On this page you will find MANUFACTURING GRADE 12 NOTES – ACCOUNTING STUDY GUIDE
The manufacturing process is divided into 3 departments:
| Administration department | Factory | Selling and distribution department |
| Office duties are performed in this department and include financing and investing activities. | Raw materials are taken through the manufacturing process in order to produce finished goods. | This department is responsible for the advertising, selling and delivery of the finished goods to customers. |
| Related costs | ||
| Administration department | Factory | Selling and distribution department |
| Accountant’s salary Bookkeeper’s salary Receptionist’s salary Cleaning staff wages Office stationery Office rent Insurance on office equipment Depreciation on office equipment Office telephone | Direct costs Raw/direct materials Factory workers’ wages/salaries (direct labour) Indirect costs/factory overheads Factory foreman’s salary (indirect labour) Cleaning staff wages/salary (indirect labour) Indirect materials/consumable stores Factory rent Factory maintenance Factory insurance Depreciation on factory equipment | Sales manager’s salary Sales representative’s commission Salary of deliverymen Bad debts Advertising Stationery costs Rent Depreciation on delivery vehicle Cellphone costs of sales staff |
3.1 Important concepts of manufacturing
Costs in the manufacturing process
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| Concept | Explanation |
| Direct labour cost | Wages and salaries of those employees physically making the product or operating the machines making the product. |
| Direct/raw materials cost | Raw materials that have been issued to the factory and have been used to manufacture the finished goods. E.g. leather and rubber soles in the making of shoes. |
| Factory overhead costs | All other costs involved in the manufacturing process which increase the cost of producing the product. |
Stocks in a manufacturing business
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| Concept | Explanation |
| Finished goods stock | Products that are completely finished and are ready for sale. |
| Factory indirect materials/consumable stores stock | The indirect materials that have not yet been used and are still available to be used, e.g. cleaning materials left over. |
| Raw materials stock | The raw materials left over that have not yet been issued to the factory but are stored safely in the warehouse for future use. |
| Work-in-process stock | Products that have not been completely turned into finished goods and are still in the manufacturing process. |
| Fixed costs | These are costs that do not change according to number of products made. For example, the rent of the factory plant will be the same no matter whether 1 000 units are made or 100 000 units are made. (For exam purposes it will be assumed that all factory overhead costs and admin costs will be fixed costs, unless otherwise stated.) |
| Variable Costs | These costs will increase when production increases. For example, the cost of raw materials used will be far less if 1 000 units are made compared to if 100 000 units are made. (For exam purposes it will be assumed that raw materials, direct labour and selling and distribution costs will be variable costs, unless otherwise stated.) |
Flow from the raw material in the store room through the factory to the finished goods in the show room.
- Study the following illustration and see the horizontal flow of funds from the storeroom to the factory and then to the show room.
- Now study the illustration vertically.
- See how the STORE ROOM is presented in the general ledger as the Raw Material stock account and in Note 1 of the Production Cost Statement.
- See how the FACTORY is presented in the general ledger account as Work in Process stock account and as the PRODUCTION COST STATEMENT.
- See how the SHOW ROOM is presented in the general ledger account as the Finished Goods stock account and in Note 4 of the Production Cost Statement.
| Storeroom Factory Show room In the storeroom the raw material and the consumable stores on hand are kept
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ILLUSTRATION OF ABOVE IN THE GENERAL LEDGER ACCOUNTS
| Raw Material stock account | Work in Process stock account | Finished goods stock account | |||
| Balance b/d 10 Bank CPJ 20 Creditors CJ 30 60 Balance b/d 15 | Creditors CAJ 5 Work in process 40 Balance c/d 15 60 | Balance b/d 150 Raw material GJ 40 Direct Labour GJ 85 Factory GJ overheads 35 250 | Finished 205 Goods 6 GJ Balance c/d 45 250 | Balance 1 b/d 100 Work in process 205 305 Balance b/d 55 | Cost of sales 250 Balance c/d 55 305 |
| Consumable stores on hand account | Factory overheads account | Cost of Sales account | |||
| Consumable stores on hand GJ 3 Bank CPJ 4 Creditors CJ 5 12 | Creditors CAJ 3 Factory overheads (used) 5 Consumable stores on hand 4 12 | Consumable stores (used) 5 Indirect Labour 3 15 Water and Elec 5 Rent expense 5 Depreciation 5 35 | Work in Process 35 | Finished Goods 250 | |
ILLUSTRATION OF ABOVE IN THE FINANCIAL STATEMENTS
| Note 1 | Factory Production Cost Statement | Note 4 | |||
| NOTE :1 Opening stock Plus Purchases (net)(20 + 30 – 5) Plus carriage on purchases Less Closing stock = Raw material issued to factory If you know the ledger accounts, you know the Production Cost Statement as well! |
10 45 0 (15) 40 | Direct materials cost + Direct labour cost = Prime/Direct cost + Factory overhead cost = Total cost of production + Work-in process at the beginning of the year – Work-in process at the end of the year = Total cost of production of finished goods The Work in Process Account is the Production Cost Statement | 40 85 125 35 160 150 (45) 205 | NOTE 4 Opening stock Plus Cost of Production of finished goods Minus Closing stock = Cost of sales | 100 205 (55) |
Study the following template and see the similarities between the General ledger accounts and the Production Statement.
If you understand the flow of the ledger accounts from the raw materials to the finished goods, you will be able to learn the format and understand the Production Statement well.
| GENERAL LEDGER ACCOUNTS | PRODUCTION COST STATEMENT | |||||||||||||||||||||||||||||||||||||||||||
| Note 1: Raw material/ Direct material cost | |||||||||||||||||||||||||||||||||||||||||||
| Opening stock + Purchases(net) (20 + 30 – 5) + Carriage on purchases + Custom duties – Closing stock = Stock issued (Direct material cost) | 10 45 – – (15) 40 | |||||||||||||||||||||||||||||||||||||||||||
| PRODUCTION COST STATEMENT | |||||||||||||||||||||||||||||||||||||||||||
| Direct materials cost + Direct labour cost = Prime/Direct cost + Factory overhead cost = Total cost of production + Work-in process at the beginning of the year – Work-in process at the end of the year = Cost of production of finished goods | 40 85 125 35 160 150 (45) 205 | |||||||||||||||||||||||||||||||||||||||||||
| Note 4: Cost of finished goods(Cost of sales) | |||||||||||||||||||||||||||||||||||||||||||
| Opening stock + Cost of Production of finished goods Closing stock = Cost of sales | 100 250 (55) 205 | |||||||||||||||||||||||||||||||||||||||||||
| Note 3 Factory overhead costs | |||||||||||||||||||||||||||||||||||||||||||
| Consumable stores (3 + 4 + 5 – 3 – 4) Indirect labour Water and electricity Rent expense Depreciation Total factory overheads used | 5 15 5 5 5 35 | |||||||||||||||||||||||||||||||||||||||||||
3.2 Production Cost
Worked example 1
Example adapted from November 2010 NSC Exam Paper You are provided with information (balances, transactions and adjustments) relating to Fatima Manufacturers owned by Fatima Fala. The business manufactures shoes.
Required
- Calculate the value of the raw materials that were issued to the factory for the year ended 28 February 2010. [6]
- Prepare the following notes to the Production Cost Statement for the year ended 28 February 2010:
2a) Direct labour cost [5]
2b) Factory overhead cost [16] - Prepare the Production Cost Statement for the year ended 28 February 2010. [12]
- Using the figures in the Production Cost Statement you have just prepared, calculate the following (show your workings):
4a) Raw materials cost per unit [3]
4b) Total cost per unit [3] - You are provided with the number of units produced and the break-even point calculated for the past two years:
2010 2009
Break-even point 19 548 units 11 300 units
Number of units produced 20 000 units 24 000 units
5a) Briefly explain what the term break-even point means. [2]
5b) Explain whether Fatima should be concerned about the break-even point for
2010. Quote figures to support your answer. [4]
Information
Fatima Manufacturers
- OPENING BALANCES ON 1 MARCH 2009:
Raw materials stock R160 000 Work-in-process stock 158 000 Finished goods stock 120 000 Consumable stores stock: Factory 6 000 Factory plant and equipment at cost 2 225 000 Accumulated depreciation on factory plant and equipment 450 000 - SUMMARY OF TRANSACTIONS FOR THE YEAR ENDED 28 FEBRUARY 2010:
Purchases of raw materials on credit R1 023 475 Carriage on purchases of raw materials 22 500 Consumable stores purchased for the factory 43 000 Cleaning materials purchased for the office 12 000 Factory plant and equipment purchased on 1 September 2009 250 000 Production wages 723 800 UIF – contribution for factory employees Salaries: Factory foreman 150 000 Administration 400 000 Sales staff 250 000 Water and electricity 163 000 Sundry expenses: Factory 194 680 Administration 530 000 Sales department 340 000 - CLOSING BALANCES ON 28 FEBRUARY 2010:
Raw materials stock R259 125 Work-in-process stock 122 900 Finished goods stock 142 500 Consumable stores stock: factory 7 000 - ADDITIONAL INFORMATION AND ADJUSTMENTS:
- No entry was made for the transport of raw materials by Pops Carriers to the factory, R3 750.
- No entry was made for the following in respect of the production wages for the last week of February 2010. The entry was omitted (left out) from the wages journal:
Gross wages R6 200
Deductions: Unemployment Insurance Fund 62
PAYE 1 240
The employer contributes 1% to the UIF. - An amount of R4 200 was still outstanding on the water and electricity account for February 2010. Sixty per cent (60%) of all the water and electricity was used in the factory.
- Depreciation on factory plant and equipment must be brought into account at 10% per annum, according to the diminishing balance method.
- During the year 20 000 pairs of shoes were manufactured.
Answers to worked example 1 (see pages 40–41)
- Value of raw materials issued:
Direct Materials Cost Opening balance of raw material stock R160 000 Add: Purchase of raw materials + R1 023 475 Add: Carriage on purchases of raw materials + R22 500 Add: Transport of raw materials (adjustment A) + R3 750 Less: Closing balance of raw material stock – (R259 125) Equals: Raw materials issued to the factory = R950 600 [6]
- NOTES TO THE PRODUCTION COST STATEMENT
DIRECT LABOUR COST R Production wages (723 800 + 6 200) 730 000 UIF contribution 7 300 737 300 [5]
FACTORY OVERHEAD COST R Salary of foreman 150 000 Consumable stores: factory
(6 000 + 43 000 − 7 000)42 000 Depreciation (177 500 + 12 500) 190 000 Water and Electricity (163 000 + [4 200 × 60%])
(Total water and electricity already paid during the year + the amount that still has to be paid as per adjustment C) × only the portion used in the factory (60% as per adjustment C).100 320 Sundry expenses: factory 194 680 677 000 [16]
Only use FACTORY COSTS on the Production Cost Statement. No administration and selling, and distribution costs appear on this statement.
There are a number of costs that may need to be split between factory, administration and selling, and distribution.
For example: water and electricity could be split in the ratio 3 : 2 : 1.
- PRODUCTION COST STATEMENT OF FATIMA MANUFACTURERS FOR THE YEAR ENDED 28 FEBRUARY 2010
TOTAL Direct materials cost 950 600
This figure comes from the answer you calculated in part 1 of this question.Direct labour cost 737 300
This figure comes from the answer in the direct labour note in part 2 of this question.Prime/direct cost 1 687 900
Direct materials cost + Direct labour cost = Prime costsFactory overhead cost 677 000
This figure comes from the answer in the factory overhead cost note in part 2 of this question.Total cost of production 2 364 900 Work-in process at the beginning of the year 158 000
This figure comes from opening balances at the beginning of the financial year.2 522 900 Work-in process at the end of the year (122 900)
This figure comes from closing balances at the end of the financial year.Total cost of production of finished goods 2 400 000
This final figure provides the accountant with the total cost of making the 20 000 pairs of shoes during the year (see additional information E).[12]
- Raw materials cost per unit
R950 600 ÷ 20 003 units = R47,53 [3]
Direct materials costs (see Production Cost Statement) ÷ number of shoes manufactured as per additional information E. - Total cost per unit
R2 400 000 ÷ 20 000 units = R120 [3]
Total cost of production of finished goods (see Production Cost Statement) ÷ number of shoes manufactured as per additional information E.
- Raw materials cost per unit
- It tells you how many items you must make and sell before you can start making a profit.33 [2]
- Explanation:
Yes, she should be concerned as units produced are close to BEP; or Yes, as the BEP has increased significantly from the previous year; or No, she is still exceeding the BEP.
Quoting of figures:
Compare 20 0003 units produced to BEP3 of 19 548 or BEP is 97,7% of total units; or Compare BEP 19 548 to 11 300 of the previous year; or Compare units of 20 000 to 24 000 of the previous year – affects BEP [4]
Learn this! Formula to calculate break-even point (BEP):
Total fixed costs
Practice task 1
- Production Cost Statement calculations:
Opening balance of raw material stock Add: Purchase of raw materials + Add: Carriage on purchases of raw materials + Add: Transport of raw materials + Less: Closing balance of raw material stock – Equals: Raw materials issued to the factory = [6]
- NOTES TO THE PRODUCTION COST STATEMENT
DIRECT LABOUR COST R [5]
FACTORY OVERHEAD COST R [16]
- PRODUCTION COST STATEMENT OF FATIMA MANUFACTURERS FOR THE YEAR ENDED 28 FEBRUARY 2010
TOTAL Primed/direct cost Total cost of production Total cost of production of finished goods [12]
Below is a list of suggested past examination questions for extra practice:Topic Paper Question Costing calculations and Production Cost Statement November 2008 3 Production Cost Statement November 2009 3 Costing calculations February/March 201 4 Multiple choice November 2010 3.1 Costing calculations and concepts February/March 2012 2 Production Cost Statement November 2013 2.1 Break even point November 2013 2.3
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