What is Manufacturing Account

Manufacturing account

Businesses are different in so many ways, especially in terms of their activities. While some business organizations sell finished goods, others manufacture their own products e.g Nestle, Coca-Cola, etc.

The business organizations that manufacture their own products are referred to as manufacturing businesses. These kinds of business enterprises buy raw materials, convert them into finished items, and then sell them to their customers. As part of their financial statement, manufacturing businesses must prepare what is called a manufacturing account.

A manufacturing account is one that provides information on all the expenses and costs incurred in the production of goods to be sold. The importance of a manufacturing account is to show the cost of running and maintaining a manufacturing business. More importantly, it is to help manufacturing business owners set profitable selling prices for their products.

Purpose of Manufacturing Account

A manufacturing account is usually prepared for the following reasons:

  1. To determine the cost of goods manufactured.
  2. To determine the amount of any profit or loss on the manufacturing process.

Types of Manufacturing Costs and Expenses

In a manufacturing business, there are costs or expenses linked (directly or indirectly) to the production of goods. They include:

  • Direct material cost: This is simply the cost of materials directly used in the manufacture of goods or products. For example, in the manufacture of a table, the raw materials consist of timber, nails, glue, paints, etc.

 

  • Direct labor cost: This is the wages paid to those who are directly involved in the production of a product or goods. It is the costs for man-powers needed to transform raw materials into finished products. For instance, in the manufacture of tables, direct labor consists of wages paid to those workers who saw, shaped,d, or join the pieces of timber into tables. In determining a direct labor cost, only those hours spent on the actual production of goods are relevant.

 

  • Direct expenses: These are expenses incurred or directly linked to the products being made, e.g Royalties and Patent fees. The sum of all the direct costs is known as PRIME COSTS.

 

  • Factory overheads: This is also known as indirect manufacturing costs and they include all expenses not directly linked to the goods being made. Examples include:

(a) Factory cleaner’s wages

(b) Machinery repairs (machines used for different items of production)

(c) Foreman wages

(d) Internal transport expenses

(e) Factory electricity bills

(f) Factory water bills

(g) Depreciation of factory machines

(h) Factory rent 

N:B Prime costs + Indirect manufacturing cost/ Factory Overheads = PRODUCTION COSTS

  • Fixed expenses– These are expenses that do not change with the level of production taking place. The same expenses will be incurred regardless of whether production is nil or goes up to a large number of units.  Examples of such expenses include rent, insurance of premises, machinery, and motor vehicles, payments on loans, depreciation, and management salaries.

 

  • Variable expenses– This is the direct opposite of fixed expenses given that the expenses change and are affected by the level of production activity going on. Variable expenses increase as production volume increases and vice versa.  Examples of variable expenses include the cost of raw materials, direct labor, carriage inwards, and factory power expenses.

 

  • Administrative expenses – These are items such as managers’ salaries, legal and accountancy charges, rent, insurance, general expenses, light and heat, and depreciation of administrative assets such as office equipment and computers.

 

  • Selling and Distribution Expenses – This includes advertising costs, carriage outwards, commission to sales personnel, wages to salespersons, and depreciation on delivery vans.

 

  • Financial Expenses – This includes bank charges, interest on bank loans, and discounts allowed.

Types of Stocks In Manufacturing Account

In a manufacturing business, there are three kinds of stocks:

  1. The stock of raw materials: These are the materials that are used up in the production process.
  2. The stock of work in progress: This refers to all the goods for which  production has not been finalized i.e partly finished goods. Although these goods have not been finalized, they have values, which must be accounted for in the manufacturing account. This value is associated with the cost of raw materials, wages, and other direct expenses spent at each level of production.
  3. The stock of finished goods: These are materials for which all the production processes have been completed and therefore are ready for sale.

How To Prepare a Manufacturing Account

The following steps should be taken in the preparation of a manufacturing account.

  1. To get the cost of materials used, add the opening stock of raw materials to purchases while subtracting the closing stock of raw materials.
  2. To get prime costs, add all the direct costs.
  3. Next, add all the indirect manufacturing costs.
  4. To get the production cost of all goods completed within the period, add the opening stock of WIP (Work in Progress) while subtracting the closing stock of WIP. WIP, if it helps to mention, cannot be sold, and therefore should not be included in the trading account.
  5. Completing the four steps above will present the manufacturing account that shows the cost of production.

Manufacturing Account format

Cost of Raw materials consumed                             .                       

 

Opening stock of raw materials (01.01.2015).                                   xxxx

Add purchase of raw materials.                                   xxxxx

Add carriage inwards on raw materials ( if any )      Xxxx

                                                                                            Xxxxx

Less Returns outwards of raw materials.                   xxxx             Xxxxx

                                                                                                                  Xxxxxx

Less Closing stock of raw materials (31.13.2015)                            xxxx

Cost of Direct Materials.                                                                    xxxxxxc

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 of plants & machinery.                   xxxxxx

Depreciation on factory building                          xxxxxx

Depreciation on factory furniture.                        xxxxxx

Depreciation on factory motor van                       xxxxxx

Depreciation on other factory fixed assets.          xxxxxx        XXXXXXX

                                                                                                             XXXXXXX

Add Opening stock of work in progress.                                      xxxxxx

                                                                                                            XXXXXXX

Less Closing stock of work in progress.                                      xxxxxx

Cost of Production.                                                                     XXXXXXX

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