MANUFACTURING ACCOUNTS
The businesses which produce and sell the items prepare the following accounts at the end of its
accounting year:a. The Manufacturing account (to calculate the total cost of production)
b. The Trading and profit & loss account (to find out the net profit or loss)
c. The balance sheet.(to show the financial position of the business)
The total cost of production = Prime cost + Factory overhead
The Prime cost = Direct material + Direct labour + Direct expenses
Direct material cost = Opening stock of raw materials + purchase of raw materials + carriage
inwards – returns outwards – closing stock of raw materials.
Factory overhead expenses = All expenses related to the factory (indirect expenses)
The 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 there are 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
Gross profit or Gross loss
xxxxxxx
XXXXXX
The profit & loss account and the balance sheet preparations will be the same as that of a sole
trader’s. So the students have to follow the previous method for the preparation of these.
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.
Key points:

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