Manufacturing account is an account in which the production cost of an item is recorded.
There are three types of business:
- Trading
- Services
- Manufacturing
Manufacturing accounts are used by the 3rd type of business, as suggested by the name.
If manufacturing accounts are used then in the profit and loss account,instead of cost of purchasing finished goods cost of manufacturing goods is taken into account.
There are 3 elements of cost:
Direct Material : the main raw material eg wood in furniture industry. Other materials like polish, nails, paint,etc are not raw materials.
Direct labour : the cost of people involved in an industry e.g carpenters in furniture industry.
Factory overheads: indirect material (e.g polish, nails, etc) + indirect labour (e.g polish boy, painters,etc) +indirect expenses (e.g transportation cost, electric bill).
Factory overheads are also known as indirect manufacturing cost.
Prime cost : ALL DIRECT COSTS (raw materials, labour, direct expenses). Direct expenses include depreciation on machinery.
Indirect Cost: cost of expenses which cannot be directly linked to manufacturing that good e.g factory power, rent and rate, depreciation of plant ,etc.
FORMAT
Opening stock XXXX
add purchase of materials XXXX
_______
MATERIAL FOR USE YYYY
Less closing stock XXXX
_______
MATERIAL USED YYYY
Add direct labour XXXX
Add direct expenses XXXX
______
PRIME COST : YYYY
Add factory overheads XXXX
_______
TOTAL MANUFACTURING COST: YYYY
Add work in progress (opening) XXXX
_______
AVAILABLE FOR MANUFACTUING: YYYY
Less work in progress (closing) XXXX
______
COST OF GOODS MANUFACTURED YYYY
Add finished goods (opening) XXXX
Less finished goods (closing) XXXX
_____
COST OF GOODS MANUFACTURED YYYY
Methods for depreciation for manufacting accounts
Manufacturers use 4 kinds of depreciation according to the goods they are manufacturing. The 4 types of depreciation methods are as follows:
Revalution method (for small items like tins, etc)
Value at start of period
Add purchases __________________
Less value at end of period
Depletion method (for quarry and mines)
Cost of fixed assets X No. of taken out in a period
Expected total contents
Machine Hour method
Cost of asset
Expected life
Sum of years method
cost – salvage cost X Production in a specific period
Total expected production