1. 12 manufacturing a/c 12 manufacturing a/c Examining the preparation of the manufacturing a/c

2. JAN 2010CIMA C2 YUAN LI2 Topics  Theory  Proformas

3. JAN 2010CIMA C2 YUAN LI3 12.1 Introduction  Forms part of the income statement for a business that manufactures goods for resale  Inventories may include raw materials, work-in-progress, finished goods.  Ledger a/cs as usual but may need to apportion some expenses between ledger accounts  Manufacturing a/c = part of double entry

4. JAN 2010CIMA C2 YUAN LI4 12.2.1 Inventories in manufacturing organisations ● raw materials; ● work in progress (partly finished goods); ● finished goods; ● bought-in goods.

5. JAN 2010CIMA C2 YUAN LI5 Trading a/c vs. manufacturing a/c  trading account  to show the sales revenue  the cost of goods sold  not the cost of goods manufactured bring together opening inventories of finished goods cost of completed goods manufactured during the period less closing inventories of finished goods

6. JAN 2010CIMA C2 YUAN LI6  Manufacturing a/c, containing Trading a/c vs. manufacturing a/c all of the Manufacturing costs opening and closing inventories of raw materials work in progress with adjustments for Expenses, no revenue

7. JAN 2010CIMA C2 YUAN LI7 12.3 Costs to include in the manufacturing account  raw materials  Other direct costs  Prime cost  Indirect costs

8. JAN 2010CIMA C2 YUAN LI8 raw materials consumed  opening inventories of raw materials + purchases of raw materials (including carriage inwards and less returns) - closing inventories of raw materials.

9. JAN 2010CIMA C2 YUAN LI9 direct costs  raw materials  Direct labour (also known as production labour)  wages and associated costs of those producing the goods  Direct expenses  Other costs that can be identified with units of production  equipment hire for a special production run, power costs for a particular machine, and royalties payable on the production of certain products

10. JAN 2010CIMA C2 YUAN LI10 Prime cost  the total of direct costs direct materials consumed direct labour direct expenses (if any)  should be clearly shown as a subtotal in the manufacturing account.

11. JAN 2010CIMA C2 YUAN LI11 Indirect costs  include all the other costs of manufacturing that are not part of prime cost  Also known as manufacturing overheads, production overheads or factory overheads  e.g.  factory rent;  factory heating, lighting and insurance;  wages and salaries paid to factory supervisors and maintenance engineers (also known as indirect factory labour );  depreciation of non-current assets used in manufacturing

12. JAN 2010CIMA C2 YUAN LI12 Indirect costs  only costs associated with manufacturing are included  not include costs associated with selling, distribution of goods sold or general administrative costs

13. JAN 2010CIMA C2 YUAN LI13 Factory cost of production  the total of prime cost and indirect costs consumed in the factory  subtotal to be shown in the manufacturing account

14. JAN 2010CIMA C2 YUAN LI14 Work in progress  The factory cost of production is the total of new costs introduced to the factory  need to adjust the factory cost of production to add in the opening work in progress and deduct the closing work in progress

15. JAN 2010CIMA C2 YUAN LI15 Factory cost of goods completed  the end result of the manufacturing account  its balance is incorporated into the trading account

16. JAN 2010CIMA C2 YUAN LI16  Direct costs – attributable to product and includes material, labor and expenses  Prime cost – total of direct expenses  Indirect costs – overheads  Factory costs – direct costs + factory overheads  Work-in-progress (WIP) – part complete units  Factory cost of goods completed – factory cost after adjusting for WIP. This is the figure transferred to the trading account.Definitions

17. JAN 2010CIMA C2 YUAN LI17 Layout of manufacturing and trading accounts  P 416

18. JAN 2010CIMA C2 YUAN LI18 Proforma – income statement SalesX Less returns inwards(X) Net salesX Opening stock of finished goodsX Opening stock – raw materialX Purchases – raw materialX Closing stock – raw material(X) Raw material consumedX Direct laborX Direct expensesX Prime cost Production overhead e.g. factory rent, heatingX Factory costX Opening WIPX Closing WIP(X) Factory cost of goods completedX X Less closing inventories of finished goods(X) Cost of goods soldX Gross profitX

19. JAN 2010CIMA C2 YUAN LI19 Study tip  Note carefully the layout of the manufacturing account  Note that the highlighted items are in the trading account, and the other items are in the manufacturing account

20. JAN 2010CIMA C2 YUAN LI20 Proforma Income statement The trading account almost the same as that for a sole trader but “purchases” are replaced by “factory cost of goods completed”

21. JAN 2010CIMA C2 YUAN LI21 Income statement for manufacturing organisations  Two sub-sections – the manufacturing account and the trading account  Sundry revenues  all other expenses incurred

22. JAN 2010CIMA C2 YUAN LI22 Proforma Income statement Gross profitX Less expenses, e.g. Wages(X) Heating and lighting(X) Administration(X) Rent(X) Discounts allowed and received(X) Carriage outwards(X) Net profitX

23. JAN 2010CIMA C2 YUAN LI23 Note  It is possible that a computer based assessment question would give a total figure for, say, heating and lighting that you would need to split across factory (thus manufacturing a/c) and warehouse/offices (S&D and Admin, in IS). This percentage split would be given in the question

24. JAN 2010CIMA C2 YUAN LI24 Study tip From gross profit to net profit is essentially the same as for the sole trader

25. JAN 2010CIMA C2 YUAN LI25 Statements of financial position for manufacturing organisations  raw materials;  work in progress;  finished goods (manufactured goods);  bought-in goods for resale

26. JAN 2010CIMA C2 YUAN LI26 Froforma – Balance sheet balance sheet as at …$’000 $’000 Assets Non-current assets BuildingsX EquipmentX X Current assets Inventories – raw materialsX Inventories – WIPX Inventories – finished goodsX ReceivablesX Bank/cashX X X Capital and liabilities CapitalX ProfitX Drawings(X) X Non-current liabilities bank loanX Current liabilities PayableX Bank overdraftX X X

27. JAN 2010CIMA C2 YUAN LI27 Study tip  The major difference from the sole trader is the inclusion of various types of inventories

28. JAN 2010CIMA C2 YUAN LI28 12.7 The accounting system for manufacturing organisations  same as for other organisations, additional ledger a/c include:  direct factory labour  indirect factory labour  inventories of work in progress and finished goods

29. JAN 2010CIMA C2 YUAN LI29 12.7 The accounting system for manufacturing organisations  part of the double-entry bookkeeping system  items in it will all have an equivalent opposite entry in either the nominal ledger or the trading a/c

30. JAN 2010CIMA C2 YUAN LI30 12.7 The accounting system for manufacturing organisations  expenses such as direct factory labour will be debited to the direct factory labour ledger account during the year, at the end of the year, the balance will be transferred to the manufacturing account Dr. manufacturing account Cr. direct factory labour  balance on the manufacturing account is transferred to the trading account at the end of the year Dr. trading account Cr. manufacturing account

31. JAN 2010CIMA C2 YUAN LI31 Note  Aim in the manufacturing account is to arrive at the total cost of manufacturing the finished goods completed in the year  the costs directly attributable to the goods produced (such as the raw materials they contain, and the wages of personnel directly involved in manufacturing);  the indirect factory costs (sometimes called factory overheads). These might include the costs of heating and lighting the factory, the rent on factory premises and the wages of factory supervisors;  an adjustment for opening and closing work in progress, similar to the treatment of opening and closing inventories of finished goods in a trading account

32. JAN 2010CIMA C2 YUAN LI32  Example 12.A on P418

33. JAN 2010CIMA C2 YUAN LI33 636,000

34. JAN 2010CIMA C2 YUAN LI34 D F

35. JAN 2010CIMA C2 YUAN LI35 28,400

36. JAN 2010CIMA C2 YUAN LI36 A

37. JAN 2010CIMA C2 YUAN LI37 169,000