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 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