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all right students bismillah r-rahman r-rahim this is ard your accounting coach today we are going to discuss about manufacturing accounts manufacturing accounts are meant to be made by producers or manufacturers manufacturers are the one who are not selling products or services rather than they are making instead they are making products for use by the consumers so manufacturers are also known as producers and today we are talking about creating account for them firstly the topic will start by discussing cost classification now what does cost classification means cost classification means dividing the cost into different types so we can understand how many types of course there are actually there in a manufacturing environment see there are three basic elements of cost such as a raw material labor and expenses means if we walk into a factory where some products are made may be garments textiles there are three primarily primary elements of fabric or may be a shirt or jeans there are three elements first of all there is a fabric which is known as a raw material secondly we have a labor input that means whatever labor is working to make the product and thirdly we have expenses such as electricity or rent depreciation and so on so first of all we need to understand there are three basic elements of a cost which is material labor and expenses secondly we can also study cost classification second type is direct versus indirect classification now what does direct cost means direct cost is a cost which can easily be traced or a cost which can easily be identified in a particular product or service now what does mean a cause can be identified a cause can be identified if is a major cost if the cost can easily be identified or traced that this much amount of cost is being incurred in a particular product in making of a particular product the cost is known as direct cost or if the cost cannot be easily traced in a particular product or service or if we do not want to trace that cause why we do not want to trace that cause because the cost is very negligible means the cause is not a greater proportion of overall cost so we will be treating this as an indirect cost now this is a bit tricky point there are costs are costs that can be easily traced and indirect costs are costs that cannot be easily traced see first of all we discuss there are three types of course namely material labor and expense now we are saying cost can be direct or as well as indirect now what does this mean this means there are two categories and we can make combinations from them which means material can be direct material or indirect material similarly labor can be direct labor or indirect labor thirdly we have expenses expenses can be direct or indirect as well expenses can be direct and in a having said that we can see now let us discuss some examples of material let's see if we let's suppose if we are making chairs wooden chairs the word for a wooden chair is direct material now why is the word that is used in making of a chair is a direct material because wood is a major material or primary material means most of the material that is used in a wooden chair is wood so wood can be traced means if there is a carpenter who is making chairs if we ask him how much amount of wood Hamid means how much quantity or kg of wood that is being used in a particular type of wooden chair we'll be able to tell you from his experience that this much amount of wood is being used in that particular type of chair so what is the direct material because it can be traced similarly cost that cannot be traced is known as indirect material if we ask a carpenter how many nails or screws will you be using in a particular type of chair so what will be his answer his answer will be that I have never thought of using how many nails I am using and he actually does not keep a record of how many nails he is using in particular type of chair why it is not that so he cannot keep record of nails but the problem is that nail is a very cheap material and he does not feel it necessary for keeping record of the nails or glue maybe glue that is used in making a particular chair so glue nails polish these are all indirect material because these are minor materials and these are not a major part of the product or service similarly there are some other examples as well means if you eat Lay's chips the potato that is used in making of Lay's chips is a direct material and the oil in which the chips are being fried the oil is indirect material but because we cannot trace particular amount of oil that is used in and one particular packet of chips let's take some other examples and if we are varying address of course we are varying one right now if you are wearing a dress the fabric of the dress is a direct material because the tailor can give you an estimate of how much length of them worked fabric is being used in a particular type of garment or dress similarly the thread or other stitching material that are being used which are known as indirect material now what does direct labor me see cause classification is very important and is instrumental in understanding manufacturing accounts if we are unable to understand the classification of course we won't be able to further identify the types of cause that are coming in the exam questions all the labor which is directly involved in making of a particular product is known as direct labor means the labor that is being working in all production departments such as cutting painting assembly finishing molding testing welding all the labor that is directly involved in making of a particular product or service is known as direct labor and the labor which is not directly involved in making of a product is known as indirect labor now what will be the examples of indirect labor and direct labor may be the supervisor if we can ask a production worker how much time do you spend in making a particular product he can tell from his experience such as a tailor can tell that how much time of his will need to be concentrated in making a particular type of dress a carpenter can tell this he can make this type of chair in two hours maybe so ours can be traced it is known as direct labor the supervisor cannot be traced to each and every product because supervisor is not directly working on a particular product because supervisor is roaming around in the factory and he is just saying that everyone is doing his or her job well or not so supervisor is an indirect material indirect labor sorry similarly there are other types of labor such as watch bands security guard these are all indirect labor now there are two types of expenses one is direct and indirect again the definition remains the same the expenses can be directly traced to a particular product or service are direct and that one that cannot be traced signed direct see the all of the expresses mostly expenses the phratry are indirect such as electricity we cannot trace that how much amount of electricity is used in making of a particular product we cannot trace that how much rent is being used in making a particular product so electricity depreciation because depreciation is basely normally based on time that is straight-line method or some other formula though depreciation is not based on particular unit so these are all indirect expenses now what constitutes a direct expense direct expense means an expense that can be traced example of which is a royalty now what does royalty means royalty means if we are making an product that is not owned by us we have taken license from abroad maybe US UK or some other country and we are making in some Asian country this product so the Asian manufacturer will need to pay royalty a sum of money to the original inventor of that particular product the original founder who has this license for this product so royalty is normally based on per unit the royalty is a direct expense so I hope you are getting the difference if in the exam question it is written direct expense or royalty this means the expense is direct and if it is written only a general expense or factory expense so we will be assuming and expenses and direct so let's move forward further first of all we discussed there are three types of course for there namely material labor expenses then we discussed one cost can be direct or indirect so till now we have six types of course direct material and direct material direct labor indirect labor direct expense or indirect expense now what is prime cost prime world has arrived has originated from primary prime means primary cost prime costs are sum of all direct cost means direct material direct labor and direct expense in factory are known as prime cost sum of all direct cost is known as prime cost and sum of all indirect cost is known as overhead in direct material and direct labor and indirect expense if we add up all the indirect cost this means and over it now having said that if any of your friend asked you whether an expense or overhead is the same thing or it is something different so what will you be saying see there are two types of expense you can explain him like that cd-r there are two types of expense expense can be direct or as well as indirect so if expense is direct it will be part of prime cost and if the expense is indirect it will be part of overheads so I am sure you are arriving at the differences between a direct cost and indirect cost sum of all direct cost is known as prime cost and sum of all indirect cost is known as overhead not just indirect expense but including indirect material and indirect labor now over its can further be divided into two categories one is production overhead and one is non production over it production overheads are also known as factory or manufacturing overhead see production factory or manufacturing is the same thing similarly non production can also be said as non factory or it can be written as non manufacturing overhead now what our production overheads production overhead production overheads are overheads or costs that are arising in a factory that are arising in a factory floor and that are being incurred during production cause that are incurred in a factory during production to make a particular product or service are known as production overhead and non production overhead are costs that are not being incurred during production means they are incurred before production or after production these are not incurred during production and these are not either incurred on factory floor means these are incurred in some other departments which has support departments what are the examples of non production overhead firstly what are production over a production overhead are all indirect cost such as in direct material and direct labor and indirect expenses that are incurred in a factory non production overhead are selling over it selling over it means all the efforts that are we are doing to sell a particular product means we are opening selling outlets we are conducting sales promotion we are paying salaries to salesmen or sales girls we are paying selling expenses sales outlet rent electricity or decoration these are all selling overhead similarly marketing overhead we are printing billboards or the whether it is print media or electronic media we are giving ads on social media these are all marketing related overhead adminstration the cost that is not incurred where any other department is known as administration and the work which is not being done by any other department is known as administration work administration means office telephone photocopy or internet similar expenses distribution distribution is known as delivery cause it is also known as garage outwards means if we are distributing our goals to customer maybe we are delivering it to home customers home or maybe we are delivering it to supermarkets so the cost of delivery includes the cost of driver the depreciation of delivery van or delivery truck and lorry and whatsoever similarly there are office overheads office / it means all the costs relating to office means accountants salary and the office assistant or secretaries salary and office rent and similar cost then we have finance cause finance cost means the loan which we have talked to finance our operations that loan interest need to be paid to the bank and the loan interest will be financed cost rnd is research and development cost which is then obviously prior to making a commercial product so these are non production / it so I hope you are getting key points relating to cosplay certification firstly we discussed cost has three elements material labor expense it we'll discuss cost can be direct or indirect thirdly we discussed cost can be production or non production let's move forward then we have building up of course building up of course if we are calculating a cost of a particular product so what is the correct sequence firstly we will write all the direct cost direct material direct labor direct expense as we already discussed previously the sum of all direct cost is known as prime cost after prime cost will be adding production overheads now what a production overheads protection overhead are all indirect costs such as indirect material indirect labor indirect expense data being incurred in a factory C prime costs are direct cost and production overhead are all indirect cost this means these six costs constitute production cost production cost means all the six costs whether there are direct or indirect data being incurred in a factory after production cost will be adding of non production overhead such as selling marketing advertising this means total cost so let's move bit further we have already discussed there a cause they're examples indirect costs admin selling so secondly we what we have we have inventory now we already know what does inventory means from manufactures perspective there are three types of inventory inventory in manufacture account there are three types of inventory firstly it is the raw material raw material is the ingredient or in components that are used to make a particular product such as plastics such as metals such as word such as chemicals ink these are all raw materials cement then we have work-in-progress work-in-progress as you may have seen in some time when when we are travelling somewhere there are some road signs which are saying sorry for convenience a work-in-progress means a flyover a bridge or maybe a road is being made or constructed or renovated means this is work in progress work in progress means we have started making a product but it is not pleated yet the product has just started and maybe it is 5% complete or 50 or 90% complete but it's not 100% coverage it is work in progress these are incomplete goods thirdly we have finished good finished goods are goods that are ready for sale that are waiting for their customers to come and buy them there are three types of inventory in a manufacturing environment material labor and expenses let's move bit further now we will be discussing manufacturing comm now manufacturing account is a key part of this CAI is levers manufacturing account normally comes in a 40 marks question in question number five in all level exams and it is also part of a two level exams a level that is a two second year and manufacturing account that comes in CA ie all levels is already I have told you 40 months but there is some time that it is not being tested in question number five and it is being tested in question about two or three and if it is coming in question about two and three it will be of twenty bucks now let discuss what is a manufacturing account represent manufacturing account means we are calculating the cost of manufacture of products whatever cost is being incurred in a factory these are referred to as a manufacturing account now it will always be made in a two column now these terminologies are very important as far CIE syllabus is concerned if you will write any terminology other than those that I have displayed there you will be losing marks in the examinations now first of all we have already discussed there are three components one its material one is labour and one is expense will be writing first of all direct raw materials now how to calcul te direct no material first of all will be writing opening inventory then we'll be adding purchase if you see this format this format is bit similar that you have already came across in making an income statement that is opening inventory add purchases less purchase return or return outwards and Karajan word and less closing in venturi this is less closing in rent rate so but the difference is that these are all RM r n stands for raw material these are all cost relating to raw material if we take an opening inventory this is the inventory that we have a start of the year if you'll be adding purchase of raw materials means we have purchase whole lot of raw material then we have returned some of the materials that is faulty then we have incurred some sort of carriage cost which will increase the price of our material then this inventory is unused we will be deducting it because we will be using it in the next financial year so we will be getting cost of raw material consume this labeling is important this labeling will give you one mark in exam cost of raw material consume cost of raw material consume means this is the total cost of raw material that is used this year to manufacture the products now after raw material will be writing labor in the exam it will be written with the name of direct labor or factory wages another name for factory will be production wages or manufacturing wages after direct raw material will be writing direct labor thirdly we have direct expense direct expense or royalty if we add up all the direct cost it will be prime cost now it is not necessary that everything will be available in the exam sometimes where purchase the return is not present sometime carriage invert is not there sometimes direct expenses not there so I have written the whole format too just to make sure that these are the all the things that need to be in in coming the examination after prime course as you already are aware prime costs are all prime course are all direct cost after direct cost will be writing in direct costs indirect costs are also known as factory overhead now factory overhead are all the costs that are incurred in a factory but which cannot be directly traced or identified in a product or service now what are these ID costs actually first of all there are some of the example this list is not exhaustive maybe there are other items as well but these are the common items that usually come in examination salary and wages but the salary in wages should be off supervisor or management because the salary and wages of factory worker will come in direct labor if the supervisor is there because the supervisors costs cannot be traced supervisor or watchman a security guard or manager will be coming in overhead then insurance if it's relating to phratry then in direct overhead maybe with the name of indirect overhead then heat and light again if it is relating to Frederic rank if it's relating to phratry or manufacturing depreciation only which is charged and phratry equipment see if there are cost that are not relating to factory means the costs relating to admin the costs relating to office or selling marketing these are won't be coming here the correlating to admin or office will be coming in next statement which is income statement a manufacturer all the costs that are coming relating to factory centra expenses relating to factory they will add all the feathery overhead and this is the total of this all the totals are coming in the second column as you are already aware these are not debit credit these are just for presentation two columns this is the final figure lastly we will adjust work in progress now what is work in progress really work in progress is incomplete goods as we have already discussed we'll be adding opening work in progress and deducting closing work in progress it is very easy to remember this because we will always add an opening inventory and lesser closing energy now what is the reason of a drink adding this work in progress the reason is that that in the last period all the goods were not completed so will be completing the goods that will be that were left incomplete in the last accounting year so we are adding the cost of incomplete goods to complete it in this accounting period now this is also not necessary that at 31st December the night of the new year all of the goods are suddenly complete means there are some cost there are some goods that are still incomplete so we will be completing these goods in the next accounting period so we'll be deducting these here and the final answer is production or manufacturing or see if the opening inventory is less and closing inventory is more the net detection will be negative but if the opening inventory is greater than closing inventory the net deduction the net amount will be positive we'll be adding this and the final answer is production cost manufacturing cost or it is also known as cost of goods manufactured so I hope you are getting the idea of how does a manufacturing account is being constructed and now I'm moving forward to the next part that is income statement manufacturing account consists comprises of around twelve to fifteen marks and CAI examinations then will be coming at income statement an income statement we are making income statement for the outlet in manufacture card we were making accounts in manufacturing account the the cost was for a factory manufacturing account is all relating to a factory but income statement is relating to a sales outlet the sales showroom or sales outlet it is income statement first of all income statement will be writing sales revenue that is sales or revenue again all of these items are letting to finish goods because in outlet we are not dealing with chemicals here we are selling the final product the product that is ready for sale against the sale is for finished goods then cost of sale this is a similar pattern which you used to study in a sole trader format opening inventory ad purchase of finished goods less return outward or purchase a return less closing inventory then cost of sale one thing that is new that is not coming in a regular income statement that is leading to a sole trader is that of production or manufacturing costs now where does this production of manufacturing cost will arise production of manufacturing costs will already be calculating in the first part production of manufacturing cost then in second part will be only writing the total of production of and vengo there can be production costs or there can be and there can be purchase of finished goods as well means in our sales outlet most of the products are our own brand that we have made in a factory that we have manufactured in a factory but there may be a situation that some of the products are not available with the factory and we'll be buying these good from outside suppliers because we do not want to upset our customers just because our factory is not producing particular type of products so we will be buying this products from some outside supplier then we have cost of sales after deducting cost of sale from revenue will be getting gross profit as you already are aware gross profit is not final profit there are some adjustments that need to be made we'll be adding other income now what is other income other income is income that is not directly related to the trading outlet the trading activities of the business income that is other than selling ordinary selling activities anything that is received in the examination is coming in other income such as the rent receive Commission receive discount receive interest receive anything that is received then if we have a decrease in provision as you are already aware if the provision is decreased during the year this is income and if the provision is increasing during the year this is an expense then are in place of expenses we will be writing a different terminology that is non manufacturing overhead non manufacturing overhead or it is also known as non production or non factory overhead are expenses that are not relating to production expenses that are not relating to production will come in here such as expenses relating to office expenses relating to admin or finance or selling or marketing or distribution and depreciation of office related assets in short any cost that is not relating to factory but is incurring in the organization will be coming here in a non manufacturing overhead column the final figure will be for the year or loss for the if the column is the final answer is positive obviously it is the profit for the year or if it is negative this is loss for the year I hope you are getting manufacturing count pretty well lastly we have a statement of financial position forgive me if the lecture is getting bit longer then you first thought but I would like to cover all the aspects thirdly we have a statement of financial position which is also known as balance sheet the previous name old name is balance sheet and the new name is statement of financial position now as you are already aware balance sheet is made in three column statement of financial position first of all this is made in the format of accounting equation which is assets is equal to capital plus liability first of all we have assets there are two types of asset as you are already aware non-current asset and current assets we will be making three column cost accumulated depreciation and net book value cost means the original cost at which we bought the set previously accumulated depreciation which is also known as provision for depreciation means how much depreciation is charged till date on these assets and net book value is the difference between the two this means this is the value that is remaining in the in our box for non current assets after all the accumulated depreciation has been deducted so you know how to calculate these figures this is easy then in current assets will be writing three types of inventing this is particularly facture account balance sheet as compared with a sole trader balance sheet in a sole trader there is only one inventory in a manufacturer or producer accounts there are three types inventory will be writing all three in the first column for raw material WIP and finished goods and will be adding up in the second column then we have trade is stable this is easy we already discussed this previously where provision for doubtful debt is detected from producible and as you're already aware bad debt has already been deducted from trade disabled and balance sheet the debtors that will arrive it is after by then we have prepaid expense an expense that is paid in advance is an asset but because we will be getting benefit from it in the future accrued income is also asset means we are providing we have provided the services but the money is yet to come because it is our receivable then bank and cash which is known as cash and cash equivalent in new curriculum so we'll be adding non-current asset and current asset this means total assets after total assets there comes capital and liabilities according to accounting equation now how is capital calculated it is similar as we are doing in in a sole trader business opening capital which is already given in the exam always the capital that is given in the exam is opening capital and closing capital is never given it is always calculated bias then ad profit for the year where which will come from income statement if there is a loss will be deducting it because loss reduces our capital and profit increases our capital then we'll be deducting drawings as you are already aware drawing reduces our capital then this figure is closing capital we need not write this because it is an understood figure and mostly the CII examiner also don't write the label for this closing capital then after capital the final figure is liabilities if we write a non-current asset first will be writing non-current liabilities first non current liabilities obviously the loans that we are we have to pay that we are obliged to pay more than one year after the balance sheet date we are recording this lecture in 2018 and the loan is being repayable in 2020 this mean loan is a non current liability if the loan would be 2019 and if the current year of the question is 2018 the loan will be short in a current liability and if any date is not giving in the loan then the loan is always non current liability 6% is the name the name and year need to be mentioned if we are skipping this 6% and 2020 we will be losing one mark then current liability there are trade papers which are creditors bank overdraft if the bank is in - it is overdraft an accrued expenses which means we have incurred the expense but we are yet to pay these these are known as accrued expenses then lastly there is a prepaid income means we have received the income but we have not earned it yet means this is a liability for us then we'll be adding up capital non current liabilities and current liabilities the final figure is total capital and liabilities as you are already aware our accounting equation assets is equal to capital and liabilities assets side always equal capital and liabilities so I'm sure you got a slight idea of how does the manufacturing accounts are being prepared now if we have some question we will be solving the question and you will be getting all the points together I hope you understood the topic jazakallah law office