Meaning and Preparation of Manufacturing Account & Tender

Manufacturing Account

There are some manufacturing concerns which do not have cost office and do not prepare cost accounts. Such manufacturing concerns ascertain the cost of goods manufactured and manufacturing profit or loss during the year. So, it is an account prepared by the manufacturing concern for the purpose of finding out the cost of production of the goods manufactured and the profit that has been made by manufacturing department. When the data related to the cost of goods manufactured of a commodity are presented in a conventional form of account i.e T-shape form, then it is known as manufacturing account. Generally, manufacturing concerns prepare this account to exhibit cost of production or cost of goods manufactured.

Features of manufacturing account

• All the expenses relating to manufacturing goods are debited.

• It shows only the figures of materials consumed instead of showing the figure of opening stock, purchase and closing stock separately.

• Opening stock of Work in Progress (WIP) is debited and closing stock of WIP is credited to manufacturing account.

• The amount received from the sale of scrap is credited to manufacturing account.

• The balance in the manufacturing account is the cost of production or manufacturing profit depending on the type of manufacturing account prepared.

Importance of manufacturing account

• It ascertains the cost of goods manufactured.

• It shows the profit or loss earned by a manufacturing department.

• It provides a basis for fixing the price of a product.

• It helps the management to evaluate the performance of the manufacturing department.

• It helps to control manufacturing cost.

Preparation of manufacturing account

The manufacturing account is prepared either to ascertain the cost of goods manufactured or manufacturing profit or loss. So, it is prepared in two ways:

• For showing the cost of production.

• For showing manufacturing profit or loss.

• Manufacturing account showing the cost of production

For the production of the materials, opening stock of WIP, direct wages and all other expenses relating to the factory are debited. Closing stock of WIP and amount credit from the sale of scrap are audited and the balance figure is shown on credit side would be the cost of production.

• Manufacturing account showing manufacturing profit or loss

If a manufacturing account is prepared to show the manufacturing profit or loss, all the items shown in the debit side of the previous format of manufacturing account are also entered on the debit side of this account. On the credit side, closing stock of work in progress, the sale of scrap and current trading price are shown and the balance figure arrived on the debit side would be the manufacturing profit.

Tender

A manufacturer has to quote the price of its product for tender at which it can supply its product to a customer. Tender or quotation price is a price at which the company can provide its product. This price also includes a reasonable profit. For this purpose, an estimated cost sheet has to be prepared on the basis of the cost of the preceeding period along with the consideration of likely changes in future.

Tender is a formal offer to supply goods or carry out work at a stated price. For this purpose, an estimated cost sheet has to be prepared and forwarded to the customers who demands products.

Procedures of preparing Tender sheet

1. Firstly, prepare cost sheet of the previous year on the basis of given information.
2. Secondly, calculate the following percentages:

• Percentage of factory overhead on direct wages,
  
  = \(\frac{Factory overhead }{direct wages}\) × 100%
  
  
• Percentage of office overhead on worksheet,
  
  = \(\frac{Office overhead }{Prime cost}\) ×100%
  
  
• Percentage of selling and distribution overhead on worksheet
  
  = \(\frac{Selling and distribution overhead}{work cos}\)×100%
  
  
• Percentage of profit on cost,
  
  = \(\frac{Net profit}{Total cost}\)×100%
  
  Or, percentage of profit on sale,
  
  = \(\frac{Net profit}{Sale}\) ×100%

3. Thirdly, prepare tender sheet:

• Direct material, direct wages, and direct expenses are given for tender, otherwise, the same cost per unit of the previous year will be taken for the purpose of tender.

• Factory overhead, Administrative overhead and selling and distribution overhead for tender are calculated on the basis of percentages calculated in step2. If there are any changes, they are to be considered.

Profit for tender is as follows:

• Percentage of profit on cost is given
  
  Net profit = \(\frac{total cost × Rate of profit %}{100}\)
  
  
• Percentage of profit on sales is given
  
  Net profit = \(\frac{Total cost × Rate of profit % }{100}\)

Note:

• Direct material, direct wages, and direct expenses should be added with changes, if any, to determine the prime cost. Other overheads are calculated on the basis of percentage of previous year cost.

• In the absence of any information, a percentage of factory overhead is computed on the basis direct wages and the percentage of other overheads is computed on the basis of factory cost.

Illustration:

The number of stoves manufactured during the year 2011 was 4,000.

The company wants to quote for a contract for the supply of 1,000. Electric Stoves during the year 2012. The stove to be quoted are uniform quality and make and similar to those manufactured in the previous year, but the cost of the materials has increased by 15% and the cost of the factory labor by 10%.

Prepare the statement showing the price to be quoted to give the same percentage of net profit on a turnover as was realized during the year 2011, assuming that the cost per unit of overheads will be the same as in the previous.

Solution:

References:

Koirala, Madhav et.al., Principles of Accounting -XII, Buddha Prakashan, Kathmandu

Shrestha, Dasharatha et.al., Accountancy -XII, M.K. Prakashan, Kathmandu

Bajracharya, Puskar, Principle of Accounting-XII, Asia Publication Pvt. Ltd., Kathmandu