MANUFACTURING ACCOUNTS INTRODUCTION A manufacturing organisation is one that manufactures (produces) goods for sale. This could either be a sole trader, a partnership or a company. TOPICS 1. Manufacturing account 2. Work in progress 3. Transfers of goods at market value 4. Provision for unrealized profits LEARNING OUTCOMES At the end of the chapter, the student should be able to: - Explain the purpose of a Manufacturing Account - Explain the treatment of opening and closing Work In Progress in Manufacturing Accounts - Calculate the profit or loss on manufacturing - Account for provision for unrealised profits on finished goods. - Prepare Manufacturing Account, Income Statement and Balance Sheet for sole traders,Manufacturing Account A Manufacturing Account is an account that collects together all the costs involved in production to determine the production cost of goods completed. To ascertain the production cost of the goods completed, charge all the elements of production cost (i.e. direct materials, direct labour, direct expenses and production overheads) to the Manufacturing Account. + Direct materials, labour, and expenses are all those costs involved in production that are traceable to units of goods produced. The total of all direct costs incurredin a year is called the prime cost. + Production overheads are all those costs incurred in a factory, but cannot be easily traced to the units of goods produced. + Atthe end of the year, the cost of goods manufactured is then transferred, as the figure equivalent to purchases, to the income statement. Opening and closing work in progress The goods partly completed at the start and end of the accounting period are respectively known as opening work in progress and closing work in progress. The value of the opening work in progress is added to the total production cost for the period while the value of the closing work in progress is deducted in arriving at the production cost ofExample: Ngonga Chombais a manufacturer. His Trial Balance as at 31st December 2024s as follows: Dr Cr K'000 K'000 Capital 274912 Drawings 17120 Premises 80.000 Machinery 65.000 Office equipment 22 000 Delivery vanexpenses 5 000 Lighting and heating: Factory 5718 Office 2220 Manufacturing wages 90 940 General expenses Office 7 632 Factory 11.280 Purchases of raw materials _78 108 Salesmen commission 15 720 Rent: Factory 9 600 Office 4.400 Office salaries 12.570 Receivables and Payables 56740 38.900 Bank 26 674 Salesrevenue 273 000Inventory at 1st January 2024 Raw materials 15 130 Finished goods 48 500 Work in progress 10.460 586812 586812 Additional information: 1 Inventory at 31st December 2024 were: Raw materials K18 100000 Finished goods K49 560 000 Work in progress K12 840 000 2. Ignore depreciation of fixed assets. Required: From the above details, prepare the Manufacturing Account, the Income Statement for the year ended 31st December 2024 and a Balance Sheet as at that date.SOLUTION Ngonga Chomba Manufacturing account for the year ended 31st December 2024 k'000 K'000 Raw materials: Openinginventory 17 130 Purchases 78 108 Total inventory available 95238 Less: losing inventory 18 100 Cost of raw materials consumed 77 138 Direct labour Wages 90.940 Prime cost 168 078 ‘Add: production overheads Lighting and heating 5718 General expenses 11.280 Rent 9600 26 598 194 676 ‘Add: opening work in progress 19.460 205 136 Less: closing work in progress 12.840 Production cost 192 296Ngonga Chomba Income Statement for the year ended 31st December 2024 K'000 K'000 Salesrevenue 273000 Openinginventory 48 500 Production cost 192 296 240 796 Less: closing inventory 49 560 Cost of sales 191 236 Gross profit. 81764 Less expenses: ‘Administrative expenses 5000 Lighting and heating 2.220 General expenses 7 632 Rent 4400 Office salaries 12570 Salesmen's commission 15720 Total expenses 47 542 Net profit 34222Ngonga Chomba Balance sheet as at 31st December 2024 Cost Dep. Value Non-current assets. K'000 K'000 K'000 Premises 80000 - 80000 Machinery 65000 - 65000 Office equipment 22000 - 22.000 167000 - 167000 Current assets: Inventory:-Rawmaterials 18 100 Workin progress 12840 - Finished goods 49 560 Receivables 56740 Cash at bank 26 674 163914 Less Current Liabilities Payables 38.900 Working capital 125014 Net assets 292014 Capital and liabilities: Capital 274912 Add: net profit 34222 309134 Less: drawings 17:120 292014Transfer of goods at market value In manufacturing organisations, it is usual to allocate the gross profit earned by the business between the factory and the selling department so that the actual profit earned from mere selling can be revealed. This split may also allow the production manager to earn a commission. To achieve this, the finished goods are transferred from the factory to the selling department with a profit element (i.e. profit loading). When goods are transferred at market value, there will be a balance in the manufacturing account representing a profit or a loss arising from manufacturing the goods instead of buying them as finished products. To close the manufacturing account, the profit or loss should be transferred to the income statement.Example: The following information has been extracted from the books of Mulenga manufacturing company for the year to 30th September 2024: 000 Deprecation far the year to 30th September 2024: Factory equipment 21000 Office equipment 12 000 Direct wages 120000 Factory: insurance 3 000 Heat 45 000 indirect materials 15000 Power 60000 Salaries 75 000 Finished goods at 1st Gctober 2023 72 000 Office: electricity 55.000 General expenses 27 000 Postage andtelephones 8 700 Salaries 210 000 Raw material purchases 600 000 Carriage inwards on raw materials 6000 Raw material inventory at 1st October 2023 24.000 Advertising 6 000 Sales revenue 1.537200 Work in progress at 1st October 2023 36 000Notes: 1. At 30th September 2024, the following were on hand: k'000 Rawmaterials 30 000 Work in progress 27 000 Finished goods 90 000 2. At 30th September 2024, there was an accrual for advertising of K3.000 000, and it was estimated that K4 500 000 had been paid in advance for electricity. These items had not been included in the books of account for the year to 30th September 2024. 3. Goods produced during the year are to be transferred to the Income Statement at a market value of K978 000 000. 4. For the purpose of inventory valuation, finished goods have been valued at cost. Re quired: Prepare in the vertical calumnar form, the company’s Manufacturing Account, Income Statement for the year to 30th September 2024.SOLUTION: Mulenga Manufacturing Company Manufacturing account for the year ended 30th September 2024 ‘000 K’000 k’000 Raw materials: Openinginventory 24.000 Purchases 600 000 ‘Add: carriage inwards __ 6.000 606.000 Total inventory available Less: closing inventory Cost of raw materials consumed Direct labour Wages 120.000 Prime cost 720 000 ‘Add: production overheads: Depreciation - factory equipment Insurance 3 000 Heat 45000 Indirect materials 15 000 Power 60 000 Salaries 75000 219 000 939 000 630 000 30.000 600 000 21000‘Add: opening workin progress 36.000 975000 Less: closing work in progress 27.000 Production cost 948 000 Market value 978 000 Less: production cost 948 000 Manufacturing profit 30 000Mulenga Nlanuracturing Company Income Statement for the year ended 30th September 2024 k'000 k’000 Sales revenue 1 537 200 Opening inventory 72 000 Market value 978 000 1.050000 Less: closing inventory 90.000 Cost of sales 960 000 Gross profit 577 200 Add: profit on manufacturing 30.000 607 200 Less expenses Advertising 6 000 ‘Add: accrual 3.000 9.000 Depreciation - office equipment 12000 Electricity 45.000 Less: prepayment 4500 40500 General expenses 27000 Postage and telephones 8 700 Salaries 210.000 Total expenses 307200 Net profit 300 000Atlowance for unrealised prorit In cases where goods are transferred at market price to the selling department, there may be some of these goods that remain unsold at the end of the year. If the inventory of such goods is valued at the transfer price or market price, then in order to arrive at the true profit, it is necessary to provide in the accounts for unrealised profits included in the valuation of inventories. The allowance for Unrealised Profit Account is opened to account for such profits. This account is prepared in the same manner as the Allowance for doubtful debts Account, i.e. an increase in the account balance is treated as an expense, while a decrease is treated as a gain in the income statement. The balance on the Provision for Unrealised Profit Account is at the end of the year deducted from the closing inventory of finished goods in theExample: The following balances as at 31st December 2024 have been extracted from the books of Simon Choalwe, a manufacturer: K’000 Inventory at 1st January 2024: Raw materials 7 000 Work in progress 5.000 Finished goods 6 900 Purchase of raw materials 38.000 Direct labour 28 000 Factory overheads Variable — 16 000 Fixed 9000 Administrative expenses: Rent andrates 19 000 Heat andlight 6 000 Stationery and postage 2000 Staff-salaries 19380 Salesrevenue 192.000 Plant and machinery: Atcost 30000 Provisions for depreciation 12000 Motor vehicles (for sales deliveries): At cost 16 000 Provisions for depreciation 4 000Payables 5500 Receivables 28 000 Drawings 11500 Balance at bank (Dr) 16 600 Capital at Ist January 2024 48 000 Allowance for unrealised profit at 1st January 2024 1380 Motor vehicles running costs 4500 Additional information: 1. Inventories at 31st December 2024, were as follows: Ko00 Raw materials 9000 Work in progress 8 000 Finished goods 10 350 2. The factoty output is transferred to the income state ment at factory cost plus 25% for factory profit. The finished goods inventory is valued on the basis of amounts transferred to the debit of the income statement. 3. De preciatianis provided annually at the following percentages of the original costs of fixed assets held at the end of each financial year Plant and machinery 10% Motor vehicles 25% 4. Amounts accrued due on 31st December 2006 for direct labour amounted to K3 000 000 and rent and rates prepaid at 31st December 2024 amounted to K2 000 000. Required Prepare the Manufacturing Account, Income Statement for the year ended 31st December 2024, and a Balance SheetSOLUTION Simon Choolwe Manufacturing account for the year ended 31st December 2024 K'000 K'000 Raw materials Openinginventory 7 000 Purchases 38.000 Total inventory available 45000 Less: closing inventory 9 000 Cost of raw materials consumed 36000 Direct labour. Wages 28 000 ‘Add: wages accrued 3.000 31.000 Primecost 67 000 ‘Add: factory overheads: Variable 16000 Fixed 9000 Depreciation - plant and machinery 3.000 28.000 95 000 ‘Add: opening work in progress _5.000 100 000 Less: closing work in progress 8.000 Factory cost 92.000Market value 115000 Less:factory cost _ 92.000 Manufacturing profit 23 000Simon Choolwe Income Statement for the year ended 31st December 2024 K000 K’000 K'000 Sales revenue 192.000 Opening inventory 6 900 Market value 115 000 121900 Less: closing inventory 10.350, Cost of sales 111550 Gross profit on trading 80.450, ‘Add: profit on manufacturing 23.000 103.450 Less expenses: Rent and rates 19 000 Less: prepayment 2009 17000 Provision for unrealised profit (w1) 690 Heat andlight 6000 Stationery and postage 2000 Staff salaries 19 380 Depreciation-motor vehicles 4000 Motor vehicle running costs 4.500 Total expenses 53570 Net profit 49.880Balance sheet as at 31st December 2024 Cost Dep. Value Non current assets: K'000 K'000 K'000 Plant and machinery 30 000 15000 15 000 Motor vehicles 16000 8 000 8 000 46000 23000 23000 Current assets: Inventories: -raw materials 9 000 -workinprogress 8 000 - finished goods 10 350 less: allowance for unrealised profit 2070 8 280 Receivables 28 000 Cash at bank 16 600 Rent andrates prepaid 2.000 71.880 Less: Current Liabilities Payables 5500 Direct labour accrued 3.000 8500 Working capita 63380 Net assets 86380 Financed By Capita 48 000 Add: net profit 49.880 97.880 Less: drawings 11500 86380Workings 1 Allowance for Unrealised Pr «000 =©K000 Balance c/d 2070 Balance b/d 1380 Income Statement 690 it Account 2070 2070 Note: Closing balance amount = K10350 000 x 25/125= K2070 000QUESTION ONE The following is a trial balance for J Mutinta as at 31 st December 2024: Dr Cr K'000 K'000 Capital 59360 Drawings 4000 Productive machinery (cost KS6m) 46 000 Accounting machinery (cost Kam) 2.400 Royalties 1400 Carriage inwards onraw materials 700 Purchases of raw materials 74.000 Inventory at 1st January 2024: Raw materials 4200 Finished goods 7 780 Work in progress 2700 Wages (direct K36m, factory K29m) 65 000 General factory expenses 6 200 Lighting 1.500 Factory power 2740 Administrative salaries 8 800 Salesmens salaries 6000 Commission onsales 2300 Rent 2.400 Insurance 840General administrativeexpenses 2.680 Bankcharges 460 Discount allowed 960 Carriage outwards 1180 Receivables 28 460 Payables 25000 Bank 11360 Cash 300 Sales revenue 200 000 284 360 284 360 Notes at 31st December 2022 1. Inventory of raw materials K4 800 000, Inventory of finished goods KB 000 000, Work In Progress K3 000 000. 2 Lighting, rent and insurance are to be apportioned: factory 5/6ths, administration 1/6th. 3. Depreciation on productive machinery and accounting machinery at 10% per annum on cost. Required: Prepare the Manufacturing Account, Income Statement for the year ended 31st December 2024 and a Balance sheet as at that date.SOLUTIONS TO EXERCISES SOLUTION ONE J Mutinta Manufacturing account for the year ended 31st December 2024 K'000 K'000 Raw materials Openinginventory 4.200 Purchases 74.000 Carriage inwards _700 Total inventory available 78 900 Less: closing inventory 4800 Cost of raw materials consumed 74.100 Direct labour. Wages 36000 Direct expenses: Royalties 1.400 Prime cost 111500 ‘Add: factory overheads: Indirect wages 29 000 General factory expenses 6 200 Lighting (6/6 x 1500) 1.250 Factory power 2740 Rent (5/6x 2400) 2.000 Insurance (5/6 x 840) 700Depreciation on productive machinery (10% x 56) ‘Add: opening work in progress Less: closing work in progress 3.000 Production cost 158 690 5600 47.490 158 990 2700 161690J Mutinta Income Statement for the year ended 31st December 2024 k'000 k'000 K'000 Salesrevenue 200 000 Openinginventory 7780 Market value 158 690 166.470 Less: closing inventory 8.000 Cost of sales 58 471 Gross profit 41 530 Less expenses: Lighting (1/6 x1 500) 250 Administrative salaries 8 800 Salesmer's salaries 6000 Commission on sales 2300 Rent (1/6x 2400) 400 Insurance (1/6 x 840) 140 General administrative expenses 2.680 Bank charges 460 Discount allowed 960 Carriage outwards 1180 Depreciation on accounting machine (10% x 4m) 400 Total expenses 23570 Net profit 17960J Mutinta Balance sheet as at 31st December 2024 Cost Dep. Value Non current assets: K’000 k'000 K’000 Productive machinery 56000 15600 40 400 Accounting machinery 4.000 2.000 2.000 60 000 17.600 42.400 Current assets Inventories: -raw materials 4 800 -workinprogtess 3.000 -finished goods 8 000 15800 Receivables 28 460 Cash at bank 11 360 Cash in hand 300 55.920 Less: Current Liabilities Payables 25.000 Working capital 30.920 Net assets Capital ‘Add: net profit Less: drawings 59 360 17960 77 320 4.000 73320 73320a eet The following trial balance was extracted from the books of Panuka Ltd after completion of the manufacturing account for the year ended 31st March 2024 Dr Cr 000 k'000 Ordinary share capital 40000 7% preference share capital 20 000 Sales revenue 200 000 Production cost 106400 Receivables 21400 Payables 10.000 Inventory: Finished goods (1st April 2002) 52000 Raw materials (S1st March 2003) 11 000 WIP (31st March 2003) 6200 Premises atcost 35000 Accumulated depreciation onbuildings 2000 Plant and machinery atcost 12000 Depreciation on plant and machinery Accumulated provision 4.800 Charge for the year 1.200 Retained profit (Ist April 2002) 27 080 Bank 8 528 Rent 3 500General expenses 3060 Distributioncosts 21316 Bad debts 400 Administrative salaries 21 615 Advertising expenses 5590 Preference divided paid 700 Suspense _3 629 308709 308709Additional formation: 1. Closing inventory of finished goods on 31st March 2024 was valued at K46 600 000. 2. Depreciation on buildings is K400 000. 3. Included in rent paid is a 16 months rental of K1 680 000 payable as from 1st July 2023. 4, Provision for Income tax on profits for the year of K15 000 000is to be made 5, The directors decided to provide for a 10% dividend on ordinary shares and a final dividend on preference shares 6. Investigations on the causes of the difference in books revealed the following errors. These errors had no effect on the production cost: i)A debit balance of Ka 600 000 owing by a customer was omitted inthe trial balance. ii) The total of the discounts received column in the cash book, K120 000, had not been posted to the nominal ledger. iil) A payment for administrative salaries, K1 323 000, was posted to the general ledger as K1 332 000. iv) A sales invoice for K8 000 000 had been omitted from the sales account. v) Acheque issued for general expenses for K50 000 had been posted to the debit of the bank account. Required a) Show the journal entries to correct the errors in six (6) above. Narratives are not required. (Smarks) b) Open up the suspense account to clear the difference in books. (3 marks) c) Taking into account the corrected errors, you are to prepare: i) Panuka Ltd's Income Statement for the year ended 31st March 2024. (12 marks) ii) Panuka Ltd's Balance Sheet as at 31st March 2024. (11 marks)SOLUTION TWO a) Journal entries K'oo0 Ko00 i) Receivables in Trial balance 4 600 Suspense 4600 ii) Suspense 120 Discount Received 120 iii) Suspense 9 Administrativesalaries 9 iv) Suspense 8 000 Sales revenue _ 8 000 v)Suspense 100 Bank 100(b) Suspense Account Dr_k’000___Cr k'000 Discount Received 120 Balanceb/d 3629 Administrative salaries 9 Receivables in Trial balance 4 600 Sales revenue 8 000 Bank 100 8229 8220c)(i) Panuka Ltd Income Statement for the year ended 31st March 2024. K'000 K'000 Sales revenue (200 000+ 8000) 208 000 Openinginventory 52.000 Production cost 106 400 158 400 Less: closing inventory 46 600 Cost of sales. 111800 Gross profit 96 200 Add: Gains: Discount received 120 Total income 96 320 Less: Expenses Rent [3 500 - (1680 = 16 x7 months)]_ 2765 General expenses 3.060 Distribution costs 21316 Baddebts 400 Administrative salaries (21 615 - 9) 21 606 Advertising expenses 5590 Depreciation on Buildings 400 55.137 Profit before taxation 41183 Less: Income tax 15000 Profit after taxation 26 183Dividends Preference -paid 700 “proposed 700 Ordinary ~ proposed 4.000 5.400 Retained profit for the year 20783 Add: Retained profit brought forward 17.080 Retained profit carried forward 37863ji) Panuka Ltd Balance Sheet as at 31st March 2024. COST _DEP_NBV Non current Assets: '000 K’000 K’000 Premises 35000 2 400 32600 Plant and machinery 12000 6000 6000 47000 8400 38 600 Current Assets: Inventory: Finished goods 46 600 Raw materials 11 000 WiP 6200 63 800 Receivables (21 400+ 4600) 26 000 Bank (8 528-100) 8 428 Rent prepaid _735 98 963 Less: Current liabilities: Payables 10 000 Taxation 15.000 Dividend payable:- preference 700 - ordinary _4.000 29700 working Capital 69.263 Net Asset 107 863Capital and reserves Ordinary share capital 40 000 7% preference share capital 20 000 Accumulated profit 47863 107 863