Topic: Manufacturing Accounts
Manufacturers are businesses that make the products which they sell rather than buy finished goods for resale.
Final accounts of manufacturing firms include the following:
Manufacturing A/c
Income statement/Trading and Profit and Loss A/c
Statement of Financial Position/Balance Sheet
The purpose of the manufacturing account is to calculate the production cost of the goods produced.
It is divided into two sections:
a) Section one deals with all direct costs incurred in the manufacturing process
b) Section two includes all indirect manufacturing costs
Direct Costs: These are costs which can be traced to the item being manufactured. These costs will be directly
affected as production changes. For example, when production increases, direct cost will increase. Likewise, when
production decreases so will these costs.
Examples of Direct Costs:
Direct Material (raw material)
Direct Labour/Manufacturing wages/Factory wages
Direct Expenses
Note: The total of the direct costs is commonly referred to as Prime Cost.
Indirect manufacturing costs (Factory overhead expenses): These are costs which cannot be traced to the item
being manufactured. These costs will not be affected by a change in production. In other words, whether or not
something is produced these costs will be incurred.
Examples of indirect manufacturing costs are:
Wages of cleaners
Salaries of supervisors/managers
Rent and Rates of factory
Factory power
Depreciation of Factory plant and machinery
In the manufacturer’s Income Statement his other expenses are classified as follows:
Administrative Expenses – these costs are incurred during the usual operation of the business office.
These include: managers’ salaries, secretarial salaries, depreciation on office equipment among others.
Selling and Distribution Expenses – these costs are incurred during the sale and distribution of the
product or service to the customer. Examples include: sales staff’s salaries and commission, carriage
outwards, depreciation of delivery vans, advertising, etc.
Financial Charges – these are expense items such as bank charges and discounts allowed, bad debts, etc
The following is an outline of how the Manufacturing Account should be drawn up:
Name of Business/Owner
Manufacturing Account
For the year ended…
$ $
Opening stock, raw materials XX
Add: Purchases, raw materials XX
Add: Carriage inwards, raw materials XX
XX
Less: Returns outwards, raw materials (XX)
Net Purchases, raw materials XX
Raw materials available for use XX
Less: Closing stock, raw materials (XX)
Cost of raw materials consumed XX
Direct Labour XX
Direct Expenses XX
Prime Cost XX
Indirect Manufacturing Costs/Factory Overhead Expenses:
Indirect Wages XX
Factory Rent XX
Fuel and Power XX
Total Factory Overhead Expenses XX
XX
Add: Opening stock, work-in-progress XX
XX
Less: Closing stock, work-in-progress (XX)
Production cost of goods completed c/d XX
Note: The production cost will be shown in the Trading account where Purchases is shown for a retailer.
However, sometimes, a manufacturer may need to buy some finished goods in addition to those manufactured. In
such a case, the Trading account will show both production cost and purchases.
Work-in-progress: These are unfinished (partly finished) goods at the beginning or at the end of the accounting
period of the firm.
Name of Business/Owner
Income Statement
For the year ended…
$ $
Sales XX
Less Cost of Goods Sold:
Opening Stock of finished goods XX
Add: Production Cost of goods completed XX
Cost of goods available for sale XX
(-) Closing stock of finished goods (XX)
Cost of goods Sold (XX)
Gross Profit XX
Administrative Expenses
Administrative Salaries XX
Rent of Office XX
Insurance XX
Depreciation of Accounting Machine XX
Total Administration Expenses XX
Selling and Distribution Expenses:
Commission on Sales XX
Carriage Outwards XX
Salesman Salary XX
Total Selling and Distribution Expenses XX
Financial Charges
Bank Charges XX
Discount Allowed XX
Total Financial Charges XX
Total Expenses (XX)
Net Profit XX
Name of Business/Owner
Balance Sheet (Extract)
As at …
Current Assets
Stock of finish goods X
Stock of Raw materials X
Stock of work-in Progress X
Debtors X
Prepayments X
Bank X
Cash X
Total Current Assets X
