1. A-level Accounting Year 13
Manufacturing Accounts Introduction to Financial Statements & Manufacturing Profit
Mr. Barry
A-level Accounting Year 13

2. A-level Accounting Year 13
Learning Outcomea
Prepare a manufacturing account showing the prime cost, work in progress and production cost of manufactured goods
Distinguish between direct and indirect costs
Prepare the financial statements for a manufacturing organisation
Mr. Barry
A-level Accounting Year 13

3. A-level Accounting Year 13
Introduction
A retailer buys and sells completed products, whereas a manufacturer has to produce the products to sell
A manufacturing account is therefore prepared to show all the costs associated with the making of these products within the factory
Mr. Barry
A-level Accounting Year 13

4. The manufacturing account
Section: Prime Cost
Section: Manufacturing Overheads
Calculates the total of the direct manufacturing cost of the products and the direct costs e.g. raw materials, direct labour and royalties
Identifies all the other costs associated with the production of the products e.g. factory rent, machine maintenance and machine depreciation
Section: Prime Cost
Section: Manufacturing Overheads
Production cost of manufactured goods
Mr. Barry
A-level Accounting Year 13

5. A-level Accounting Year 13
Terms
Direct costs This cost is identified with the cost unit. Costs attributable to a particular product e.g. direct materials and direct labour Manufacturing overheads indirect costs incurred in the production of the products, for example depreciation of machinery, factory insurance and factory rent. These are often known as factory overheads.
Mr. Barry
A-level Accounting Year 13

6. A-level Accounting Year 13
Terms
Production cost of manufactured goods (also known as ‘cost of production’ or ‘production cost of completed goods’): the total of all the costs of manufacturing the products
Royalties a sum of money paid to the investor of a product for the right of use of his ideas
Indirect costs this cost is not identified with the cost unit. Costs that cannot be attributed to a particular product e.g. indirect labour
Mr. Barry
A-level Accounting Year 13

7. A-level Accounting Year 13
Terms
Cost of raw materials consumed This calculation consists of opening inventory of raw materials + net purchases – closing inventory of raw materials and is a direct cost that is added
Mr. Barry
A-level Accounting Year 13

8. Example of a manufacturing account
Mr Barry’s top tip:
Ensure you only include information about the factory and actual manufacturing process. Non-production costs DO NOT GET INCLUDED e.g. warehouse, administration, finance and distribution costs 1 2
Mr. Barry
A-level Accounting Year 13

9. A-level Accounting Year 13
Work in progress (WIP)
The partly finished goods
The total production cost of manufactured goods in a manufacturing account is therefore made up of:
Prime cost 1 + factory overheads 2 + opening work in progress 3 – closing work in progress 4
Mr. Barry
A-level Accounting Year 13

10. A-level Accounting Year 13
Example 3 4
Mr. Barry
A-level Accounting Year 13

11. Preparing a manufacturer’s income statement
Very similar to previous topics with income statements (similar layout)
Only difference is in cost of sales you will have opening inventory of finished goods + Production cost of manufactured goods (manufacturing account answer) – closing inventory of finished goods
Mr. Barry
A-level Accounting Year 13

12. A-level Accounting Year 13
Example
Mr. Barry
A-level Accounting Year 13

13. Preparing a manufacturer’s statement of financial position
Has to show all three types of inventory held at the year end within the current assets
All of the inventory in the current assets is valued at the lower of cost and net realisable value
Mr. Barry
A-level Accounting Year 13

14. A-level Accounting Year 13
Example 1
The following information is available for Brown Ltd., a manufacturer of toy wooden soldiers, for the year ended 31 March 2013
Additional information:
Direct wages due £16,400
Factory rent was payable a month in advance. The monthly rent was £3,000
Invoice for purchases of raw materials of £1,200 has been omitted
Closing inventory included inventory which had cost £5,500 but is now only worth £3,600 due to damage
Direct wages
133,600
Factory insurance
14,800
Inventory of raw materials at 1 April 2012
42,500
Inventory of raw materials at 31 March 2013
51,200
Factory rent
39,000
Purchase of raw materials
98,100
Royalties
15,000
Mr. Barry
A-level Accounting Year 13

15. A-level Accounting Year 13
Answer
Mr. Barry
A-level Accounting Year 13

16. A-level Accounting Year 13
Manufacturing profit
Some manufacturing businesses transfer their products from the factory to the income statement at total production cost plus a notional mark-up percentage
This is the transfer price
The difference between production cost of completed goods and the transfer price is called factory profit or manufacturing profit
Mr. Barry
A-level Accounting Year 13

17. Recording manufacturing profit
Production cost of manufactured goods x percentage mark-up
781,110 x 30% = 234,333 (factory profit)
Production cost of manufactured goods + Factory profit = Transfer price
781, ,333 = 1,015,443
Mr. Barry
A-level Accounting Year 13

18. The provision for unrealised profit
IAS 2 LOWER OF COST OR NRV
If we use a transfer price for our financial statements, do we follow this rule?
Inventory of raw materials are used in a manufacturing account, if we apply a mark up (factory profit) do we follow prudence and IAS 2?
Mr. Barry
A-level Accounting Year 13

19. A-level Accounting Year 13
A big no!
If transfer price is used these inventories will include an element of unrealised profit on finished goods
Unrealised profits MUST NOT BE RECOGNISED within the statement of financial position and financial statements as it contradicts both realisation and prudence concepts
Mr. Barry
A-level Accounting Year 13

20. A provision for unrealised profit is used to
Remove the unrealised profit in the income statement, otherwise profits will be overstated
Remove the unrealised profits from the inventory of finished goods within the current assets on the statement of financial position so that inventory is not overvalued and is valued at cost not cost plus markup
Mr. Barry
A-level Accounting Year 13

21. A-level Accounting Year 13
Formula
You already know this!
Remember the formula for working out mark up profit from sales? It’s exactly the same!
Example 1.
At 31 March 2013 the inventory of finished goods was valued at £126,000, being cost plus the mark-up of 20%. What is the amount of unrealised profit?
Mr. Barry
A-level Accounting Year 13

22. A-level Accounting Year 13
Record provision for unrealised profit in the statement of financial position?
Current assets:
Inventory of raw materials
71,200
Inventory of work in progress
18,100
Inventory of finished goods
126,000
Less provision for unrealised profit
(21,000)
105,000
194,300
Always remove provision for unrealised profit to comply with IAS 2, prudence and realisation concept
Mr. Barry
A-level Accounting Year 13

23. Record provision for unrealised profit in the income statement?
Can you remember how provision for bad debt is treated?
It is exactly the same for provision for unrealised profit
Difference in provision Minus from factory profit
Difference in provision Add to factory profit
Mr. Barry
A-level Accounting Year 13

24. A-level Accounting Year 13
Income statement
Revenue
1,200,000
Opening inventory of finished goods
108,000
Transfer price
1,042,800
Closing inventory of finished goods
(126,000)
(1,024,800)
Gross Profit
185,200
Factory profit
173,800
Less increase in provision for unrealised profit
(3,000)
170,800
TOP TIP
Always remember to bring forward factory profit from manufacturing account. The change in provision needs to be shown with this factory profit.
Mr. Barry
A-level Accounting Year 13

25. A-level Accounting Year 13
Question time!
Mr. Barry
A-level Accounting Year 13