Summary Financial Management 2A - LU6

FINM6221 LU6



FINM6221 LU6 – Accounting for a
manufacturing enterprise
6.2 Terminology
Direct / Raw material = recorded in asset account and kept according to
perpetual inventory method. Cost of raw materials used in the manufacturing of
the particular product.

- Leather, wood, flour, cement

Work in progress inventory = this account shows the cost of raw materials,
labour and factory overheads already paid

- Wood used, salaries paid to carpenters and rent paid for the factory

Finished goods = this account shows the production costs of finished goods
manufactured during the period

- Tables, chairs, shoes, furniture

Indirect material = costs of raw material not directly related to the
manufacturing of a particular product

- Lubricants, cleaning materials, glue

Direct labour = cost of employees directly involved in the manufacturing of
products

- Factory workers, bakers

Indirect labour = costs of employees not directly involved in the manufacturing
of products

- Supervisors, cleaners, security

Factory overhead costs = the costs that are associated with the
manufacturing process but cannot be directly identified in the final product

- Rent, insurance, rates

Variable costs = costs that vary in relation to the number of products produced

- Electricity, wages for overtime, wood in a furniture factory

Production costs = all cost related to the manufacture of products

- Direct / raw material, direct labour, manufacturing overheads




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6.3 Accounting Records of a Manufacturing Enterprise

6.3.1 New General Ledger Accounts
Direct Material / Raw material

- Summarises movement of all materials that have not yet entered the
manufacturing process

Direct Labour

- Represents payment of wages of workers directly involved in the
manufacturing process

Manufacturing overheads

- All costs utilised in the manufacturing process, except direct material and
labour, will be debited to this account

Work-in-progress / Manufacturing account

- direct material, direct labour and manufacturing overheads that were used
in the manufacturing process during a financial year will be summarised in
this account.
- The balance of the account will represent the cost of items that have
entered the manufacturing process, but that have not yet been completed
at the end of the financial year.

Finished goods

- Production cost of completed items in the inventory at the end of the
financial year
- During the course of the year, the cost of goods completed will be credited
to the WIP account and debited to the finished goods account

Sales

- Represents amount received during a financial year for completed goods
sold either for cash or on credit

Cost of sales

- Represents the manufacturing costs of goods sold during a financial year
- The finished goods account will be credited with this amount and the sales
account will be debited




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6.3.2 Format of the Ledger Accounts
Direct material
Dat Details Fol Amount Dat Details Fo Amount
e e l
Balance b/d XX Work-in-progress GJ XX
4
Trade Payables 1 CJ XX Balance c/ XX
d
Bank 2 CB XX
P
Bank 3 CB XX
P
XX XX
Balance b/d XX
1. Direct material purchased on credit
2. Direct material purchased for cash
3. Carriage, railage or shipment paid by EFT
4. Raw materials issued for processing

Direct labour
Dat Details Fol Amount Dat Details Fo Amount
e e l
Creditors for WJ XX Work-in-progress GJ XX
wages
Medical Aid WJ XX
Contribution
XX XX


Factory overhead cost
Dat Details Fol Amount Dat Details Fo Amount
e e l
Factory GJ XX Work-in-progress GJ XX
Maintenance
Factory GJ XX
Electricity
Factory Rent GJ XX
Depreciation of GJ XX
Equipment
Indirect material GJ
XX XX


Work-in-progress (WIP)
Dat Details Fol Amount Dat Details Fo Amount
e e l
Balance b/d XX Finished goods 4 GJ XX
Direct Material 1 GJ XX Balance c/ XX
d
Direct Labour 2 GJ XX
Factory GJ XX

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