Chapter 19
Manufacturing
Accounts
Manufacturing Companies
• A Manufacturing Firm is one which converts
raw materials into finished goods and sells
the finished goods to make a profit.
• A Manufacturing Account is prepared to
calculate the cost of producing completed
goods.
Direct vs Indirect Cost
DIRECT COST
INDIRECT COST
1. Direct materials or raw
materials – these are materials
used or consumed in
production.
1. Indirect materials – these costs
are essential in a firm’s
operations but cannot directly
be traced in the production of
goods.
2. Direct labour or production
2. Indirect labour – these are cost
labour – these are cost incurred
incurred paid as wages to
paid as wages to people who
people who support in the
work directly on the product.
development of a product
however, the cost of the labour
cannot be traced to the actual
product for example: foreman
wages.
SECTIONS OF A
MANUFACTURING ACCOUNT
• Prime cost – contains the direct (variable)
cost related to the volume of production.
• Factory overheads – contains cost that are
likely to be incurred regardless to the number
of units produced.
• Work-In-Progress – contains opening and
closing stock of semi-finished goods.
The Trading Account
The components of the trading account would
include:
• Cost of goods manufactured transferred from the
manufacturing account.
• Opening stock and closing stock of finished goods.
• Sales of finished goods.
• Purchases of finished if the manufacturing company
buys from another supplier.
The Profit & Loss Account
The components of the profit and loss
account would include costs not related to
the making of the product:
• Administrative (office) expenses
• Selling and distribution expenses
• Financial expenses.
The Balance Sheet
The Balance Sheet differs from other
businesses because of the three types of
stock. These types of stocks(raw materials,
work in progress and finished goods) are
shown separately in the Current Assets
section in the Balance sheet.