MANUFACTURING ACCOUNTS

Manufacturing simply means the conversion or transformation of raw materials into

finished goods. Manufacturing accounts therefore are the final accounts prepared by
business organizations which are engaged in the manufacturing of goods for sale. They are
prepared by business organizations which are engaged in the manufacturing of goods for
sale. They are prepared to ascertain the cost of goods manufactured during the financial
year.
PURPOSE OF MANUFACTURING ACCOUNT
The purpose of manufacturing accounts are:
1. To ascertain the cost of the goods manufactured
2. To ascertain the amount of any profit on the manufacturing process.
COST COMPONENTS/ COST CLASSIFICATION
Certain costs make up the manufacturing account. Such costs include:
1. Cost of raw materials consumed
2. Direct costs
3. Indirect costs
4. Prime cost
5. Cost of work-in-progress
6. Cost of finished good
7. Selling and distribution cost.
1. Cost of raw materials consumed: This is the cost of raw materials which have been
used up in the manufacturing process. This will be found by:
a. Taking opening inventory of raw materials
b. Adding purchases of raw materials
c. Deducting closing inventory of raw materials
There are two kinds of materials:
a. Direct materials: These are materials which can be directly traced to, or identified
with a product e.g. flour of a loaf of bread and limestone in a cement.
b. Indirect Materials: These are also raw materials used in production but cannot be
directly traced to, or identified with a product. Note that the cost of raw material
used during a period will include the cost of raw materials purchased as well as the
cost of carriage inwards.
2. Direct Cost: This is any cost directly incurred that can be traced to the number of units
produced. Such costs include direct labour and direct expenses.
a. Direct labour: Direct labour is the mental or physical efforts put into production.
The reward of such inputs is known as direct or manufacturing wages e.g. Machine
operators.
b. Direct Expenses: These are expenses which have direct identification with
production e.g. royalties.
3. Indirect Cost: This is any cost which cannot be traced directly to the units of goods
produced. It is also referred to as production or factory overhead. It covers several units
of production. It can also be subdivided into indirect labour and indirect expenses.

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4. Prime cost:These are costs that can be traced to a particular production unit. They are
directly related to the manufacturing process. These are:
i. Direct material
ii. Direct labour
iii. Direct expenses
iv Other direct expenses
5. Cost of work in progress: These are costs of goods which are partly completed and are
in various stages of production. They are neither raw materials nor finished goods and
so, could be referred to as Semi finished goods.
6. Cost of finished goods: This is the total cost incurred in turning raw materials into
finished goods. It includes various costs at various stages of production e.g. cost of raw
materials, cost of labour, direct and indirect expenses and work in progress. It is also
referred to as cost of production or cost of goods completed.
7. Administrative expenses: These are expenses incurred outside manufacturing. They
are charged to the statement of profit or loss e.g. Office rent and rates, Managers’ salary,
Depreciation of office equipment etc.
8. Selling and distribution cost: These expenses are also incurred outside manufacturing
and are charged to statement of profit or loss. They are incurred in the course of selling
and distributing the finished goods e.g., advertising, carriage outwards, discount
allowed, depreciation of delivery van, sales men salary etc.
9. Total cost: This is the total cost of production plus administrative cost plus selling and
distribution cost

FORMAT
MANUFACTURING STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31ST
DECEMBER 20XX
N N N
Opening inventory or raw materials x
Purchases of RM x
Carriage inwards of RM x x
Return outwards of RM (x) x
Cost of raw materials available for production xx
Closing inventory of raw materials (x)
Cost of raw materials consumed xx
DIRECT COST
Direct labour/ wages/ manufacturing wages x
Royalty x
Direct expenses x x
Prime cost xx
FACTORY OVERHEAD
Factory rent and rates x
Factory insurance x

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Factory light and power x
Foremen’s salaries x x
Production cost (if there is no work in progress) xx
Opening inventory of WIP x
Closing inventory of WIP (x) x
Production cost (if there is work in progress) xx
Manufacturing profit x
Market value xx
Revenue (Sales) x
Return inwards (x)
xx
Cost of sales
Opening inventory of finished goods x
Production cost of finished goods x
Purchases of finished goods x
Carriage inwards of finished goods x
x
Return on purchases (x) x
Cost of goods available for sale xx
Closing inventory of finished goods (x)
Cost of goods sold (xx)
Gross profit/loss xx
Other income
Discount received x
Commission received x
Rent received x
Dividend received x xx
xx
Expenses
Admin expenses x
Selling and distribution expenses x (x)
Net profit/ (loss) xx

Question 1
The following balances were extracted from the ledger of Sosoko Limited for the year
ended 30 june 2008.
N000
Stock of raw materials 01/07/2007 320
Work-in-progress 01/07/2007 146
Stock of finished goods 01/07/2007 1,400
Sales 10,000
Purchases of raw materials 3,500

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Printing and stationery 72
General expenses 60
Other administrative expenses 132
Factory rent 80
Depreciation of delivery van 500
Depreciation of plant 668
Carriage inwards of raw materials 150
Advertising expenses 100
Bad debts 85
Indirect wages 1,000
Direct wages 1,600
Direct expenses 400
Additional information:
(i) Stock as at 30/06/2008 were:
Raw materials N450,000
Finished goods N1,800,000
Work-in-progress N168,000
(ii) The following expenses are to be apportioned as follows:
Factory Administrative & selling
Printing and stationery ¼ ¾
General expenses 1/3 2/3
(iii) Direct wages outstanding as at 30 June 2008 were N50,000.
Required:
Prepare the manufacturing statement of profit or loss for the year ended 30 june 2008.
Show clearly the prime cost, the cost of production, gross profit and net profit.
Question 2
The following balances were extracted from the books of Amanda Enterprises a
manufacturer of leather materials in Aba at 30th September 20X7.
N
Raw materials purchased 38,720
Manufacturing wages 18,870
Factory sundry expenses 10,120
Inventory at 1/10/20x6:
Raw materials 8,460
Work in progress 3,070
Finished goods 12,380
Revenue (Sales) 135,000
Depreciation:
Plant and machinery 7,560
Delivery vans 3,040
Office equipment 807
Repair of plant and machinery 3,020

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Factory power 3,100
Foreman’s salary 2,530
Advertising 3,556
Discount allowed 1,524
Office expenses 2,910
Rent and rates 8,400
Salesmen salaries 6,410
Carriage inwards on raw materials 2,720
Other direct factory expenses 2,100
Office salaries 5,170
Additional information
Rent and rates should be apportioned as follows:
Factory 50%
Administration 30%
Selling and distribution 20%
Closing inventory at 30th September 20x7 were:
Raw materials N10,985
Work-in progress N2,460
Finished goods N14,570
You are required to draw up the manufacturing statement of profit or loss of Amada
Enterprises for the year ended 30th September 20x7.