[Music] hey guys Kristian whaddup tuition it and in this video I'm going to show you how to do a manufacturing account or as a soon at the kid level a schedule of cost of goods manufactured reforming it in tip I wanna let you know a couple of things one there is no one right way to do in manufacturing account there is no fixed format it's not a financial statement governed by any international accounting standards or international financial reporting standards it's actually not part of financial accounting which is where you create income statements and balance sheets that kind of stuff this is part of cost accounting or management accounting it is done for management used for internal use so it doesn't need to be governed by rules standards so I'm curious if anybody here after watching video if you see that my format is different from the former that you use a you've been taught please let me know in the comments below what differs between your method and my method or your your format and my format rather and the other thing is as you go along watching this video you may want to make some notes ooh be sure to grab a pen some people and not any interesting points or if there's something that I explain and you still don't really understand from this video write it down and of course let me know in the comment section below and I will do my best to get bathroom okay with that covered that's gonna take all right guys so let's start with some easy questions to won't agree know so first question is why do people get into business to make a profit how do we calculate profit revenue minus expenses included how do we learn revenue to provide either a good or a service where do the goods come from well we either buy them or we make them to sell them again okay so I'm gonna pull up a trading account now to help me illustrate what I'm talking about it so when we buy goods to sell that's called purchases purchases mix up part of the calculation can be cost a bit soon however if we are making goods to sell rather than buying goods then there won't be a purchases figure well there no as a matter fact it would be so what does that mean well the thing is when we make goods we have to spend money to make the goods and the cost of mika-nee goods is what's going to replace it purchases figure in the cost of the sole calculation so what that's going to be called is called the cost of goods manufactured and that is the purpose of doing a manufacturing account or a schedule of cost of goods manufactured to capture all of the costs that go into making goods that we provide in order to help us calculate profit so the question is now what are the costs that are involved in the manufacturing process let's take an example so most of you guys have graduation coming up soon right and I guess you want to go to grad at a nice fancy suit or a nice nice dress so maybe you don't want to go to the store buy one of the rack you wanna get one custom-made so the first thing I'm going to need this material the next thing you're gonna need unless you're making your suit or your dress yourself it's someone to make it for you and that person is probably going to need some kind of tools equipment supplies in order to make this dress feel so here we see three components of production cost we have the materials we have the label and we have other costs which we will call overheads and I'll explain why in a little bit now this breakdown can be taken and apply it almost any manufacturing process and in any particular situation so always bear in mind that the cost information you are collecting are for materials labor and overhead and there is one other item that will go at the end of the manufacturing account but I will explain what that is a bit later on okay so what we're gonna do now is take a look at a very simple manufacturing a common applet up here so you can see a cross there we have a line for materials a line for labor and unlined for other costs or overheads and I'll tell you why they call that in a little bit ok so this is basically the gist of the manufacturing account or and as you can see the total is called total production cost incurred it can be called total manufacturing cost incurred cost of goods produced to the current period costs all sorts of stuff there's no one right in the collet if however you know different because of whatever tell me specifically what it's called and tell me why you know that give me a textbook reference or our website reference or whatever the cases okay now we of course know that the the manufacturer conducive you've seen it no it isn't this simple looking a lot more details it and yes we have to flesh it out but before we flesh it out we have to get familiar with certain what we call cost classifications what are these cost classifications I mentioned just now we have to before I tell you what they are I want you to think about something first let's go back to the example with the grad dress with the grad suit when you first engage the seamstress of the tailor you carry the material to them and what do they do well they sit down or stand with it or whatever the case is and they convert it to use their materials their needles their thread sewing machine their whatever they use right all these things and they convert that raw material into a finished product and when you get the finished product what are you get well you get a suit or a dress but it's made of material which you can see touch feel you put it on and the material is put together and cut and stitched in different ways to look like whatever it is you wanted it to be a dress or a suit and of course the finished product looks markedly different from the raw materials that went into making it so I wanted to bear in mind some things here the material and the labor that went into making that finished product those things are called direct costs or prime costs any cost that is directly and easily traceable to a finished unit or finished product those costs are direct costs so the materials in cotton or whatever other material that went into making the dress of the suit that's direct you can see that on the finished product we labor well you can see exactly what it dressmaker made or this would make a meal that's not up for debate alright now the thing is like I said I mentioned that the tail or this interests me I've had other cereals they may have other equipment or machinery a sewing machine they may have had to use a glue gun all these different is they may appear to rent on the Berlin area occupy now those costs for example rent you don't see any of the rents on the suit of the dress do you write the glue gun maybe I mean I'm hoping it won't see any glue on your suit you know some might that went into making it but we may not know exactly how much right when the suits or the dresses on the mannequin sometimes they have to pin up certain things and it though they may have a marker to mark certain things how much of the marker ink is on the finished part always used how many pins we use exactly what about the depreciation on the sewing machine what about if they had to hire clean entertain about after then that person's labor is definitely not seen on the finished product so we have certain costs sorry certain items at the cost of which write certain items sorry are seen on the finished product the cost of which are direct cost and then we have other items materials they've all other where those things are not seen on the finished product so those items the cost of those items are classified as indirect costs and we call them overheads and I'll tell you why not right because if you think of for example rent rent literally puts a roof over your head when you pay the electricity most and lights are overhead as well right a condition all that kind of stuff Wi-Fi Wi-Fi is all around you so that's not really good way but long story short they took the calling indirect cost overheads because just basically put everything over your head you had to use so we have direct costs the cost of items that are directly and easily traceable to finish units and we have indirect costs because those items of those costs are not necessarily easily or directly traceable to finish units but will include in the production environment and hence must be included in the total cost of production okay yet so what we're gonna take a look at now is a slightly more lest old manufacturing account let me just click a button and lose you okay go okay so example one manufacturer of most items so we have as you can see we start there materials directly about other direct cost I'll talk about that just now the total of all direct costs is called prime cause you can call it total direct costs but most times we call it prime costs theirs are the primary costs of production because that went primarily into making the finished unit of course we know we have to add overheads because with all the overheads we probably would not be able to engage and those product production or manufacturing activities so you see in direct materials and direct labor rent a factory but let me talk about rent before depreciation on factory equipment factory power or electricity you total of that section is called to the overheads and then we have total production cost and good now I want to talk about a couple of items here first one is the other direct costs so we we are okay with the I'm hoping we are okay with in materials any labor because those things can literally be seen on the finished product other direct costs what are some examples of other direct costs well I can tell you off the bat we have things like trademark fees copyright fees license fees franchise fees and some cases and as I've come to learn recently packaging right now with the exception of packaging all those other things mainly have to do with paying for the permission to use other people's intellectual property so if you didn't pay those fees and you use people's intellectual property you could be open to legal action you could get sued so paying those fees is directly related to being able to produce whatever it is it trying to produce which is using other people's intellectual property right so other direct costs go there usually the question is very specific about what goes there most time sourcing other direct cost so it's relatively simple all the time that I've seen franchise fees license fees trademark use copyright fees and sometimes they can give you an in the additional information section if not well like I said I hope you have your pen in the paper and in taking notes all right okay and in other overheads indirect materials indirect labor so what about what are these materials what what materials could be used that don't go into the actual finished product well think about it right now whenever I watch this video we this is March 12 sorry 2020 and we have the worldwide I don't say outbreak crazy of coronavirus the situation right now and I have a responsibility to keep my classroom clean so now this is not a plug for this particular product right but I use this to wipe down my desks every day and the thing is that is not directly involved in my teaching but it is involved in my classroom experience PC I mean I have to clean it would be irresponsible I mean not the clean wouldn't it so the cost of that stuff can't go into the cost of my sorry can be classified as direct cost because it's not directly traceable to my lesson right but it is it does form part of my core structure it wasn't it was spent right so those materials can be considered in their cleaning materials are usually indirect right indirectly but what is indirect label well if I had someone come here to do my cleaning for me and I paid them that would be indirect label right even if I do it that dad that part of my labor is not related specifically and directly to my lesson preparation so therefore that could not be classified as direct labor so any label that is not directly involved in the production of the finished units or the provision of the service is indirect labor interestingly enough most questions have you might see factory monitors salary or factory soup or production supervisor salary so even though you think okay well that was in Boots in a factory and there is the production so it must be direct interestingly enough the answer is no the factory manager Amata as a matter of fact musi does more people who've done production if any production at all the production supervisor supervises you she may not be directly involved in the production process they may be advising workers and doing a lot of other tasks that are not directly related to production so usually once you sit with salary most times that is indirect in nature wages the key would wages that is direct but I have seen question but indirect wages so I don't want to tell you that salaries are always indirect which is always direct read your question carefully and look for those key phrases or those explanations in the question so that was the direct costs indirect materials indirect labor okay so those are the three that explain so now what we're going to take a look at is the fleshing out of the material section alright guys so let's take a look at this example here so we have opening stock purchases closing stuff and all of these are materials specifically right remember when you are manufacturing goods to reseal it's unlikely you are buying this to sell as well it's not impossible but we're going to keep it simple and straightforward for now now you'll notice that these components resemble components you might regularly see in a regular income statement question specifically for the cost of goods or section in the trading section of the income statement so if you need a refresher as to what the logic is behind this calculation I'm gonna put a card up there so you can take a look at that video on how to do trading accounts and it'll walk you through the logic of the cost of goods sold calculation now it's one of my other videos so it may not be as good as for my later videos but still it's worth a watch for the logic okay now let's take a look here and see what the calculation of the cost of materials use materials consumed by production is going to be right so cost of direct or raw materials consumed now when you are writing your words you don't have to put direct and then draw in brackets you can put cost of direct materials consume cost of raw materials consumed cost of materials consumed so dollar sign let's go so opening stock or raw materials are the purchases of raw materials which is going to give us total materials available for use or costs of materials available for use rather and from that we're going to subtract the closing stock which is going to give us the cost of materials assume by productions right now I did mention that you're not going to see me put opening stock of raw materials of direct materials or purchases of direct materials and close-up of materials because it's under this section this heading which has cost of materials consumed so everything there should be assumed to be materials alright so I think that's a safe assumption right so of course we know from our trading account across the vessel calculation we have a couple other adjustments to make the purchases so I'm gonna take a look at that right now so let's give me a second I don't know why I did that but okay cool alright so example two we have opening stock purchases Carriger on direct materials and returns upwards in addition to closing stock so remember carriage is basically there we have same delivery or transportation and I've seen the music with transportation of materials delivery of materials so remember we add that to the purchases figure like if you call for delivery for food from whom you have to pay notice with the food before the delivery which would increase the total amount of money you have to spend hence that is why we include or we add the carriage on raw materials to the purchases returns upwards if you see if they brought the wrong thing and you or they try to give you more than you ordered and they Hatter than your bill you have to send it back you copy for weight in order so therefore that's why we subtracted returns of words from the purchases let's take a look so cost of direct or raw materials consumed so let's stop with the opening stock of three hundred thousand plus the I so we're gonna shift across a little bit today purchases so ten thousand is the carriage on direct materials which gives us two hundred and sixty two minus the theatre if it returns off was the Magnificent net purchases these items here right give us this so we don't necessarily want all of this detail in this column right so that's why we use separate columns to shift out certain details so that we can keep certain columns clearer than if we had extra details in them but the details are there nonetheless to the left so if we want to see those details we can so now we have the total cost of material available for use which was the open in stock plus the net purchases and then we subtract the closing stock and I will give us the total cost of materials in production okay so if you need to rewind and go over that again that's fine but what I want to do now is I want to put this in the larger context of the manufacturing account alright so what we're gonna take a look at now is the expanded cost of materials section in the manufacturing account as a whole so the information as you can see is on the left hand side it's open in stock purchases Karajan direct materials returns always closing stock and a bunch of other stuff so let's take it one thing at a time okay so yes you're manufacturing account should be headed up and it should say right manufacturing account for the year and it's very well whenever the period end it is okay cool so let's get some dollar signs going there so we're gonna head up cost of materials consumed and open in stock is to start with then we have the purchases the carriage on direct materials of 10000 returns always a food oh sorry got to add those two to 1510 is 260 - Timmy tunes on the materials which is 30,000 which will give us a net purchases figure of 230,000 we're gonna add the open and stock and the net purchases to give us five hundred and thirty thousand which is the cost of materials available for use in production you can write all that cool thing if you want or just what costs the materials available we have to subtract the closing stock from that of four hundred thousand giving us cost of materials consumed one hundred and thirty thousand now that's the first item in our direct that's our prime cross section to which we add directly above factory wages as it's called here 250 other direct costs two hundred thousand they didn't detail what those are the direct costs are so we just put it we total those three things they give us total prime costs or just prime cost and to that we have to add overheads so our overheads start with the indirect materials 50,000 indirect wages seventy-five factory depreciation 125 factory lighting and heating 25 factory rental factory insurance giving us a total value as a 3,000 and total production cost incurred is the sum of the prime cost and the total overhead you can put some things into the overheads here so - it's all overheads right what you don't necessarily have to okay so that is how the manufacturing outlook so far so we're gonna take a look at another example now which of course has some of the complications okay guys so in this example we're gonna take a look at expense items that have to be split between the overhead section in the manufacturing account and the expense section in the income statement so let's get the irregular stuff in the manufacturing account in so we can see how to proceed with this so opening stock so that set up manufacturing account for the end whenever dollar signs so first thing to do is the cost of materials consumed opening stock 300,000 purchases and so we have carriage and we have returns upwards so we have to adjust for do is so purchases is 250 add carriage on direct materials tench gives us 260 - returns upwards of 30 giving us net purchases of 230 added to the opening stock of materials will give us 534 cost of materials available for they shouldn't say seal let's take that out available for use in production right from that if to subtract losing stock of the 400,000 which is gonna give us cost of materials consumed 130,000 directly above factory wages to 50,000 or the direct cost 200,000 and then total prime costs 580 overheads now so we have indirect materials 50,000 indirect wages now we have for item of them we have four notes so I'm gonna maximize this idea so we can take a read of those notes so depreciation is to be split equally between factory and admin so there's depreciation items now why might this happen so let's say for example you have some machinery that is used specifically for the factory and some that is used for the office or non manufacturing Tanakh is whatever is specifically for non manufacturing should go in the income statement what is for manufacturing should go any manufacturing account never put non manufacturing items in the manufacturing account okay so here so let's say maybe there was one one machine or let's say the value machine here is equal between both of them and use in depreciation rate so they say split equally so what we're gonna do we're gonna do 250 divided by two which is gonna give us 125 thousand here and then we expand section in the income statement if you have to do one you would see an equal amount for depreciation there let's go back and see what the next note is lighting and heating are to be shared between the factory and admin offices in the ratio five to one so lighting and heating is thirty thousand so how do we trigger three issues well five plus one will give us six and then you put each number over that total five six one six so five six of thirty thousand is going to give us twenty five thousand I believe right so of course lighting even so maybe the factory use uses more electricity than as the admin side so it may need to get a greater share of the electricity or the lighting and heating than the admin side all right what about no rental rental fee should be a portion twenty percent of factory I mean maximize so you can see rest eighty percent admin okay so it means twenty percent goes to the factory and eighty percent was the admins all you're gonna do is find 20 percent of that hundred is twenty thousand and insurance so insurance at ten thousand is attributable to the admin side and they remain there is attributable to the factory side so ten thousand from fifteen movie was with five thousand so it looks like we're gonna have five thousand any manufacturing so sorry our total overheads is three hundred thousand oh you're gonna add that to a prime cost all right current period costs eight hundred eighty thousand right so as you can see it actually does kind of resemble an income statement with almost like a trading section on top even have a almost like a cost a good soul calculation here and down here the overhead kind of resembles the expense section in the income statement immediate differences of course you know this is not revenue right they are all expenses so instead of taking prime cost and subtracting overheads you're not gonna do that all the costs are added together to give the total production costs okay guys alright so that's this example we of course have something else a little complication so let's take a look at that okay so the last thing that we need in order for this manufacture notes account to be complete is the adjustment for something called work-in-process alternative this one has work in progress or just WIP working processes simply work that has not yet been completed so you guys know sometimes you might start an exercise for homework and you don't finish it right that's like we can process you'll probably come back to it later the same day or maybe the next day and then put more work in and finish it same thing with production sometimes a batch of goods is started and then the day ends and certain ones are completed certain ones are not and then whatever is not completed is carried forward to the next period and completed there so what is the implication therefore for the manufacturing account so let's take a look at the example of anybody so this is actually the same example from just now and instead of starting from the top and going back down through all these same adjusted I just left it as it was the only new things we have are these two items here you can process at start and you can process at the end so I'll tell you what we do with them and then I'll tell you why so there are a couple of presentations for this and I'm going to show you both of them first presentation is what I do right I make an adjustment for the working process so we have the working processor start we - Lee we can process at end and then whatever the net figure is there is combined with the current period cost to get the cost of goods manufactured or completed now in this case if we can process that start was created than you can process at end so you had a net positive figure if it's reverse you're gonna have a negative figure if this was negative 5 as an FD working processor n was as 885 this would have been a negative 5 and you would have subtracted it from the ETA T and got 875 write an alternative presentation for the soup's I'm going to have to zoom in a little bit for this boy all right so let's go back on so the same it it is down here and you see in the same 80,000 we can process that start from across here it's added to the current period course or product total production cost incurred in the current period giving us 960 and then we subtract it we can process and as you see here alright so some people prefer this format and some people prefer this format where let's you do an adjustment first and ever net figure it does not matter which one you do neither one is more right than the other right so let's talk about why we are working sorry let's say we subtract like and process an end so remember what we're doing is we are transferring this figure to the income statement in place of the purchases figure because you know because we are me because we are making goods we don't have a purchases of finished goods figure we have to compare all the costs of manufacturing goods and put them in place of the purchases figure in the income statement but if we didn't finish make some Goods would they be ready to be sold no I don't think so so you can't have goods that are not ready for sale the value of those Goods included in the cost of sales or cost of goods sold section so that's why we subtract the working process at end from well in the manufacturing account and then that is gonna be carried forward to another period more work is gonna be done on it so it means that in that future period you're gonna have some more it may have some more materials more labor more overheads require to complete those goods so we we can process that start kind of becomes wrapped up in the current period production cost and of course if you have any of those Goods still in process after that's where we subtract them out so long story short you add you we can process that start and you're - we can process again okay guys so one more example and then we'll call it a day so we're going to construct the manufacturing account for this information the left-hand side here so head of manufacturing account of course that there was a name to the company but name for the year with for whatever period ended whenever it is to all the science so cost of raw materials consumed of course of direct materials consumed or whatever you want to call it so the open stock has 180,000 so we have purchases but we have carriage and returns so we shift one space to the left purchases is 415 the carriage is 15,000 giving us 430 and we subtract the returns with a 10,000 giving us four hundred and twenty thousand for net purchases of Dark Materials we add that to the opening stock and we get cost of materials available for use which is six hundred thousand we subtract the closing stock of raw materials which is two hundred thousand giving us cost of materials used four hundred thousand direct labor factory wages 320,000 franchise fee so franchise fee so if you go down to the additional information section you see franchise fees are treated as a direct cost so after we are factoring - salary and factory matter such as indirect labor okay so that's total of all our direct cost I got prime cause of eight hundred thousand and head up overheads right so factory managers salary seventy two thousand indirect materials so NT now let's take a look because I'm seeing item three is depreciation that's let's just open it up here so depreciation is to be split eighty percent between the factory and admin respectively so eighty percent of that goes to the factory so we're gonna do ninety six thousand then we have lighting and heating let's see what it says like I take anything to be share it in a factory an admin and the ratio two to one so as a two-thirds one-third split of seventy-five thousand which is gonna give us 50 and 25 respectively right two thirds of that is 50 rental fees should be a portion 60 percent of factory and forty percent are admin okay that's relatively straightforward just find that percentage and we good to go and insurance fifteen thousand dozen is attributable to factory right we mean is clearly for the admin and total overhead is 301 so we add total overheads the prime cost and if we can process adjustment so where they want to do it like this where you put it we can process a start - at end and then do the adjustment or you want to add and subtract in the same column as the current period cost that's fine and we in this case we end up adding so we have 1 million one hundred eleven 1,000,001 oriental read cool as you total cost of goods manufactured I was a far jump from my recordings perennials alright guys so there you have it that is how you prepare a manufacturing account so I hope I've explained everything clearly but of course it's never my expectation that you guys understand everything perfectly for every single video that I do and that's why I encourage you to ask questions in the comment section below I love to hear from you guys I love the answer you guys because I never profess to know everything and sometimes you way I explain something in your video you might not take two so I need to find a different way to experience so that you can understand and you know I also want to do a passed paper questions a manufacturing possible questions video but I don't know if I'll get that out very soon if I don't I do have a Facebook page and I'll put the link in the description below that you can go to and get full past paper questions for not only POA but maths and add maths now I've been going through some exam revision with my forum fives and I've been spotting some errors in the PAP solutions and I'm gonna fix them as time goes by so if you spot an error leave a comment tell me what the area is and I will fix it okay guys and you know I want to take up too much more time so just remember you can do anything you want to do you can be anything you want to be if you have the correct mindset and you put in the work along the way you're bound to make errors errors are part of life and they help us grow there is brain science brain research that shows that errors help us grow but they grow more if you have a growth mindset they believe that you can learn something they believe that your intelligence and your abilities are not fixed and that they can change if you put any work and of course you're going to have trouble your mountain encounter some roblox here and there and it's okay to ask for help right and of course if what you are doing is not working then you're gonna need to change what you're doing you're going to have to try a different approach to it adapt because change is the only constant alright guys thank you so much for watching don't forget to Like share and subscribe and I'll see you right [Music] [Music] [Music] [Applause] [Music]