Prepared by L.A.W
Manufacturing accounts
A manufacturing account is an account prepared at the end of the financial period in order to calculate the
production cost of manufactured goods.
A manufacturer takes raw materials and with the aid of workers and machinery, changes them into finished
goods.
Three functional areas are: a) factory or production area; b) general office or administrative area;
c) sales office or selling and distribution area.
All these areas incur costs. The manufacturer will want to know how much each functional area contributes to
the total cost of making and selling his good. He also wants to know how costs behave as the number of units
produced changes.
Cost- is defined as ‘ an expenditure incurred or attributable to a specific product or activity.,eg. the cost of one
bottle of soft drink or the cost of making a chair.
There are two major factors that influences costs. They are time and activity.
*The costs that are influenced by time are known as fixed or period costs, because they remained unchanged for
a long time.
* The costs that influenced by activity are called variable costs. They change with the level of activity ,that
is,with each item of production these costs will increase (eg., cost of material and cost of labour)
Two main costs- Direct and Indirect
A cost element is an amount paid for a resource consumed either immediately or over time.
Three distinct cost elements incurred in all areas are: materials cost, labour costs, and expenses.
Each of these costs can be described in terms of the way they increase or decrease in response to how many
items(volume) the manufacturer wishes to produce. This is called cost behaviour.
Direct costs-costs or resources which can be identified with the manufacture of specific units, for example: a)
direct materials ( wood for table manufacturing) ; b) direct wages( paid to those who actually worked on the
product); c) direct expenses ( rental of piece of equipment to be used in production).
Indirect costs/Overheads- costs incurred in production which cannot be specifically identified with the
manufacture of specific units,for eg.
a) indirect materials(lubricants for the machinery); b) indirect wages( manager's salary) ; c) indirect expenses
( rent for company premises)
Note: mostly in factory area that incurs direct cost but all areas incur indirect costs.
A simple manufacturing account is split into two sections:
The prime cost section and the factory overheads section.
Prime cost- the total of all direct costs incurred when producing the products.
Factory overheads- the indirect costs incurred in the production of the products, for example depreciation of
machinery, factory insurance and factory rent.
Prime cost + factory overheads = cost of production
Stocks of the manufacturer
There are usually three groups of stocks:
a) stock of raw materials – these are materials to be used in production.
b) stock of work in progress- these are partly finished items at the end of the accounting period.
c) stock of finished goods- these are completed goods ready for sale.
FORMAT FOR MANUFACTURING ACCOUNT
Company name
Manufacturing a/c
For the period ending Dec.31,20xx
$
$
Opening stock of raw materials
xxx
Purchases of raw materials
xxx
Add: carriage inwards
xxx
xxx
Less returns outwards
(xxx)
Net purchase of raw materials
xxx
Materials available for use
xxx
Less: closing stock of raw materials
(xxx)
COST OF RAW MATERIALS USED
xxx
Add: DIRECT LABOUR
xxx
Direct expenses
xxx
PRIME COST
Add: Factory overheads
Rent and rates
xxx
Other materials
xxx
Depreciation of machinery
xxx
Foremen’s salaries
xxx
TOTAL FACTORY OVERHEADS
$
xxx
Less: Closing work – in-progress
xxx
xxx
xxx
xxx
(xxx)
PRODUCTION COST
xxx
Add: Opening work-in- progress