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What is a manufacturing account?

In a manufacturing business, a manufacturing account is prepared periodically in addition to the trading and profit and loss accounts. The manufacturing account is prepared to calculate the total cost of production

Direct materials
Direct materials are raw materials that are used directly in the manufacture of the product. The cost of direct materials include carriage inwards on raw materials.

Direct labour
Direct labour is labour directly involved in the making of the product. An example is the wages of people who use their hands or machines in the manufacture of the product.

Direct expenses
Expenses directly incurred in the manufacture of the product include the hire of special machinery for a job.

Prime cost = Direct material + Direct labour + Direct expenses

Manufacturing cost (Total cost of production) = Prime cost + Factory overhead expenses

Factory overhead expenses
Indirect materials, indirect labour and indirect expenses come under factory overheads. These are costs which are incurred in the factory where the manufacturing of the product is being carried out. They cannot easily be attributed to the production of the product.

Examples are:

  • Wages of people who work in the factory such as cleaners, forklift drivers, etc.
  • Rent and rate of the factory building.
  • Lighting, power, water, etc. for the factory building.
  • Depreciation of plant and machinery.


The manufacturing account shows the total cost of production which is transferred to the trading account. 


Trading account

The production cost is brought down from the manufacturing account to the trading account. The following items appear on the trading account:

  • Sale of finished goods
  • Returns inwards of finished goods, if any
  • The opening stock of finished goods which are at production costs and are unsold in the previous accounting period.
  • The closing stock of finished goods which are at production costs and are unsold at the end of the accounting period.
  • Any goods taken by the business owners for their own private use are recorded here.

The trading account will show the gross profit or loss. This will be carried down to the profit and loss account.


An example of a manufacturing account:

Manufacturing account for the year ended 31 December 20X2



$

$
Opening stock of raw materials



750
Add: Purchases of raw materials



8,700
Add: Carriage inwards



250









9,700
Less: Returns outwards of raw materials



350









9,350
Less: Closing stock of raw materials



920









8,430
Add: Direct labour - manufacturing wages



18,500
Add: Direct expenses - royalties



550





Prime cost



27,480





Factory overhead expenses




Factory lighting and heating

630


Factory rent

4,500


Factory insurance

420


Indirect wages

540


General repairs and maintenance

450


Depreciation of plant and machinery

1,400

7,940









35,420
Add: Work in progress as at 1.1.20X2



380









35,800
Less: Work in progress as 31.12.20X2



470





Cost of production of finished goods



35,330







Last Updated (Thursday, 14 October 2010 05:08)