Manufacturing Account in 2024: What Is It, Example

The primary purpose of preparing a manufacturing account is to ascertain the manufacturing costs of producing finished goods. Non-manufacturing entities are involved in the trading of goods at a profit. Therefore, manufacturing entities prepare a manufacturing account in addition to a trading account, profit and loss account, and statement of financial position.

The manufacturing account helps to better understand the cost-effectiveness of manufacturing activities. After ascertaining the costs of finished goods, we need to transfer this cost to the Trading Account.

Separating Production and Non-Production Costs

Separating costs into the costs for each function can provide useful information for management. Functional costs show managers what they are expected to spend on each function (budgeted costs) and how much they are spending.

It is important to separate production costs from non-production costs in a manufacturing business to value closing inventory which will consist of the following:

• finished goods that have been produced during the financial period but not yet sold (finished goods inventory); and
• partly finished production (work-in-progress or WIP).
• The costs of finished goods and work-in-progress consist of their production costs.

Total production costs during a period must therefore be divided or shared between the:

• goods produced and sold in the period;
• goods produced but not yet sold (finished goods);
• work-in-progress.

Non-production costs e.g. salaries of sales persons are never included in the cost of inventory.

Reporting Profit and Manufacturing Account

Profit is the revenue for a financial period minus the costs for the period.

In trading businesses, the cost of sales figure is built from purchases as adjusted by inventory movement. However, in manufacturing businesses, it is comprised of the cost of goods manufactured (instead of purchases) as adjusted by finished goods inventory movement. The cost of goods made is a more complex figure than purchases. It comprises prime costs and production overheads adjusted by movement in work in progress in the year.

Example of factory overheads:

• Factory rent and rates
• Indirect materials
• Factory Insurance
• Factory supervisor’s salary
• Indirect labor
• Factory machinery’s depreciation
• Indirect wages
• Factory light and heat
• Depreciation of Factory NCA

Items not included in the manufacturing account but treated as an expense in the income statement:

• Office rent and rates
• Office Insurance
• Sales staff wages
• Carriage outwards
• Discount allowed
• Depreciation of office non-current assets
• Administrative, selling, and distribution cost
• Finance cost
• General expenses, sundry expenses, advertising cost
• Bad debts and provision for doubtful debts

It is often constructed in a manufacturing account. The total from this account feeds into the statement of comprehensive income.

M/s HM Cost of Goods Manufactured for the period ended March 31, 2007			Rs. 000
Purchases of raw material 450-18			XXX
Transportation cost			XX
+	Opening stock à raw material	XX
Cost of materials available for consumption			XXX
–	Closing stock à raw material	(XX)
Cost of materials consumed			XXX
+	Direct labor (wages)	XX
+	Other direct expenses	XX
Prime Cost (Total direct costs)			XXX
+ Factory (production or manufacturing) overheads (expenses)			XXX
Rent			XX
Electricity			XX
Insurance			XX
Supervisory salaries			XX
Cleaning			XX
Provision for depreciation on machinery			XXX
Factory (manufacturing or production) cost			XXX
+	Opening stock à work in process	XX
+	Purchase of WIP	XX
Cost of goods available for manufacturing			XXX
–	Closing stock à work in process	(XX)
COST OF GOODS MANUFACTURED			XXXX

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