Why Manufacturing Accounts?

Manufacturing firms convert raw materials into finished goods. Unlike trading firms that simply buy and sell, manufacturers need to calculate the cost of production (also called production cost or manufacturing cost). This figure is then used in the trading account to determine gross profit.

Types of Manufacturing Costs

• Prime Cost: Direct materials + Direct labor + Direct expenses
• Factory Overhead Costs: Indirect expenses such as factory rent, supervisor salaries, power, insurance, and depreciation of plant
• Work in Progress (WIP): Goods that are partially complete at year-end. Opening WIP is added, and closing WIP is subtracted

Format of Manufacturing Account

This production cost is transferred to the Trading Account as the cost of goods manufactured.

Worked Example: Manufacturing Account

ECO Company had the following balances at year-end:

• Opening raw materials: TZS 420,000
• Purchases of raw materials: TZS 7,400,000
• Carriage inward: TZS 70,000
• Direct wages: TZS 3,600,000
• Royalties (direct): TZS 140,000
• Factory overheads: TZS 3,915,000
• Opening work in progress: TZS 270,000
• Closing work in progress: TZS 300,000

Closing raw materials: TZS 480,000

Required: Prepare the Manufacturing Account.

Solution

Partnerships require special adjustments when a new partner is admitted or when an existing partner retires. These changes affect the distribution of profits and losses.

Admission of a New Partner

When a new partner is admitted:

1. Revalue assets to reflect current market values (any increase or decrease affects the existing partners' capital)
2. Settle goodwill: The new partner may bring in goodwill (premium). This is shared among existing partners in their profit-sharing ratio
3. Adjust capital accounts: The new partner's capital contribution is recorded
4. Prepare new partnership agreement: Specify new profit-sharing ratio

Retirement of a Partner

When a partner retires:

1. Settle the retiring partner's account: Pay them their capital balance plus share of goodwill and revalued assets
2. Revalue assets: Any revaluation affects remaining partners
3. Adjust remaining partners' capital: They may contribute additional capital to pay the retiring partner
4. Maintain records: The retiring partner's capital account is closed

Determining Profit or Loss

The profit or loss is shared among partners according to their agreed profit-sharing ratio. This is shown in the Profit and Loss Appropriation Account.

A joint venture is a temporary partnership formed for a specific project. Unlike a regular partnership, it does not have a continuing legal existence.

Key Features

• Two or more parties collaborate for a single project
• Each party maintains separate records
• Profit or loss is shared as agreed
• No partnership capital accounts are maintained

Recording Joint Venture Transactions

• Each party records their own contribution
• When goods are sent to the venture, they are recorded as "Goods sent to venture"
• When the venture is completed, the final profit or loss is calculated and shared

Determining Profit or Loss

Profit or loss is calculated by comparing the total sales proceeds with the total costs incurred by all parties. The result is divided among venture participants according to their agreement.

Consignment is an arrangement where goods are sent to an agent (consignee) who sells them on behalf of the owner (consignor).

Key Terms

• Consignor: The owner of goods who sends them
• Consignee: The agent who receives and sells goods
• Consignment outwards: Goods sent to agent
• Consignee's sales: Revenue from sales made by the agent

How to Determine Profit or Loss

1. Calculate cost of goods sold: Consignor sends goods at cost price
2. Record sales by consignee: The consignee reports sales
3. Account for expenses: Consignor pays expenses (e.g., freight); consignee pays selling expenses
4. Calculate profit: The profit is the difference between sales proceeds and total cost (including expenses)

The profit belongs to the consignor. The consignee earns commission on sales.

A departmental store divides its operations into departments, each selling different types of goods. Each department is treated as a separate profit center.

Departmental Trading and Profit & Loss Account

Each department prepares its own Trading Account to calculate gross profit, then all departments combine into a Profit and Loss Account to determine net profit.

Allocation of Expenses

Expenses are classified as:

• Direct expenses: Charged directly to the specific department (e.g., departmental manager's salary)
• Indirect expenses: Shared among departments using appropriate bases

Inter-Departmental Transfers

When goods are transferred from one department to another:

• Reduce purchases of the sending department
• Add to purchases of the receiving department
• Record at cost price or transfer price

• Manufacturing firms: Prepare a Manufacturing Account to calculate production cost, then use it in the Trading Account
• Partnership firms: Adjust capital accounts for admission/retirement; share profits according to agreed ratio
• Joint ventures: Treat as temporary partnership; calculate profit on completion and share
• Consignments: Consignor owns the goods; profit is sales proceeds minus all costs
• Departmental stores: Each department calculates its own profit; indirect expenses are allocated on fair bases

In Tanzania, a small-scale maize mill owner in Morogoro would use manufacturing accounts to determine whether their milling business is profitable. By calculating production costs (raw maize, labor, electricity, mill maintenance), they can set appropriate milling charges and know if they are making a profit or loss. Similarly, shop owners in Kariakoo market who stock different product lines (groceries, textiles, hardware) could use departmental accounting to identify which product line earns the most profit and adjust their inventory accordingly.