Manufacturing Accounts

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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