Manufacturing Accounts

Manufacturers produce goods for resale rather than purchasing them. For this reason, it is
important to calculate how much is spent on the manufacturing process. In order to do this, a
financial statement called a manufacturing account is prepared.
The following cost are relevant when calculating production costs:
 Raw materials
 Labor cost , i.e. payments to those who are engaged in the development of the products,
who may use tools or machinery to do so.
 Factory cost/ Manufacturing Overhead: i.e. the cost of operating a workshop, production
building. This may include:
 Electricity
 Insurance (for machinery
 Depreciation of machinery and equipment
 Rent of production area

ALL OF THESE COST TOGETHER MAKES IT POSSIBLE TO CALCULATE TOTAL

PRODUCTION COSTS OR TOTAL MANUFACTURING COSTS.
Direct and Indirect Costs
A manufacturing account is used to show the total cost of producing goods during a financial
year. In a simple manufacturing account, the costs are divided into two (2) groups.
 Direct Costs: these are the costs incurred in manufacturing that can be traced to the item
being manufactured
 Direct Material (raw materials used up in production process)
 Wages paid to workers/ Manufacturing Wages
 Direct Expenses ( royalties, patents, license fees)
When these costs are shown in the account, there are to be subtotaled to show a figure called the
prime cost. The direct cost of materials is based on purchases or raw materials, with adjustments
made for opening and closing inventories of raw materials, to give a figure called the cost of raw
materials consumed.
 Indirect cost: Indirect manufacturing costs are all those costs which occur in the factory
or other places where production is being carried out but cannot be easily traced to the
items being manufactured. I.e.
 Wages of cleaning staff
 Factory power and lighting
 Depreciation on goods
  Insurance
 Repairs
Also in this category would include wages and salaries (indirect labor) paid to staff
who are not directly involved in production, i.e., supervisors. Indirect costs are shown
as the second section in a manufacturing account and the costs are subtotaled to give
a figure for the total indirect costs.
Administration expenses: consists of such items as managers’ salaries, legal and accountancy
charges, etc.
Selling and distribution expenses: items such as sales staff salaries and commission, carriage
outwards, advertising, etc.
Finance charges: those expenses incurred in providing finance facilities such as interest charged
on loan, bank charges, discount allowed.
WORK IN PROGRESS
It is very unlikely that all products will be finished at the moment when the end of the financial
year statements are prepared. In the production process, there will be some items at different
stages of production ( some nearly finished, some in the earlier stage of production). The cost of
unfinished goods is called work in progress.
An opening inventory of work in progress should be added to the cost of production as these
items will have been completed.
The closing inventory of work in progress is subtracted from the cost of production for the year,
ensuring that the cost of production represents only amounts spent on goods actually finished
during that year.
Adjustments and end of the financial year
Adjustments for prepayments, accruals, etc. will be necessary at the end of the financial year.
Additionally it will be necessary to share certain costs between the different sections of the
business. As a result, an appropriate amount will be charged to the manufacturing account and
the remainder to the income statement.
Calculating the cost of a unit production
COST OF PRODUCTION/ NUMBER OF UNITS MANUFACTURED
FORMAT OF FINANCIAL STATEMENT
Debited with production cost of goods completed during the accounting period. Consists of:
 Direct material
 Opening inventory of raw materials
 Add the cost of purchases of raw materials plus carriage inward charges
 Less closing inventory of raw materials
This gives the cost of raw material consumed. To this figure, add the following:
DIRECT COSTS
 Direct labor
 Direct expenses
This now gives the figure for the prime cost.
Now ADD
 Indirect Manufacturing Costs( factory overhead expenses) such as indirect wages,
rent, etc.
 Opening work in progress
And deduct closing work in progress. This gives production cost of goods completed.
When completed, the manufacturing account shows the total productions costs relating to
the goods manufactured and available for sale during the accounting period. The figure is
then transferred to the trading account section of the trading and profit and loss account.
TRADING ACCOUNT SECTION
PRODUCTION COST BROUGHT DOWN FROM THE MANUFACTURING
ACCOUNT IS TRANSFERRED HERE TO THE COST OF SALES!
PROFIT AND LOSS ACCOUNT SECTION