Classify the different manufacturing costs and prepare the financial statements for manufacturing enterprises

Describe the characteristics of a partnership, prepare the financial statements of a partnership and account for the changes in a partnership including the dissolution of a partnership

Explain autonomous local branches and record the transactions and prepare financial statements for selling agencies and autonomous local branch

Describe the nature of hire purchase transactions and show how they are accounted for in both the buyer’s and seller’s books.

Explain the conceptual foundation of non-profit organization, and preparation of related accounts

At the end of the course, students should be able to:Explain cost elements, cost classification structure of manufacturing account, manufacturing profits, provision for unrealized profit and WIP valuationUnderstand types of partnership, identify simple partnership, changes and dissolution in partnershipEnable the preparation of related accounts to partnership and final accounts of partnershipExplain the branch accounting, characteristics of branch and preparation of current account, income statement in columnar form and combined balance sheet.Explain the different between business enterprise and non-profit organization, in terms of conceptual foundation, preparation of related accounts and incomplete records.

1. Manufacturing accounts2. Partnership3. Branch accounting4. Accounting for hire purchase

transactions5. Accounting for clubs and non-profit

organizations

At the end of this chapter, you should be able to: Distinguish between manufacturing

and trading business Identify the elements of costs,

classify into direct and indirect cost Prepare manufacturing account,

income statement and balance sheet Calculate manufacturing profits,

provision for unrealised profit. Discuss on WIP valuation and its

treatment in the manufacturing account.

Trading business:

Buy ready made goods from supplier

Manufacturing business:

Converting raw materials, together with other costs into finished goods

Direct cost Indirect cost

All costs directly related to the process

All costs indirectly related to the process

Easily traceable to the product

Do not easily traceable to the product

The amount needed vary with the output produce

The amount needed vary with the output produce

Usually known as Prime cost

Usually known as Factory overhead

Direct materialMajor and important part of prime cost.Ex: rubber in the making of tyre.

Direct laborWages/ salaries paid to workers employed

directly in the process.Ex: salaries to factory operators or machine

operator

Direct expensesExpenses directly related to the process.Ex: royalties, hire/ rent of special machine

The opening and closing materials must be taken into account when calculating the cost of material

Any other cost incurred in the purchase of raw material (ex: duty, freight and insurance) should be added to the purchase cost of raw material

Example:

Opening stock 12,000Purchase of raw material 8,000Carriage inward 200

8,200Less: closing stock (5,000)

15,200

Indirect materialEx: Loose tools (opening + purchases – closing)

Indirect laborEx: supervisor salary

Indirect expensesRent and rates of factoryDepreciation of plant and machinery

Total cost

Production costGeneral and admin

Selling and distrFinancial expenses

Prime costs Production costs

Direct materials

Direct labor

Direct expenses

Indirect materials

Indirect labor

Indirect expenses

It is partly finished goods It can be valued at prime cost or

production cost

Valued at prime cost Valued at production cost

Prime cost

+ opening WIP

- closing WIP

Cost of production

+ opening WIP

- closing WIP

Occurs when:Finished goods transferred to the trading

account is at cost plus mark-upClosing stock of finished goods is actually

closing stock of the self-manufactured goods

Why it need to be determined?The stock has not yet being sold,profit should

not be recognised yetTo comply with conservatism/ prudence conceptStock may tend to be overstated

Example:Opening stock RM1,100 (at market price)Closing stock RM2,200 (at market price)Finished goods transferred to trading

account at cost plus 10%

Answer:Unrealised profit on opening stock= 10/110 x RM1,1000 = RM100

Unrealised profit on closing stock= 10/110 x RM2,200 = RM200

There is an increase of RM100 (expense)

Provision for unrealised profit

Balance b/d 100

Balance c/d 200 Income statement

100

200 200