Lesson Note on Manufacturing Account: Transfer of Goods and Balance Sheet Preparation for SSS 2

Class: Senior Secondary School 2 (SS 2 / SSS 2)
Term: 1st Term
Week: 4
Age: 16 years
Duration: 45 minutes
Subject: Financial Accounting
Curriculum Theme: Final Accounts of Manufacturing Concerns
Previous Lesson: Manufacturing Account: Profit and Loss Preparation.
Topic: MANUFACTURING ACCOUNT
Subject Matter: Transfer of goods manufactured from manufacturing department to sales department, balance sheet (layout, preparation).

Specific Objectives

By the end of the lesson, pupils should be able to:

Cognitive Domain:

• Define manufacturing account.
• Identify the components of a manufacturing account.
• Explain how the cost of goods manufactured is transferred.
• State the purpose of a balance sheet.

Affective Domain:

• Appreciate the importance of preparing manufacturing accounts for decision making.
• Show neatness and accuracy in preparing financial statements.

Psychomotor Domain:

• Prepare a simple manufacturing account.
• Demonstrate the transfer of cost of goods manufactured to the trading account.
• Prepare a simple balance sheet.

Social Domain:

• Collaborate with peers to solve accounting problems.
• Communicate their understanding of manufacturing accounts and balance sheets.

Reference Materials

The following resources were used in planning this lesson:

• Senior Secondary Schools Education Curriculum
• State Unified Scheme of Work
• Financial Accounting for Senior Secondary Schools by O. A. Longe

Instructional Materials

The teacher will teach this lesson with the aid of:

• Chart showing the format of a manufacturing account.
• Flash cards with terminologies used in manufacturing account.
• Chart showing the format of a trading account.
• Chart showing the format of a profit and loss account.
• Chart showing the format of a balance sheet.

Rationale for the Lesson

This lesson helps pupils understand how manufacturing businesses determine the cost of products made and how this cost flows into other financial statements. It enables pupils to prepare a balance sheet, which shows the financial health of a business at a specific time.

Prerequisite/Previous Knowledge

Pupils should have basic knowledge of final accounts, including the preparation of trading, profit and loss accounts, and the concept of assets, liabilities, and capital.

Lesson Content/Board Summary

MANUFACTURING ACCOUNT

Definition of Manufacturing Account

A manufacturing account is a financial statement prepared by manufacturing businesses to determine the total cost of goods produced during an accounting period. This cost is often referred to as the “Cost of Production” or “Cost of Goods Manufactured.”

Components of a Manufacturing Account

The key components used in preparing a manufacturing account are:

• Direct Materials: Raw materials that can be directly traced to the finished product. This is calculated as: Opening Stock of Raw Materials + Purchases of Raw Materials – Closing Stock of Raw Materials.
• Direct Labour: Wages paid to workers directly involved in the production process (e.g., factory machine operators).
• Direct Expenses: Expenses directly attributable to the production of a specific product (e.g., royalties paid for each unit produced, hire of special machinery for a specific product).
• Prime Cost: The sum of Direct Materials, Direct Labour, and Direct Expenses. It represents the direct costs of production.
• Factory Overheads (Indirect Costs): All other manufacturing costs that are not direct costs. These include indirect materials (e.g., lubricants), indirect labour (e.g., factory supervisor’s salary), factory rent, factory insurance, depreciation of factory machinery, etc.
• Work-in-Progress: Goods that are partially completed at the beginning (opening work-in-progress) or end (closing work-in-progress) of the accounting period.

Format of a Manufacturing Account (Simplified)

Manufacturing Account for the Year Ended 31st December XXXX

Details	₦	₦
Direct Materials:
Opening Stock of Raw Materials	XXX
Add: Purchases of Raw Materials	XXX
Less: Closing Stock of Raw Materials	(XXX)	XXX
Direct Labour		XXX
Direct Expenses		XXX
Prime Cost		XXX
Add: Factory Overheads:
Indirect Materials	XXX
Indirect Labour	XXX
Factory Rent	XXX
Depreciation of Factory Machinery	XXX	XXX
Total Manufacturing Cost		XXX
Add: Opening Work-in-Progress		XXX
Less: Closing Work-in-Progress		(XXX)
Cost of Production (or Cost of Goods Manufactured)		XXX

Transfer of Goods Manufactured from Manufacturing Department to Sales Department

The “Cost of Production” (or Cost of Goods Manufactured) calculated in the manufacturing account is transferred to the debit side of the Trading Account. It replaces the “Purchases” figure normally seen in a merchandising business’s trading account, becoming the cost of goods available for sale by the sales department.

Balance Sheet

Definition of Balance Sheet

A balance sheet is a statement of financial position that shows the assets, liabilities, and owner’s equity (capital) of a business at a specific point in time. It provides a snapshot of the business’s financial health.

Layout of a Balance Sheet

The balance sheet typically has two main sections that must balance:

• Assets: Resources owned by the business.
  • Non-Current Assets (Fixed Assets): Assets held for long-term use (e.g., land, buildings, machinery, motor vehicles).
  • Current Assets: Assets expected to be converted into cash or used within one year (e.g., cash, bank, debtors, stock of finished goods).
• Equity and Liabilities: Claims against the assets.
  • Capital (Owner’s Equity): The owner’s investment in the business, adjusted for profit/loss and drawings.
  • Non-Current Liabilities (Long-Term Liabilities): Obligations due in more than one year (e.g., long-term loans).
  • Current Liabilities: Obligations due within one year (e.g., creditors, short-term loans, accrued expenses).

Worked Example: Illustrating Transfer and Balance Sheet Items

Let’s use simplified figures to demonstrate the flow from Manufacturing Account to Trading Account and then to the Balance Sheet.

Example 1: Manufacturing Account

Assume the following for a manufacturing business for the year ended 31st December 2023:

• Raw Materials: Opening N50,000; Purchases N200,000; Closing N40,000
• Direct Wages: N120,000
• Factory Overheads: N80,000
• Work-in-Progress: Opening N30,000; Closing N20,000

Step 1: Calculate Direct Materials Consumed.

Opening Stock + Purchases – Closing Stock = N50,000 + N200,000 – N40,000 = N210,000

Step 2: Calculate Prime Cost.

Direct Materials Consumed + Direct Wages = N210,000 + N120,000 = N330,000

Step 3: Calculate Total Manufacturing Cost.

Prime Cost + Factory Overheads = N330,000 + N80,000 = N410,000

Step 4: Calculate Cost of Production.

Total Manufacturing Cost + Opening Work-in-Progress – Closing Work-in-Progress = N410,000 + N30,000 – N20,000 = N420,000

Therefore, the Cost of Production is ₦420,000.

Example 2: Transfer to Trading Account and Balance Sheet Impact

Continuing from Example 1, assume:

• Sales: N700,000
• Opening Stock of Finished Goods: N60,000
• Closing Stock of Finished Goods: N50,000
• Selling & Admin Expenses: N100,000
• Capital (start of year): N500,000
• Drawings: N30,000
• Non-Current Assets: N450,000
• Current Liabilities (Creditors): N80,000

Step 1: Prepare a simplified Trading Account to show transfer of Cost of Production.

Trading Account for the Year Ended 31st December 2023

Details	₦	Details	₦
Opening Stock of Finished Goods	60,000	Sales	700,000
Cost of Production (from Mfg. A/c)	420,000
Less: Closing Stock of Finished Goods	(50,000)
Cost of Goods Sold	430,000
Gross Profit c/d	270,000
	700,000		700,000

Step 2: Determine Net Profit (assuming Gross Profit is the only income and Selling & Admin Expenses are the only other expenses).

Gross Profit – Selling & Admin Expenses = N270,000 – N100,000 = N170,000

Therefore, Net Profit is ₦170,000.

Step 3: Prepare a simplified Balance Sheet.

Balance Sheet as at 31st December 2023

Assets	₦	Equity and Liabilities	₦
Non-Current Assets:		Capital:
Non-Current Assets (e.g., Machinery)	450,000	Opening Capital	500,000
		Add: Net Profit	170,000
Current Assets:		Less: Drawings	(30,000)
Closing Stock of Finished Goods	50,000	Closing Capital	640,000
Cash/Bank (assumed balancing figure)	220,000
		Current Liabilities:
		Creditors	80,000
Total Assets	720,000	Total Equity and Liabilities	720,000

Note: Cash/Bank is assumed to make the balance sheet balance for illustrative purposes.

Teaching Methods/Instructional Techniques

Discussion, Lecture, Demonstration, Question and Answer, Visual Aids

Instructional Procedures

Step 1: Introduction

Time: 5 minutes

Teaching Skill: Set Induction

Teacher’s Activity: The teacher greets the pupils and asks them to recall what they know about final accounts for a trading business.

Pupils’ Activity: Pupils respond by mentioning trading, profit and loss accounts, and balance sheets.

Learning Point: Pupils connect previous knowledge to the new topic.

Step 2: Explanation of Manufacturing Account

Time: 7 minutes

Teaching Skill: Explanation/Lecture

Teacher’s Activity: The teacher explains the concept of a manufacturing account, differentiating it from accounts of trading businesses, and states its purpose.

Pupils’ Activity: Pupils listen attentively and ask questions for clarification.

Learning Point: Pupils understand the definition and purpose of a manufacturing account.

Step 3: Components and Format of Manufacturing Account

Time: 7 minutes

Teaching Skill: Demonstration/Explanation

Teacher’s Activity: The teacher uses a chart to display the components of a manufacturing account (direct materials, direct labour, factory overheads) and demonstrates its layout, explaining prime cost and cost of production.

Pupils’ Activity: Pupils observe the chart, copy the format, and identify the various items.

Learning Point: Pupils grasp the structure and elements of a manufacturing account.

Step 4: Transfer of Goods Manufactured

Time: 7 minutes

Teaching Skill: Explanation/Connection

Teacher’s Activity: The teacher explains how the cost of goods manufactured from the manufacturing account is transferred to the trading account as “Cost of Production” or “Cost of Goods Manufactured” for onward sale.

Pupils’ Activity: Pupils understand the link between the manufacturing account and the trading account.

Learning Point: Pupils learn the correct accounting treatment for manufactured goods in the final accounts.

Step 5: Balance Sheet Layout and Preparation

Time: 7 minutes

Teaching Skill: Demonstration/Explanation

Teacher’s Activity: The teacher explains the definition of a balance sheet and uses a chart to demonstrate its layout, highlighting assets, liabilities, and capital, and how net profit/loss affects capital.

Pupils’ Activity: Pupils observe the balance sheet format and identify key components.

Learning Point: Pupils understand the structure and purpose of a balance sheet.

Step 6: Worked Example

Time: 7 minutes

Teaching Skill: Demonstration/Problem-solving

Teacher’s Activity: The teacher demonstrates a simplified worked example on the board, showing the preparation of a manufacturing account, the transfer of cost of production to a trading account, and relevant items in a balance sheet, emphasizing the flow.

Pupils’ Activity: Pupils pay close attention, ask questions, and copy the example into their notes.

Learning Point: Pupils see a practical application of the concepts and the interrelationship of the accounts.

Step 7: Evaluation/Review

Time: 5 minutes

Teaching Skill: Questioning/Assessment

Teacher’s Activity: The teacher evaluates the learning by asking the following questions:

1. Define a manufacturing account.
2. List three components of prime cost.
3. How is the cost of production from the manufacturing account treated in the trading account?
4. State two main sections of a balance sheet.

Pupils’ Activity: Pupils answer orally and in writing.

Learning Point: Pupils demonstrate understanding of the lesson.

Step 8: Conclusion

Time: 2 minutes

Teaching Skill: Summarization

Teacher’s Activity: The teacher summarizes the key points of the lesson, reiterating the importance of manufacturing accounts and the balance sheet in determining business performance and financial position.

Pupils’ Activity: Pupils listen and make final notes.

Learning Point: Pupils consolidate their understanding of the topic.

Lesson Keywords

• Manufacturing Account – An account prepared to determine the cost of goods produced.
• Cost of Production – The total cost incurred in manufacturing goods during a period.
• Prime Cost – The sum of direct materials, direct labour, and direct expenses.
• Factory Overheads – Indirect costs incurred in the factory.
• Work-in-Progress – Partially completed goods.
• Balance Sheet – A statement showing assets, liabilities, and capital at a specific date.

Differentiation

For pupils who grasp concepts quickly, the teacher can provide additional complex examples involving more varied factory overheads or work-in-progress adjustments. For pupils requiring more support, the teacher will provide simplified formats and more direct guidance, focusing on one component at a time before combining them.

Note for teachers using this lesson plan

Ensure that pupils have a solid understanding of basic final accounts before introducing manufacturing accounts. Emphasize the flow of cost from the manufacturing account to the trading account and then the impact on the balance sheet. Use practical examples relevant to local manufacturing businesses where possible to enhance understanding.