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MANUFACTURING GRADE 12 NOTES - ACCOUNTING STUDY GUIDE

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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

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

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.

  1. Study the following illustration and see the horizontal flow of funds from the storeroom to the factory and then to the show room.
  2. Now study the illustration vertically.
    1. 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.
    2. See how the FACTORY is presented in the general ledger account as Work in Process stock account and as the PRODUCTION COST STATEMENT.
    3. 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

  1. You have stock on hand
  2. You purchase new raw materials- cash
    or credit
  3. You transfer raw materials to
    the factory (called COST OF RAW
    MATERIAL ISSUED TO FACTORY) 
  1. You have uncompleted stock on hand.
  2. In the factory the raw materials that
    you received from the storeroom are
    taken through the manufacturing
    process.
  3. You have a manager, cleaners and
    security- indirect labour
  4. You have employees who are directly
    involved in the product- direct labour
  5. You have overhead cost; rent expense,
    water and electricity, depreciation, etc.
  6. Then you have the completed goods
    that are transferred out of the factory to
    the selling and distribution department.
    This figure is the COST OF PRODUCTION
    OF FINISHED GOODS
  1. You have finished goods on hand
  2. Received finished goods from the
    factory,
  3. You sell goods and the finished goods
    decreased at cost price. (Cost of
    Sales)


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 b/d 45

 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)
250 


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  

 

Dr Raw material stock Cr           
Balance  b/d  10 20   Creditors contr.  CAJ    5
Bank  CPJ  30 Work in process  GJ   40
Creditors contr  CJ    Balance   c/d   15
    60      60
Balance  b/d  15      
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
 
Dr Work in process Cr      
Balance  b/d  150  Finished goods  GJ  205
Raw material  GJ  40 Balance  c/d   45
Direct labour  GJ 85       
Factory overheads    35      
    250     250
Balance b/d 45      
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
Dr Finished Goods Cr      
Balance  b/d   100 Cost of Sales  GJ  250
Work in process GJ 205 Balance c/d 55
    305      305
Balance  b/d 55      
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
Dr Factory overheads Cr    
Consumable stores  5 Work in process  35 
Indirect labour  15     
Water and elec  5    
Rent expense  5    
Depreciation  5    
  35    35
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

  1. Calculate the value of the raw materials that were issued to the factory for the year ended 28 February 2010. [6]
  2. 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]
  3. Prepare the Production Cost Statement for the year ended 28 February 2010. [12]
  4. 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]
  5. 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

  1. 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 
  2. 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
  3. 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
  4. ADDITIONAL INFORMATION AND ADJUSTMENTS:
    1. No entry was made for the transport of raw materials by Pops Carriers to the factory, R3 750.
    2. 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.
    3. 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.
    4. Depreciation on factory plant and equipment must be brought into account at 10% per annum, according to the diminishing balance method.
    5. During the year 20 000 pairs of shoes were manufactured.

Answers to worked example 1 (see pages 40–41)

  1. 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]
  2. NOTES TO THE PRODUCTION COST STATEMENT
    1. DIRECT LABOUR COST  R
      Production wages (723 800 + 6 200)  730 000 
      UIF contribution  7 300
        737 300
      [5]
    2. 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.
  3. 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 costs
    Factory 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]
  4.  
    1. 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.
    2. 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.
  5.  
    1. It tells you how many items you must make and sell before you can start making a profit.33 [2]
    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

  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]

  2. NOTES TO THE PRODUCTION COST STATEMENT
    DIRECT LABOUR COST   R
       
       
       

    [5]

    FACTORY OVERHEAD COST  R
       
       
       

     [16]

  3. 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
Last modified on Wednesday, 08 September 2021 12:50
Published in Accounting Study Guide and Notes Grade 12

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