MANUFACTURING ACCOUNTS
By Nenae 11GS
WHAT IS MANUFACTURING ACCOUNT?

A manufacturing account is prepared in addition
to the income statement. It is produced for
internal use only. People other than the owners
and managers of the organisation concerned
rarely see a manufacturing account.
DIVISIONS OF COSTS

In a manufacturing business the costs are
divided into different types.
Direct materials
Direct labour
Direct expenses
Prime cost
Plus
Indirect manufacturing costs
Plus
Production
cost
Total
cost
Administration expenses
Selling and distribution expenses
Financial charges
The prime cost item and the production cost item are shown
in the manufacturing account. The administration expenses,
selling and distribution expenses and financial charges
appear in the income statement.
DIRECT AND INDIRECT COSTS
Direct costs (or prime cost) are costs that can
be traced to the item being manufactured.
E.g. cost of raw material including carriage
inwards on those raw material, hiring of special
machinery for a job.
 Indirect manufacturing costs (or indirect
costs or sometimes known as factory overhead
expenses) are those costs which occur in the
factory or other place where production is
being done, but which cannot easily be
economically traced to the item being
manufactured. E.g. wages of cleaners, rent of
factory, factory power/lighting, depreciation of
machinery, cost of operating forklift trucks.

ADMINISTRATION EXPENSES

Administration expenses consist of such items
such as managers’ salaries, legal and
accountancy charges, the depreciation of
accounting machinery and secretarial salaries.
SELLING AND DISTRIBUTION EXPENSES

Selling and distribution expenses are items such
as sales staff’s salaries and commission, carriage
outwards, depreciation of delivery vans,
advertising and display expenses.
FINANCIAL CHARGES

Financial charges are expense items such as
bank charges and discount allowed.
FROM THE EXPLANATION ABOVE, TICK IN
THE APPROPRIATE COLUMN FOR EACH OF
THE FOLLOWING COST…
Indirect
Direct Direct Direct
manufacturing
material labour expenses
costs
1).Purchases of raw
material
2).Direct wages
3).General factory
expenses
4).Depreciation of
machinery
5).Commission on
sales
6).Factory rent
7).Carriage inwards
of raw material
8).Royalties paid
9).Inventory of raw
material
10).Administration
salaries
11).Indirect labour
12).Bank charges
13).Carriage
outwards
14).Discount allowed
15).Factory lighting
Administration
expenses
Selling and
distribution
expenses
Financial
charges
FORMAT OF FINANCIAL STATEMENTS

Manufacturing account section

Put into series of steps by:
1.
2.
3.
4.
Add opening inventory of raw materials to purchases and
subtract the closing inventory or raw material
Add in all the direct costs to get the prime cost
Add in all the indirect manufacturing costs.
Add the opening inventory of work-in-progress and
subtract the closing inventory of work-in-progress to get
the production cost of all goods complete in the period.

Trading account section of the income statement

Includes
Sales
 Less: COGS-Opening inventory of finished good
 Add: Production cost of goods complete b/d
 Less: Closing inventory of finished good
 =Gross profit


Profit and Loss section of the income statement

Includes:
All administration expenses
 Add all selling and distribution expenses
 Add all financial charges
 The gross profit then subtract by the total of the calculation
above. This calculation will become net profit.


Example and activity for manufacturing account
and income statement are provide in the
manufacturing account example & activity
document. (as a work sheet)