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)

In the examination questions, the stock figures will be given separately.

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

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