What is Manufacturing Account?
The manufacturing account gives information on all the expenses and costs incurred in the preparation of the goods to be sold. This includes the expenses that are met in the path of preparing the goods but not the finished goods. Any type of expenses including the cost of raw materials, the cost of machines and their maintenance, the salaries and wages of both skilled and unskilled workers which are considered as the direct expenses of the manufacturing. Even the depreciation of the assets like costly machines and plants are also included under this account. This statement of account is very important for a manufacturing firm or plant to get an idea of the total profit or loss incurred throughout the year in the total process. The effectiveness and fixing of the cost price of the finished goods are based upon the statement of the manufacturing account. The statement of the manufacturing account does not have a prescribed format. It is only important to show the quantities and values clearly.
Manufacturing Account Format
Dr. (For the period ended . . . . . . . . . ) Cr.
Production Accounts
Production accounts are accounts of cost or cost-sheet in a ledger account format, showing only the output during a given period, which is the total cost and per-unit cost incurred during the period and also the profit or loss for that particular period. Production accounts are nothing but the calculation of all costs involved during the conversion of raw materials to finished goods.
Underapplied Overhead
The actual factory overhead cost amounts that are not allocated to the production units are known as underapplied overhead. This kind of situation ascends when the accurate standard division amount of per unit of production does not equate to the actual overhead cost amounts incurred in a financial period, resulting in underapplied overhead.
Absorption Costing Unit Product Cost
Under the absorption costing unit product cost method or the managerial accounting method, all costs which are associated with the particular product are captured. Examples of entries that are accounted in this method are direct materials, direct labor, insurance, and rent. For external reporting, absorption costing unit product cost uses GAAP or Generally Accepted Accounting Principles.
Preparation of Manufacturing Account
The cost of goods sold is found out by the preparation of the manufacturing account. Manufacturing trading profit and loss accounts is maintained by all manufacturing organizations to help in the formation of final accounts of a manufacturing concern. The manufacturing overhead account is calculated by the addition of indirect factory expenses like machine repairs, depreciation, insurance, factory supply, electricity, etc. Generally manufacturing overhead t account is prepared to have a standardized form of account. Non-manufacturing entities or what is called trading entities are generally involved in the purchase and also sales of goods at a profit. Usually, it is the manufacturing entities that prepare a manufacturing account and trading account, profit and loss account, and balance sheet in addition. The cost of goods manufactured format includes the cost of raw materials and all the direct expenses.
Manufacturing Account in Tally
The preparation of manufacturing account in tally can be done in the following process:
Select Gateway of Tally followed by Inventory Vouchers and then click on F7.
Select the manufacturing journal.
Selection of the product to be manufactured should follow.
The selection of the bill material is next.
Selection of the godown where the storage of finished goods will be done will then be done.
Entering the production quantity will come next.
Entering the batch date, manufacturing date, and expiry date is to follow.
Selection of the components like the name of the item, godown components, the number of raw materials, and the rate of raw materials will take place next and likewise, the amount will be displayed after the calculation.
FAQs on Manufacturing Account: Meaning and Format
1. What is a Manufacturing Account and why is it prepared by businesses?
A Manufacturing Account is a specialised ledger account prepared by businesses involved in production to determine the cost of goods manufactured during a specific accounting period. It is prepared to consolidate all factory-related costs, both direct and indirect, into a single statement. This allows the business to accurately calculate production costs, control expenses, and set appropriate selling prices for its products.
2. What is the standard format of a Manufacturing Account?
While there is no legally prescribed format, a Manufacturing Account is typically prepared in a 'T' format. The debit side records all production-related costs, and the credit side records the value of closing work-in-progress and sale of scrap. Key items include:
- Debit Side: Opening work-in-progress, raw materials consumed, direct wages, direct expenses, and all factory overheads (e.g., factory rent, power, machinery depreciation).
- Credit Side: Closing work-in-progress and sale of scrap. The final balancing figure is the Cost of Production, which is transferred to the Trading Account.
3. How does a Manufacturing Account fundamentally differ from a Trading Account?
The core difference lies in their purpose. A Manufacturing Account focuses on the production process and calculates the 'Cost of Goods Manufactured'. It deals with raw materials and factory costs. In contrast, a Trading Account is prepared to determine the 'Gross Profit' or 'Gross Loss' from the sale of finished goods. It uses the final figure from the Manufacturing Account as its primary cost input, similar to how a retail business uses 'Purchases'.
4. What are the key components debited to a Manufacturing Account?
The debit side of a Manufacturing Account aggregates all costs incurred to convert raw materials into finished goods. The main components are:
- Raw Materials Consumed: Calculated as Opening Stock of Raw Materials + Purchases – Closing Stock.
- Direct Labour: Wages paid to workers directly involved in production.
- Direct Expenses: Costs other than materials or labour directly attributable to production, such as hire charges for special equipment.
- Factory Overheads: All indirect costs related to the factory, such as factory rent, supervisor salaries, fuel, and depreciation of plant and machinery.
5. Why is 'Work-in-Progress' (WIP) shown in the Manufacturing Account?
Work-in-Progress (WIP) represents partially finished goods. Its inclusion is vital for accurate cost calculation. Opening WIP is debited because it represents costs from the previous period that will be completed in the current period. Closing WIP is credited because its cost was incurred in the current period, but the goods are not yet complete. This adjustment ensures that the 'Cost of Goods Manufactured' only reflects the cost of units that were fully completed during the period.
6. Why can't factory expenses like machinery repairs be recorded directly in the Profit & Loss Account?
Factory expenses like machinery repairs are considered production costs, not operating costs. They are essential for manufacturing goods and must be included in the Manufacturing Account to determine the true cost of production. The Profit & Loss Account is designed to record office, administrative, and selling expenses incurred *after* the goods are produced. Mixing these costs would distort both the 'Cost of Goods Manufactured' and the 'Net Profit', leading to incorrect financial analysis.
7. How is the final balance of the Manufacturing Account treated in the final accounts?
The final balancing figure of a Manufacturing Account is the 'Cost of Goods Manufactured'. This amount is not a profit or loss. It is transferred to the debit side of the Trading Account. In the Trading Account, this figure acts as the main cost against which sales revenue is compared to calculate the Gross Profit for the period, effectively replacing 'Purchases' used by non-manufacturing entities.
8. What is the accounting treatment for income from the sale of scrap materials?
The sale of scrap material is a natural by-product of the manufacturing process. The income generated from it is treated as a reduction in the total cost of production. Therefore, the value from the 'Sale of Scrap' is recorded on the credit side of the Manufacturing Account. This entry lowers the overall cost, resulting in a more accurate 'Cost of Goods Manufactured' figure.
