Topic: Manufacturing Accounts

Manufacturers are businesses that make the products which they sell rather than buy finished goods for resale.

Final accounts of manufacturing firms include the following:

 Manufacturing A/c
 Income statement/Trading and Profit and Loss A/c
 Statement of Financial Position/Balance Sheet

The purpose of the manufacturing account is to calculate the production cost of the goods produced.

It is divided into two sections:

a) Section one deals with all direct costs incurred in the manufacturing process
b) Section two includes all indirect manufacturing costs

Direct Costs: These are costs which can be traced to the item being manufactured. These costs will be directly
affected as production changes. For example, when production increases, direct cost will increase. Likewise, when
production decreases so will these costs.

Examples of Direct Costs:

 Direct Material (raw material)
 Direct Labour/Manufacturing wages/Factory wages
 Direct Expenses

Note: The total of the direct costs is commonly referred to as Prime Cost.

Indirect manufacturing costs (Factory overhead expenses): These are costs which cannot be traced to the item
being manufactured. These costs will not be affected by a change in production. In other words, whether or not
something is produced these costs will be incurred.

Examples of indirect manufacturing costs are:

 Wages of cleaners
 Salaries of supervisors/managers
 Rent and Rates of factory
 Factory power
 Depreciation of Factory plant and machinery

In the manufacturer’s Income Statement his other expenses are classified as follows:
 Administrative Expenses – these costs are incurred during the usual operation of the business office.
These include: managers’ salaries, secretarial salaries, depreciation on office equipment among others.

 Selling and Distribution Expenses – these costs are incurred during the sale and distribution of the
product or service to the customer. Examples include: sales staff’s salaries and commission, carriage
outwards, depreciation of delivery vans, advertising, etc.

 Financial Charges – these are expense items such as bank charges and discounts allowed, bad debts, etc
The following is an outline of how the Manufacturing Account should be drawn up:

Name of Business/Owner
Manufacturing Account
For the year ended…

$ $

Opening stock, raw materials XX

Add: Purchases, raw materials XX

Add: Carriage inwards, raw materials XX

XX

Less: Returns outwards, raw materials (XX)

Net Purchases, raw materials XX

Raw materials available for use XX

Less: Closing stock, raw materials (XX)

Cost of raw materials consumed XX

Direct Labour XX

Direct Expenses XX

Prime Cost XX

Indirect Manufacturing Costs/Factory Overhead Expenses:

Indirect Wages XX

Factory Rent XX

Fuel and Power XX

Total Factory Overhead Expenses XX

XX

Add: Opening stock, work-in-progress XX

XX

Less: Closing stock, work-in-progress (XX)

Production cost of goods completed c/d XX

Note: The production cost will be shown in the Trading account where Purchases is shown for a retailer.
However, sometimes, a manufacturer may need to buy some finished goods in addition to those manufactured. In
such a case, the Trading account will show both production cost and purchases.

Work-in-progress: These are unfinished (partly finished) goods at the beginning or at the end of the accounting
period of the firm.
 Name of Business/Owner
Income Statement
For the year ended…
$ $

Sales XX

Less Cost of Goods Sold:

Opening Stock of finished goods XX

Add: Production Cost of goods completed XX

Cost of goods available for sale XX

(-) Closing stock of finished goods (XX)

Cost of goods Sold (XX)

Gross Profit XX

Administrative Expenses

Administrative Salaries XX

Rent of Office XX

Insurance XX

Depreciation of Accounting Machine XX

Total Administration Expenses XX

Selling and Distribution Expenses:

Commission on Sales XX

Carriage Outwards XX

Salesman Salary XX

Total Selling and Distribution Expenses XX

Financial Charges

Bank Charges XX

Discount Allowed XX

Total Financial Charges XX

Total Expenses (XX)

Net Profit XX

Name of Business/Owner
 Balance Sheet (Extract)
As at …
Current Assets
Stock of finish goods X
Stock of Raw materials X
Stock of work-in Progress X
Debtors X
Prepayments X
Bank X
Cash X
Total Current Assets X