Manufacturing account



    Manufacturing account is an account in which the production cost of an item is recorded.

    There are three types of business:

    1. Trading
    2. Services
    3. 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.



    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



    Less work in progress (closing)                                   XXXX



    Add finished goods (opening)                         XXXX

    Less finished goods (closing)                          XXXX




    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