In our lesson on trading and Profit or Loss Account, we
discussed the final account of a sole trading firm. In this case, the business
entity buys and sells goods already produced or manufactured by another person
or entity.
In the manufacturing account setting, we have to look at
the accounting processes involved in the manufacturing of a product and the
eventual sales point of that product. Thus, manufacturing account involves
accounting for the cost of producing a product.
In a manufacturing account, the cost of production is
arrived at using the following format
***Prime Cost consist of Direct material cost, Direct
Labour cost and Direct Expenses
With this, the above format will appear thus
Example 1
PRODUCTION
COST OF GOODS COMPLETED
The production cost of goods completed is also called
production cost of goods manufactured.
It is transferred to the income statement to take the place
of purchases. In other words, it is debited to the trading and profit or loss
account. The reason for this is that since the manufacturing firm produces
goods and sells them itself, we do not expect it to purchase goods for resale.
For this reason, the production cost of goods completed is taken as purchases
in the income statement.
However, in some cases where the manufacturing firm runs
out of stock, it may be necessary to buy some goods from other firms for
resale. In this case, we have purchases of finished goods.
Example 2
Example 3
WORK – IN –
PROGRESS
In some cases, the production or manufacturing of a
product may not have been completed before the company’s accounting year-end.
That is the goods will have been partly produced. Where this happens, the total
cost of the partly manufactured goods are determined and treated in the account
as work-in-progress. Again, the work-in-progress may happen in two forms – one
that was partly manufactured in the previous year and the one that is partly
manufactured in the current year.
The value of goods partly manufactured brought forward
from previous year is called opening work-in-progress and it is added to the
production cost before. The value of work-in-progress for the current year is
called the closing work-in-progress and it is deducted from the production cost
of goods completed.
MARKET VALUE OF GOODS MANUFACTURED
In the previous instance shown, the production cost of
goods manufactured is transferred to the income statement (profit or loss
account) at cost and treated in the same manner as purchases for the period. To
be realistic, the firm could have paid a higher price for same goods if it had
chosen to buy the goods from other entity or person. To bring this fact into
consideration, the manufacturing firm will have a mark-up predetermined by the
management of the firm. This mark-up is the profit on the manufacture of those
goods.
TREATMENT OF MARK-UP
The mark-up is debited (charged) to the manufacturing
account and credited to the income statement (profit or loss account). In other
words, the mark-up is added to the production cost of the goods completed and
taken as profit element in the income statement.
Example 4
FINAL ACCOUNT OF A MANUFACTURING COMPANY
In a manufacturing firm, the final account will include
the manufacturing account as an addition to final account of trading firm.
Example 5
Click here to view example5 and itssuggested solution to illustrate the preparation of final account in amanufacturing firm
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