to workers involved in the production process.
3. Factory overheads: This includes all indirect costs associated with the production process, such as rent, utilities, and maintenance.
4. Work-in-progress: This includes the value of goods that are partially completed but not yet sold.
5. Finished goods: This includes the value of goods that are completed and ready for sale.

Here are some multiple-choice questions based on the above information:

1. What is manufacturing? a) The transformation of finished goods into raw materials b) The transformation of raw materials into finished goods c) The buying and selling of goods d) The provision of services to customers
2. Which of the following is not included in the Manufacturing Account? a) Direct materials b) Direct labor c) Factory overheads d) Selling expenses
3. What is the purpose of the Manufacturing Account? a) To show the cost of goods sold b) To show the profit or loss of the organization c) To calculate the value of the organization’s assets d) To show the organization’s cash inflows and outflows
4. What is direct labor? a) The cost of rent and utilities b) The cost of raw materials c) The cost of workers involved in the production process d) The cost of finished goods
5. What is factory overheads? a) The cost of raw materials b) The cost of workers involved in the production process c) All indirect costs associated with the production process d) The value of finished goods
6. What is work-in-progress? a) The value of goods that are completed and ready for sale b) The value of goods that are partially completed but not yet sold c) The value of raw materials d) The cost of workers involved in the production process
7. What is finished goods? a) The value of goods that are partially completed but not yet sold b) The value of goods that are completed and ready for sale c) The value of raw materials d) The cost of workers involved in the production process
8. Which of the following is an example of a manufacturing company? a) A supermarket b) A clothing store c) A car manufacturer d) A hair salon
9. What is the cost of goods sold? a) The cost of raw materials used in the production process b) The cost of goods produced during the accounting period c) The cost of finished goods sold during the period d) The cost of workers involved in the production process
10. What is the value of goods produced? a) The cost of goods sold during the accounting period b) The value of goods that are partially completed but not yet sold c) The value of finished goods sold during the period d) The cost of goods produced during the accounting period

PURPOSE OF MANUFACTURING ACCOUNTS 

Manufacturing Account are prepared to ascertain the cost of goods manufactured during the financial 

year. Therefore manufacturing accounts have the following purposes.

1. To ascertain the cost of production
2. To determine the profit on the manufacturing process.

To elaborate further on the purposes of manufacturing accounts:

1. To ascertain the cost of production: The primary purpose of the Manufacturing Account is to calculate the cost of goods produced during a particular accounting period. This includes the cost of direct materials, direct labor, and factory overheads. By calculating the cost of production, the manufacturing company can determine the efficiency of its production process and identify areas for improvement.
2. To determine the profit on the manufacturing process: The Manufacturing Account also helps in determining the profit earned on the manufacturing process. This is done by subtracting the cost of goods manufactured from the total sales revenue generated during the period. The resulting figure represents the gross profit earned on the manufacturing process. This information is crucial for the management of the manufacturing company to make informed decisions on pricing, production processes, and cost control.

The Manufacturing Account provides valuable information on the cost of goods produced and the profitability of the manufacturing process. This information helps the manufacturing company to make informed decisions on production processes, pricing, and cost control

Evaluation

1. What is the purpose of a Manufacturing Account? a) To record all financial transactions related to the manufacturing process b) To determine the cost of goods manufactured during the financial year c) To show the organization’s financial position at a specific point in time d) To calculate the organization’s net income
2. What does the Manufacturing Account help to determine? a) The cost of goods sold b) The cost of goods produced during the accounting period c) The value of finished goods sold during the period d) The cost of workers involved in the production process
3. What are the two primary purposes of the Manufacturing Account? a) To determine the organization’s net income and cash flows b) To calculate the cost of production and determine the profit on the manufacturing process c) To show the organization’s financial position and performance d) To record all financial transactions related to the manufacturing process
4. What does the cost of production refer to? a) The cost of goods sold during the accounting period b) The cost of goods produced during the accounting period c) The value of finished goods sold during the period d) The cost of raw materials used in the production process
5. What is gross profit? a) The profit earned on the manufacturing process after deducting all expenses b) The profit earned on the manufacturing process before deducting all expenses c) The total revenue earned during the accounting period d) The net income of the organization
6. How is gross profit calculated? a) By subtracting the cost of goods manufactured from the total sales revenue generated during the period b) By adding the cost of goods sold and the cost of goods manufactured c) By dividing the net income by the total sales revenue generated during the period d) By subtracting the cost of goods sold from the total sales revenue generated during the period
7. What is included in the cost of goods manufactured? a) Direct materials, direct labor, and factory overheads b) Indirect expenses related to the production process c) Expenses related to the selling process d) The cost of finished goods sold during the period
8. What is the purpose of determining the profit on the manufacturing process? a) To assess the organization’s financial position b) To identify areas for improvement in the production process c) To make informed decisions on pricing, production processes, and cost control d) To record all financial transactions related to the manufacturing process
9. What is the purpose of cost control in the manufacturing process? a) To increase production efficiency and reduce costs b) To increase the organization’s net income c) To generate more revenue from sales d) To improve the organization’s financial position
10. How can the information provided by the Manufacturing Account be used by the management of a manufacturing company? a) To make informed decisions on pricing, production processes, and cost control b) To record all financial transactions related to the manufacturing process c) To assess the organization’s financial position and performance d) To calculate the organization’s net income and cash flows

ELEMENTS OF COST OF PRODUCTION 

1. COST OF PRODUCTION: This is the total expenditure incurred in the production of goods. Production costs include PRIME COST + FACTORY OVERHEADS 
2. PRIME COST: These are cost directly related in the production process. It is also called Direct Cost which include: Direct materials, direct labour, direct expenses and any other direct expenditure. 

• Direct materials cost: These are cost of raw materials

• Direct labour cost: These are cost of labour wages paid

• Direct expenses: These are cost of other expenditure incurred in the production process.

1. FACTORY OVERHEADS: These are cost incurred in the running of the factory but not directly related to the production process. It is also called INDIRECT COST.  They include; factory rent and rates, depreciation of plant and machinery. Indirect wages, upkeep of factory building 

Format of Manufacturing Trading Profit and Loss Account

                        N       N                        N

Opening stock of raw material         x        Cost of production        x

Add purchases of raw material        x

Carriage inward of raw material        x    x

                                X

Loss closing stock or raw material net        (x)

Cost of raw material consumed            x

Add direct wages                x

Royalties                    x

Direct expenses                x

Prime cost                    x

Factory overheads:                x

Factory power                x

Factory rent & rates                x

Indirect wages                x

Factory insurance                x

Depreciation of P & M            x

Fuel and power                x

Lubricants                    x    x

                                X

Add opening stock W.I.P            X

                            X

Less closing stock W.IP            X

Cost of production                x                        x

Manufacturing Trading, Profit and loss Account contd

                        N    N                    N    N

Opening stock of finished goods        x    sales                    x

Add cost of production                 x

Cost of good available for sale        x

Less closing stock of finished goods        (x)

Cost of goods sold                x

Gross profit c/d                X    

                            X                         x

Expenses                        Gross profit b/d            x

Selling & distribution                    Discount received            x

Carriage outward            x                            x

Commission sales            x

Salesmen salaries            x    x

Administration exp   

Admin salaries                x

Office rent                x

Office insurance            x

Office lighting                x

Depreciation of

Office machinery             x    x

                            X

Net profit c/d                    x       

                            X                        x

TRANSFER PRICING

In the trading account, the cost of production is charged to determine profit on sales. The changing of cost of production of goods may be done in two ways.

1. Actual factory cost
2. Current market values 

When goods manufactured are charged at the current market value to the trading account,  the main objective is obtain  profit on the manufacturing process. The manufacturing accounts will then have to show a balance which represents a profit or loss on production and this is transferred to profit and loss account. 

EVALUATION

1. State four classifications of costs revealed by manufacturing accounts.
2. State two reasons for the preparation of manufacturing accounts.

PRACTICAL ILLUSTRATIONS

The following information was extracted from the books of Tasty Enterprises for the year ended 31st December 1991

                                N

Manufactured goods                    9,740

Raw materials                        3,000

Discount allowed                        3,740

Depreciation on plant and machinery                  13,000

Printing and stationery                      930

Purchases: Manufactured goods                      12,740

            Carriage inwards                      500       

Debtors                                  21,740

Cash at bank                            1,710

Purchases of raw material                    87,260

Office rent and rates                        6,500

Repairs to machinery                    2,500

Plant and machinery                              75,200 

Factory electricity                        5,790

Carriage inwards (raw materials)                3,410

Office salaries                        9,400

Carriage outwards                        2,330

Factory rent and rates                          22,710

Cash in hand                          570

Manufacturing wages                        110,290

Sales                                    299,420

Capital                                  77,820

Creditors                                  21,790

Additional                        

(a) Stock on 31st Dec 1991

    Manufactured goods N27,940

    Raw material    N 2,000

(b) Goods manufactured to be posted to the sales department at net     realizable value of N271,500

You are required to prepare manufacturing trading profit and loss account for year ended 31st Dec. 1991.

SOLUTION:            TASTY ENTERPRISES

Manufacturing Trading Profit and Loss Account for the year ended 31st December, 1991.

Dr                    N        N                N    N

Opening stock of r.m                3,000          Transfer cost       271,500

Add. Purchases of r.m        87,260

Carriage of raw mat.          3,410        90,670

                            93,670

Less closing stock of r.m                2,000

                            91,670

Manufacturing wages                          110,290

Prime cost                                  201,960

Factory overheads

Depreciation p&m            13,000

Repair to machinery              2,500

Electricity                  5,790

Factory rent and rates        22,710        44,000

Production cost                          245,960

Gross profit on production                25,540

                                  271,500            271,500

Opening stock of finished gds            9,740Sales             299,470

Add: Transfer cost 271,500

Purchases of finished gds                12,740

Carriage inwards                500           284,740

Cost of goods available                       294,480

for sales  

TASTY ENTERPRISES

Manufacturing Trading Profit and Loss Account for the year ended 31st December, 1991.

                    N    N                    N    N

Cost of goods available         294,480 Sales b/f                299,420

for sale b/f

Less closing stock                  27,940

Cost of goods sold            266,540

Gross profit c/d                  32,880

                        299,420                299,420

Expenses                        Gross profit b/d        32,880

Discount allowed                  3,740    Profit on manufacture        25,540

Office rent & rates              6,500

Office salaries                  9,400

Carriage outward                  2,330

Printing & stationary            930

Net profit                    35,520

                        58,420                    58,420

EVALUATION

1. What is factory overhead?            
2. What is prime cost?
3. Define cost of production by way of formula

GENERAL EVALUATION QUESTIONS

1. Explain three differences between a trial balance and a balance sheet
2. State four reasons for disagreement between a bank statement balance and cash book balance
3. List five methods of providing for depreciation
4. State five reasons for making provision for depreciation
5. List six factors to be considered in computing the depreciation on fixed assets   

READING ASSIGMENT

Essential Financial Accounting for S.S. by O.A. Longe page 160-171

WEEKEND ASSIGNMENT

1. The following is the main objective of a manufacturing account (a) to ascertain gross profit (b) to ascertain net profit (c) to ascertain profit on     asset (d) to ascertain cost of production 
2. The cost components of manufacturing directly related in the per unit of good produced is called (a) factory cost (b) cost of production (c) prime     cost (d) fixed cost.
3. Cost of production is also called (a) factory overhead (b) factory expenses (c) manufacturing cost (d) prime cost
4. Prime cost can also be described as (a) indirect cost (b) direct cost 

    (c) fixed cost (d) variable cost

5. Royalties is an example of ________ cost (a) factory cost (b)  indirect cost (c) prime cost (d) selling and distribution 

THEORY

1. Write short note on:
2. Prime cost  
3. Factory overhead
4. Distinguish between 
5. Work in progress (W.I.P) and finished goods 
6. Prime cost and factory overhead.

Lesson Presentation

Title: Introduction to Manufacturing Account

Grade Level:  SS 2

Duration: 45 minutes

Objective: By the end of the lesson, students will be able to:

1. Define manufacturing and explain its importance in the production process
2. Understand the purpose of the Manufacturing Account and its components
3. Explain how the Manufacturing Account helps manufacturing companies make informed decisions on pricing, production processes, and cost control

Materials:

• Whiteboard and markers
• PowerPoint presentation
• Handouts on Manufacturing Account and its components
• Examples of manufacturing companies and their products

Introduction (5 minutes):

• Begin by asking students if they have ever heard of manufacturing companies such as Nestle, Cadbury, and PZ.
• Briefly explain that manufacturing involves transforming raw materials into finished goods.
• Introduce the topic of the Manufacturing Account and its importance in manufacturing companies.

Presentation (25 minutes):

• Use the PowerPoint presentation to define manufacturing and explain the Manufacturing Account and its components.
• Explain that manufacturing companies prepare the Manufacturing Account to ascertain the cost of goods manufactured during the financial year.
• Discuss the components of the Manufacturing Account, including direct materials, direct labor, and factory overheads.
• Show examples of manufacturing companies and their products to help students understand how the Manufacturing Account is used in the production process.

Activity (10 minutes):

• Distribute handouts on the Manufacturing Account and its components.
• Divide students into groups and ask them to identify the components of the Manufacturing Account in a given scenario.
• Have each group present their answers to the class and discuss any discrepancies.

Conclusion (5 minutes):

• Summarize the key points of the lesson, including the definition of manufacturing, the purpose of the Manufacturing Account, and its components.
• Emphasize the importance of the Manufacturing Account in helping manufacturing companies make informed decisions on pricing, production processes, and cost control.
• Encourage students to think about the manufacturing process in their daily lives and how the Manufacturing Account is used in various industries

Weekly Assessment /Test

1. What is manufacturing?
2. What are some examples of manufacturing companies?
3. What is the purpose of the Manufacturing Account?
4. What are some components of the Manufacturing Account?
5. What is direct materials?
6. What is direct labor?
7. What are factory overheads?
8. Why do manufacturing companies need to calculate the cost of production?
9. How can the Manufacturing Account help manufacturing companies make informed decisions?
10. Can you think of any products that are made through the manufacturing process