Other
CMGT Notes, exam questions and solutions
- Course
- Institution
ICB CMGT Cost and Management Accounting Notes, exam questions and solutions
[Show more]
Seller
Follow
rozelleoosthui
Content preview
MANUFACTURING ENTRERPRISEA TERMINOLOGY CHART FOR THE MANUFACTURER
Terms Definition Examples
Direct/Raw materials Recording in an asset account and Leather, wood, flour, cement,
generally kept according to the etc.
perpetual inventory method.
Work in process inventory This account shows the cost of raw Wood used + salries paid to
materials, labour and factory overheads carpenters + rent paid to the
already paid. landlord for the factory.
Fianished goods This account indicates the production Tables, chairs, shoes, cakes,
costs of finished goods manufactured furniture.
during the period.
Indirect material Costs of raw material not directly related Lubricants, cleaning materials,
to the manufacturing of a particular glue, etc.
product.
Direct/Raw material costs Costs of raw materials used in the Leather, wood, flour and cement
manufacturing of a particular product. used.
Direct Labour Cost of employees directly involved in Factory workers, bakers,
the manufacturing of products. shoemakers, etc.
Indirect labour Costs of employees not directly involved Supervisor, cleaners, security,
in the manufacturing of products. etc.
Factory overhead costs These are the costs which are associated Electricity, insurance,
with the manufacturing process but depreciation, rent, etc.
cannot be directly identified.
Fixed costs Costs that are incurred irrespective of Rent, rates, insurance, etc.
the number of products produced.
Variable costs Costs that vary in relation to the number Electricity, telephone, wages for
of products produced. overtime, etc.
Production costs All costs related to the manufacture of Direct/Raw material, Direct
products. labour and manufacturing
overheads.
NEW GENERAL LEDGER ACCOUNTS
The accounts of a production or manufacturing enterprise will include some accounts which are not
found in the general ledger of a retail enterprise. The most important of these are:
1. Direct material: This account may also be called ‘Raw materials’ and summarises the movement
of all materials which have not yet entered the manufacturing process.
2. Direct labour: This account represents payment of wages of all workers directly involved in the
manufacturing process.
3. Manufacturing overheads: All costs utilised in the manufacturing process, except for direct
material and direct labour will be debited to the manufacturing overheads account.
4. Work-in-process (WIP) or manufacturing account: The three elements of production (direct
material, direct labour and manufacturing overheads) which 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 which have entered the manufacturing process, but which have
not yet been completed at the end of the financial year.
, 5. Finished Goods: The balance of this account represents the production cost of completed items
in inventory at the end of a financial year. During the course of a financial year the cost of goods
completed will be credited to the WIP account and debited to the finished goods account.
6. Sales: This represents the amount received during a financial year for completed goods sold
either for cash or on credit.
7. Cost of sales: This represents the manufacturing costs of goods sold during a financial year. The
finished goods account will be credited with this amount and the cost of sales account will be
debited.
A LOGICAL APPROACH TO THE MANUFACTURING PROCESS
THE FACTORY LAYOUT/PLAN DIRECT MATERIALS/
Raw materials stock account
Balance b/d Xxx WIP XXX
Creditors xxx
Delivery Stock Room Bank xxx Balance c/d Xxx
of stock Total total
DIRECT
MATERIALS
ADMINISTRATION
WORK-IN-PROGRESS/
Production Manufacturing account
Balance b/d Xxx Finished goods XXX
WORK-IN-
Direct Materials xxx
PROGRESS
Direct Labour xxx
(use: Direct
Factory xxx Balance c/d xxx
materials; Direct
overheads
labour; Factory
SALES DEPARTMENT
overheads) Total total
Store Room FINISHED GOODS
Balance b/d Xxx Cost of sales XXX
FINISHED GOODS Work-in-progress xxx
***Cost of sales xxx Balance c/d Xxx
COST OF SALES Total total
Finished goods Xxx Trading account XXX
EXPLANATORY NOTES
SALES DIRECT MATERIALS = Opening Stock + Materials
Trading account Xxx Debtors C XXX purchased – WIP – Closing Stock
Bank XXX WORK-IN-PROGRESS = Opening Stock + Direct Materials
+ Direct labour + Factory overheads – Finished goods –
TRADING ACCOUNT Closing stock
Cost of sales Xxx Total Sales XXX FINISHED GOODS = Opening stock + work-in-progress –
Gross Profit cost of sales – Closing stock
(Profit & Loss
account) xxx Remember:
PROFIT AND LOSS Materials purchased either on credit(Creditors) or cash
Selling & xxx Trading XXX (Bank)
administrative account (Gross Factory overheads include Electricity, insurance,
expenses Profit) depreciation, rent, etc.
Capital xx Other xx Expenses are split into Factory overheads (recorded in
(Net profit) operating the WIP Account) and administration expenses
income (recorded in the Profit and Loss Account)
xxxx xxxx
,ACCOUTING PROCEDURES: Recording the flow of goods
During the manufacturing process, material costs, labour costs and overheads are incurred. These costs,
which are accumulated during the production process, are recorded in the accounting records of the
manufacturing enterprise.
The manufacturing process can briefly be explained as follows:
Goods and raw materials are ordered and when they are received, they are placed in the warehouse.
These goods and/or raw materials are called material on hand. In the general ledger the Raw materials
stock account (Asset increases) is debited.
When a requisition is received from the factory, the requested material is issued. In the general ledger
the Raw materials stock account is now credited (Assets decreases), and the Work-in process account is
debited.
When the products have been manufactured, the finished goods are transferred to storage. In the
general ledger the Raw materials stock account is now credited (Asset decreases), and the Work-in-
process account is debited.
When the products have been manufactured, the finished goods are transferred to storage. In the
general ledger the Work-in-process account is now credited and the finished goods account is debited.
NOTE:
1. Raw materials stock account – where raw materials and other stock on hand still to be used in
the manufacturing process are recorded.
2. Work-in-process account – where semi-finished goods which are in the manufacturing process
are recorded.
3. Finished goods account – where finished goods/products waiting for dispatch are recorded.
COST CONCEPTS
1. PRIME COSTS = Direct materials costs + Direct labour costs
2. CONVERSION COSTS = Direct labour costs + Factory overheads
3. TOTAL PRODUCTION COSTS = Direct material costs + Direct labour costs + Factory overheads +
Work-in-process (beginning) – Work-in-process (end)
4. FIXED COSTS
- Remains unchanged, do not vary depending the number of goods produced.
𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡
FIXED COSTS PER UNIT = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑
5. VARIABLE COST
- Cost that changes in relation to the number of products produced.
𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡
VARIABLE COST PER UNIT = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑
6. TOTAL COST = Total Fixed cost + Total Variable cost
, 𝑇𝑜𝑡𝑎𝑙 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑐𝑜𝑠𝑡
7. UNIT COST OF PRODUCTION =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑
𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠
8. BREAK-EVEN POINT = 𝑆𝑃(𝑢𝑛𝑖𝑡)− 𝑉𝐶(𝑢𝑛𝑖𝑡)
Practice exercise 1
The following information relates to Tatterson’s Designer Products on 28 February 20.9
Cash purchases of direct material R176 350
Transport cost of direct material (paid from petty cash) 19 150
Direct labour 89 130
Indirect labour 35 000
Indirect material 27 040
Maintenance: factory 13 600
Sundry manufacturing overheads 16 300
Electricity (60 % relates to the factory) 120 000
Depreciation of factory equipment 81 200
Depreciation of office equipment 9 750
Salaries: administrative staff 127 800
Selling expenses 45 960
Rent (50 % relates to the factory) 62 000
Inventory on hand: 1 March 20.8 28 February 20.9
Direct material R 134 850 R 125 000
Work-in-progress 142 700 163 200
Finished Goods 170 000 195 000
Required:
Complete the following accounts in the general ledger of Tatterson’s Designer Products:
• Direct material
• Direct labour
• Manufacturing overheads
• Work-in-process
• Finished goods
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller rozelleoosthui. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $17.05. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
62890 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now