Manufacturing accounts

ACC 206
G. Tobedza
 What is manufacturing account?

• A manufacturing account is prepared in

addition to the income statement. It is
produced for internal use only. People other
than the owners and managers of the
organization concerned rarely see a
manufacturing account.
 Divisions of costs
In a manufacturing business the costs are divided into
different types.
Direct materials
Direct labour Prime cost
Direct expenses Production
cost
Plus
Total
Indirect manufacturing costs cost
Plus
Administration expenses
Selling and distribution expenses
Financial charges

The prime cost item and the production cost item are shown in the
manufacturing account. The administration expenses, selling and distribution
expenses and financial charges appear in the income statement.
 Direct and indirect costs
 Direct costs (or prime cost) are costs that can be traced to
the item being manufactured. E.g. cost of raw material
including carriage inwards on those raw material, hiring of
special machinery for a job.
 Indirect manufacturing costs (or indirect costs or
sometimes known as factory overhead expenses) are those
costs which occur in the factory or other place where
production is being done, but which cannot easily be
economically traced to the item being manufactured. E.g.
wages of cleaners, rent of factory, factory power/lighting,
depreciation of machinery, cost of operating forklift trucks.
 Administration expenses
• Administration expenses consist of such items
such as managers’ salaries, legal and
accountancy charges, the depreciation of
accounting machinery and secretarial salaries.
 Selling and distribution expenses
• Selling and distribution expenses are items
such as sales staff’s salaries and commission,
carriage outwards, depreciation of delivery
vans, advertising and display expenses.
 Financial charges
• Financial charges are expense items such as
bank charges and discount allowed.
 From the explanation above, tick in the
appropriate column for each of the following
cost…
 Indirect Selling and
Direct Direct Direct manufacturing Administration distribution Financial
material labour expenses costs expenses expenses charges
1).Purchases of raw
material
2).Direct wages
3).General factory
expenses
4).Depreciation of
machinery
5).Commission on
sales
6).Factory rent
7).Carriage inwards
of raw material
8).Royalties paid
9).Inventory of raw
material
10).Administration
salaries
11).Indirect labour
12).Bank charges
13).Carriage
outwards
14).Discount allowed
15).Factory lighting
 Format of financial statements
• Manufacturing account section
– Put into series of steps by:
1. Add opening inventory of raw materials to purchases
and subtract the closing inventory or raw material
2. Add in all the direct costs to get the prime cost
3. Add in all the indirect manufacturing costs.
4. Add the opening inventory of work-in-progress and
subtract the closing inventory of work-in-progress to get
the production cost of all goods complete in the period.
• Trading account section of the income
statement
– Includes
• Sales
• Less: COGS-Opening inventory of finished good
– Add: Production cost of goods complete b/d
– Less: Closing inventory of finished good
• =Gross profit
• Example and activity for manufacturing
account and income statement are provide in
the manufacturing account example & activity
document. (as a work sheet)
• Profit and Loss section of the income
statement
– Includes:
• All administration expenses
• Add all selling and distribution expenses
• Add all financial charges
• The gross profit then subtract by the total of the
calculation above. This calculation will become net
profit.