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Billing statement of account sample for Manufacturing

hello my name is Dino Haase and today we are going to look at manufacturing accounts again it's quite a large topic this one so the video may be slightly long do feel free to break it up into chunks and watch the video at different sort of starting points so the first thing to make clear is the purpose of our manufacturing accounts which fundamentally is used to calculate the equivalents of purchases in a company that actually has a factory and makes its own goods so what we are actually doing an operator in our manufacturing accounts is calculating the cost of producing the finished item so let's say for example we made toy trains we could buy them from a creditor or a supplier I should say on credit or if we have our in factory we'll be making them so instead of having purchases from outside what you're going to have is the actual costs of production that you use to make the toy trains so the manufacturing accounts as the name suggests calculates the cost of manufacturing the toy trains in this case it's worth pointing out a few common terms that are used when you guess question or manufacturing accounts the first one is direct costs or direct cost is a cost that is attributable than other words is payable by the factory that is actually making the toy trains so in other words the cost is direct so a worker that is actually on the factory floor making the toy trains would be direct labor for example the materials that you use to make the toy train would be direct raw materials because they are directly involved in the factory manufacturing process in other words making the toy trains any indirect costs are also sometimes known as overhead expenses and they are costs that you need to run the battery but actually are not necessarily costs directly involved in the production of the toy train so the example I was used by students is you're obviously going to need cleaners to make sure that the factory is tidy and that the toilets are hygienic they're essential in terms of making sure you are sticking to health and safety standards but they're the people who clean the factory are not directly involved in the production process so they would be seen as an indirect cost another example might be security again you need them to safeguard the toy trains you're making and make sure that they're not stolen but the security guards are not directly involved in the production process another common area that causes quite a bit of confusion among students is this word apportionments a strange word just simply means division so how do we divide up the expenses between the factory and any other offices that you might have running a company so typically let's say you're making a you're making a set of toy trains the factory really is only concerned with the cost of making the toy trains you may also have as part of the same business and office where the managing director and the sales team work to market and sell the toy trains to the customers you may also have an admin and a finance office all right so those are not necessarily directly linked to the factory but they're still expenses so if you're renting the whole premise is a whole area and you've got a part of that premises is the factory and then another part might be different offices for the marketing team and the finance team and the managing director how do we divide up things like rent so that the cost is apportioned always divided fairly between the factory and the other offices in the business well the answer to that is the question will tell you how it's going to be divided up and what you then have to do is for expenses like rent you have to make sure that you apportion them or divide them ing to the percentages given to you so I've got a quick example I've drawn up here we can see that the rent for the year is $10,000 but it tells us in the question that the factory floor area is 70% and the office floor area is only 30% so what we would do is 70% of ten-thousands obviously 7000 that cost in terms of that part or division of the rent would go to or go into the manufacturing account and the other 3,000 would simply be put in your profit and loss account as a rent expense for the rest of the office you know for your marketing team and your director and secretary admin and Finance there are a number of ways you can divide up an expense between the factory and other parts of the business the most common is floor area but you could also do it ing to the number of workers so the larger the number of workers the more floor sorry the more rent in this example you would have to pay and the third is they might just simply not tell you how they've decided they're going to divide it up ie by floor area or workers I'll just simply say 70% is to be paid by the factory and say 30% is going to be paid by the office in terms of the rent expense so basically go with what the question says and then a portion will divide up the expense between the profit and loss account and the manufacturing accounts ok so now on to the format of the manufacturing accounts the first thing to remember is that we are actually working out the cost of making the toy trains in our factory so all the costs are going to get added together ok and sometimes students get confused and they think that we are taking it away from sales though the manufacturing account is calculating the cost of production so the equivalent of purchases so in most cases are going to be adding together the cost of the various materials and labor that you need to make the finished products ok so of course in any factory we're going to have raw materials so again you have as you do with cost of sales you have an opening stock of raw materials which in this case is 5000 plus you purchase the raw materials from your suppliers which you're then going to use to make your toy trains if you pay any carriages costs of transport or bringing in the goods again that gets added to your cost so in total here our materials cost us sixteen thousand dollars for the year at the end of the year we had three thousand left that would obviously be - which means that the value of the materials that we used during the year was thirteen thousand dollars the workers involved in actually making the finished products or the toy trains the labor costs or wages were six thousand and all the expenses the direct expenses so usually that's things like direct electricity may be associated with machinery and other expenses may be such as packaging anything that's directly related to the actual toy trains cost four thousand again remember we're working out the cost here so we add all these together to give us a prime cost or the cost of direct production so the cost to actually make the toy trains was twenty three thousand dollars you know there are no extra marks here for cool new styles you have to learn the format as it's laid out on this handouts I'm afraid so in addition to the prime cost we also need to add the overhead expenses which are the indirect costs of running the factory so here the rent the insurance the depreciation of the machinery that's involved in actually making the toy trains and the electricity presumably this is to light the factory so it's not necessarily directly involved in making the goods but obviously need lights to be able to see what you're doing in the factory is six thousand so we've got seven thousand Brent two thousand and Sharons a thousand depreciation the electricity of 6,000 again it's a cost that we're working out so when we add all this together it comes to a total factory overhead expenses I indirect expenses of sixteen thousand we add that to the prime cost the direct cost of making the toy trains and it gives us thirty nine thousand now a lot of students stop at that stage and they forget we also have something known as a work-in-progress and keep it simple a work-in-progress basically means a half-finished item so it would be a half-finished toy train again we look at the half-finished toy trains or items at the beginning of the year which was nine thousand we assume those are made because they are at the opening work-in-progress inventory in other words they are the stock of half-finished goods at the beginning of the year well of course in your factory the first thing you're going to do is finish them off so we add those to the thirty-nine thousand to give us now a total cost of production of forty-eight thousand and all the half-finished toy trains that we count that we have at the end of the year the closing work-in-progress we would take away because they're not finished so therefore we can't count them as a cost and that leaves us with the production cost of forty one thousand and that's basically the manufacturing accounts and what we're saying is that rather than going to our supplier and buying the toy trains finished from our supplier we've made them are in the factory and in this case the toy trains have cost us forty-one thousand dollars exactly to make so once we've calculated the production cost of goods completed of forty-one thousand dollars we simply use that number instead of purchases so the rest of the income statement the trading account and the profit and loss counts looks exactly the same so we have our sales and then we have our opening stock of finished goods our closing stock of finished goods but instead of this purchases figure which would normally be here we simply transfer the forty one thousand and we put it at the production cost of goods completed in other words this is the value of the goods that we made in our fat in this case 41,000 opening stock plus purchases or the equivalent of production cost of goods completed gives me four thousand plus forty one thousand and then any closing stock of finished goods we would take away from the forty five thousand to give us a cost of goods sold of thirty seven thousand which we then take away from sales to give us our gross profits and the expenses will be divided up as the apportioned figures that we discussed earlier on and again all that information in terms of how you divide up the expenses that aren't directly linked to the fir-tree will be given to you in the question so here we've got a rent of a thousand got electricity of five hundred insurance of two and a half thousand salaries of four thousand add those together gives me eight thousand we take that away from my gross profits to leave me with a net profit in my profit and loss account of thirty five thousand