INTRODUCTION TO MANUFACTURING ACCOUNTS
Manufacturing of goods is the transformation of raw materials into finished goods. A manufacturing organization will acquire raw materials, engage labour and other inputs necessary to change the raw materials into finished goods. Manufacturing accounts are prepared to ascertain the cost of goods manufactured during the financial year. It is an extension of the grading account.
Division Of Cost
Direct materials + Direct labour + Direct expenses = Prime cost
Prime cost + Indirect manufacturing costs = Production cost
Prime cost + factory overheads = Total cost of production
Format of a manufacturing account
Manufacturing account for the year ended ..............................
Opening stock of raw materials
|
xxxx
| |
Add purchase of raw materials
|
xxxxx
| |
Add carriage inwards ( if any )
|
Xxxx
| |
Xxxxx
| ||
Less Returns outwards (of raw materials)
|
xxxx
| |
Xxxxx
| ||
Less Goods drawings ( if any )
|
xxxx
| |
xxxxx
| ||
Less Closing stock of raw materials
|
xxxx
| |
Cost of Direct Materials
|
xxxxxxx
| |
Add Direct labour
|
xxxxxxx
| |
Add Direct expenses (Eg: royalties)
|
xxxxxxx
| |
Prime Cost
|
xxxxxxx
| |
Add Factory overhead expenses
| ||
Factory lighting
|
xxxxxx
| |
Factory heating
|
xxxxxx
| |
Factory insurance
|
xxxxxx
| |
Factory rent
|
xxxxxx
| |
Factory maintenance
|
xxxxxx
| |
Factory indirect wages
|
xxxxxx
| |
Factory supervisor’s wages
|
xxxxxx
|
( + )
|
Depreciation on plant & machinery
|
xxxxxx
| |
Depreciation on factory building
|
xxxxxx
| |
Depreciation on factory furniture
|
xxxxxx
| |
Depreciation on factory motor van
|
xxxxxx
| |
Depreciation on other factory fixedassets
|
xxxxxx
|
XXXXXXX
|
XXXXXXX
| ||
Add Opening stock of work in progress
|
xxxxxx
| |
XXXXXXX
| ||
Less Closing stock of work in progress
|
xxxxxx
| |
Cost of production
|
XXXXXXX
|
In a manufacturing concern, usually we have these three kinds of stocks:
Stock of Raw materials (the materials which are mainly used for production of the item)
Stock of Work in progress (the materials on which some work process have been completed)
Stock of Finished goods (The materials on which all the production processes are completed and ready for sale to the customers)
Format of trading account of a manufacturing concern
Sales of finished goods
|
xxxxx
| |
Less Returns inwards
|
xxxxx
| |
xxxxxx
| ||
Less Production cost of goods sold
| ||
Opening stock of finished goods
|
xxxxx
| |
Add Cost of production
|
xxxxxxx
|
(-)
|
xxxxxx
| ||
Less closing stock of finished goods
|
xxxxx
| |
xxxxxxx
| ||
Less finished goods drawings by the owner
|
xxxxx
|
xxxxxxx
|
Gross profit or Gross loss
|
XXXXXX
|
Fixed expenses and Variable expenses
Some expenses will remain constant whether the level of activity increases or falls. These expenses are called fixed expenses E.g. rent of building
The expenses which change with changes in activity are called variable expenses
E.g: cost of materials.
Some important things to note:
* Carriage on raw materials means carriage inwards and it is a part of prime cost.
* Carriage outwards is shown in the profit & loss account as an expense.
* Royalties paid is to be treated as direct expense.
* Depreciation on Plant and Machinery or any other factory asset is to be treated as factory overhead expense.
* Stocks of raw materials and work-in-progress are taken in the manufacturing account and stock of finished goods is taken in the trading account.
* Stocks at the end of the year (raw materials, work-in-progress and finished goods) are shown in the balance sheet as current assets.
* Owner’s raw materials drawings are shown in the manufacturing account while calculating the prime cost.
*Finished goods drawings are shown in the trading account while calculating the cost of goods sold.
* The purchase of finished goods is added with cost of production in the trading account.
* The depreciation of any asset used in the office should be shown as an expense in the profit & loss account.
* Cost of readymade items bought for the production of items manufactured should be treated as direct expense.
*Unit cost of production = Total cost of production
No of units produced
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