OVERVIEW: ABOUT MANUFACTURING ACCOUNT AND CONTROL ACCOUNTS
Accounting is the process of recording, classifying, selecting, measuring, interpreting and communicating financial data of an organization to enable users make decision. It incorporates measurement and reporting of profit and loss. An accountant must not only be interested in record keeping alone but in the application of his professional competency or knowledge and skill in presenting accounting information to assist management decision making. It's therefore irresistable not to make use of this accounting principles, knowledge and measures in all spheres of life such as manufacturing and in control of organizatons. To this effect we shall discuss account as it as to do with manufacturing and control of organizatons.
Manufacturing of goods is the transformation of raw materials into finished goods.Some firms have to manufacture their products before they are sold to the public e.g Coca Cola, Nestle and Cadbury. Whereas some merely sell products which are acquired in a finished form. A manufacturing organization will acquire raw materials, engage labour and other inputs necessary to change the raw materials into finished goods. Manufacturing accounts are in essence prepared to ascertain the cost extents of goods manufactured during the financial year of a manufacturing company, which makes It's an extension of the trading account.
PURPOSE OF MANUFACTURING ACCOUNT
The purpose of the manufacturing accounts include the following:
1: To ascertain the cost of the goods manufactured in a fiscal year.
2. To ascertain the amount of any profit on the manufacturing process.
The manufacturing account covers the details of cost of production, Non manufacturing cost, and a host of other details.
COST OF PRODUCTION:
This is the total expenditure incurred in the production of output. This is obtained by taking into account the total expenses which relate to the manuacturing process. It includes prime cost and factory overheads
Prime cost: These are cost that can be traced to a particular production unit e.g . They are directly related to the manufacturing process. These are:
1. Direct materials
2. Direct labour
3. Direct expenses
4. Other direct expenditure.
Direct materials: This expenditure incurred on raw materials which can be traced to a particular production unit e.g orange in fanta making unit.
Direct labour: This refers to the wages of employees who are directly engaged in the production process as e.g wages of machine operator.
Direct expenses: These are expenses which have direct identification with the production e.g royalties.
Factory overheads: These relate to expenditure incurred in running the factory which cannot be traced to a particular production unit. They are indirect costs consumed during production processes e.g
i Factory rent and rates
i. Depreciation of plant and machinery
iii. Indirect wages
iv. Upkeep of factory building etc.
Since the manufacturing account is mainly concerned with expenses, all the items appear on the debit side, such as:
Work in progress: This can be defined as the partly finished goods or incomplete work. The cost of production must be adjusted for work in progress at the beginning and end of the year.
Cost of raw materials consumed: This is the cost of raw materials which have been used up in the manufacturing process. This will be found by:
1. Taking opening stock of raw materials
2. Adding purchases of raw materials
3. Deducting closing stock of raw materials.
Non manufacturing cost: These are selling, distribution and administrative expenses which are used up in the production process. The expenses will appear on the debit side of profit and loss account for the period.
TRANSFER PRICING: The goods manufactured may be charged to the trading account at the actual factory cost or at the current market value in order to obtain a separate profit on the manufacturing process. The manufacturing account will show a balance which will represent a profit or loss on production and will be transferred to profit and loss account. This is credited to themanufacturing account and debited to trading account. The net profit will not be affected.
Note: Since the goods were transferred to the sales department at the net realizable value, there will be gross profit on manufacture and gross profit on trading.
In big organizatons, many ledgers are kept for debtors and creditors. Because of the large number of ledgers used in the preparation of accounts, errors may be difficult to locate. In order to reduce the time involved in locating errors, it is convenient and desirable to adopt a System whereby each ledger can be balanced independently of others. Control accounts can be employed for this purpose.
Control accounts can now be defined as memorandum account, the balance of which reflects the aggregate balances of many related subsidiary accounts which are part of the double entry system. It is the account to which is debited and credited the total amounts of all the transactions which have been debited and credited in details to individual debtors and creditors ledgers. Control accounts are not necessarily part of the double entry system. They perform the function of a trial balance to a particular ledger. They are kept for customers (Sales ledgers) account and suppliers (Purchase ledgers) account,
ADVANTAGES OF CONTROL ACCOUNTS
1 Control accotunts helps in locating errors.
2. It can provide a check on the accuracy of balances of the ledgers.
3. Fraud will become difficult to cry out.
4. The balances of the total debtors and creditors can be easily calculated.
5. They can be used to detect missing figures in an account presentation.
6. They save time.
7 They allow homogenous accounts to be grouped together.
Division of control accounts
1. Total Debtors Control Account or Sales Ledger Control Account.
2. Total Creditors Control Account or Purchases Ledger Control Account
CONTRA ENTRIES: The Contra entries occur when a supplier is also a customer. The firm can sell on credit to a customer and buy on credit from the same person. The inter-indebtedness will be set-off against each other. At the end of the month the smaller of the two balances will be set-off against the larger balance.
SALES LEDGER CONTROL ACCOUNT
This is the control account for sales ledger. It can be referred to as total debtors control accounts.