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 |
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.
Storeroom Factory Show room
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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 205 250 | 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) 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 | |||||||||||||||||||||||||||||||||||||||||||
| 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 |
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
Information
Fatima Manufacturers
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 |
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 |
Raw materials stock | R259 125 |
Work-in-process stock | 122 900 |
Finished goods stock | 142 500 |
Consumable stores stock: factory | 7 000 |
Answers to worked example 1 (see pages 40–41)
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 |
DIRECT LABOUR COST | R |
Production wages (723 800 + 6 200) | 730 000 |
UIF contribution | 7 300 |
737 300 |
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 |
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). |
Learn this! Formula to calculate break-even point (BEP):
Total fixed costs
Practice task 1
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]
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 |