Manufacturing Account: Factory Overheads & Treatment of Work-In Progress ( Part 2)

Looking at the below formula:

Cost of Production = Prime Costs + Factory Overheads

Therefore :

Factory Overheads = Cost of Production less Prime Costs

Hence, Factory Overheads Expenses:

• are all expenses incurred by the factory over and above the prime cost and
• do not relate directly to the actual production.

Normally, these includes:

• Light and heat incurred in factory;
• Power;
• Depreciation of plant and machinery;
• Rent and rates of factory;
• Indirect labor costs like factory clerk’s salaries, factory manager’s salaries and production director’s remuneration

Take note that Factory Overheads do not include items like selling and distribution, administration and finance expenses.

WORK-IN-PROGRESS:

• During the manufacturing process, there are often partly manufactured goods at the end of the accounting period. Such goods are usually valued according to the amount of materials, labor and expenses which have so far being incurred.

• Treatment of Work-In-Progress:

To find the cost of production on completed goods, the work-in-progress at the beginning and end of an accounting period must be adjusted. This is by adding the opening work-in-progress to the cost of production and minus the closing work-in-progress ie:

Total cost of production                 XX

Add:

Work-In-Progress- 1 st June          xx

(Less:

Work-in-Progress- 30 th June       (xx)

Production costs of completed goods xx

Take note that sometimes work-in-progress  may be valued at prime cost which the adjustment would be to the total prime cost figure instead of total production cost figure.

SAMPLE of a Simple Manufacturing Account & Trading Accounts if taken in Prime costs, Factory overheads and Work-In-Progress

XYZ Manufacturers

Manufacturing Account and Trading Accounts for the Year Ended 31 st Dec

Opening stock of raw materials        $10,000

Add:

Purchases of raw materials                $5,000

Less:

Closing stock of raw materials           $(6,000)

Cost of raw materials used/consumed  $9,000

Direct Labor                                       $2,000

Prime Cost                                       $11,000

Add:

Factory Overheads                             $2,000

                                                      $13,000

Add:

Opening work-in-progress                   $2,000

Less:

Closing work- in-progress                  $(1,000)

Total Cost of Production transferred to

Trading Account                                $14,000

Sales                                             $25,000

Less: Cost of sales:

Opening stock of finished goods         $1,000

Add: Purchases                                 $3,000

Add: COST OF PRODUCTION             $14,000

                                                      $18,000

Less:

Closing stock of finished goods            $3,000

Cost of sales                                    $15,000

Gross Profit                                      $10,000