Manufacturing Account

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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.

Particulars

Amount

Particulars

Amount

To Work-in-progress (Opening)


To Work-in-progress (Closing)


To Raw materials consumed:


By Sale of scrap


Opening stock


By Cost of production of finished goods


Add: Purchase of raw materials




Less: Closing stock of raw materials




To direct wages




To factory overhead





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.

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FAQs (Frequently Asked Questions)

1. What are the Features of Manufacturing Account?

Manufacturing account is quite important for a running plant to know all sorts of expenses it is having to finish the goods in the proper time.  The main features of the manufacturing account which make it so easy to understand and maintain are as follows:

  • The statement includes all expenses both in the form of direct expenses and the cost of raw materials in the production of manufacturing goods as debits and the credits from different sources also.

  • The opening and closing stocks during work in progress are considered as debts and credits of the account respectively.

  • The opening stock involves direct expenses and closing stock involves credit through the sale of scraps and profits from the cost of production.

  • Depending on the manufacturing account prepared, the manufacturing account balance is either the cost of production or the manufacturing profit.

2. What is the Difference Between a Trading Account and Manufacturing Account?

Manufacturing account is quite important for a running plant to know all sorts of expenses it is having to finish the goods in the proper time.  The main features of the manufacturing account which make it so easy to understand and maintain are as follows:

  • The statement includes all expenses both in the form of direct expenses and the cost of raw materials in the production of manufacturing goods as debits and the credits from different sources also.

  • The opening and closing stocks during work in progress are considered as debts and credits of the account respectively.

  • The opening stock involves direct expenses and closing stock involves credit through the sale of scraps and profits from the cost of production.

  • Depending on the manufacturing account prepared, the manufacturing account balance is either the cost of production or the manufacturing profit.

3. In what method a manufacturing account is created?

Manufacturing accounts help to improve the cost-effectiveness of the manufactures. Though there is no fixed format to maintain it, a few things should be properly entered into the statement to get the actual information that is needed.  Debiting all expenses like the cost of raw materials and other direct expenses are to be exhibited in the statement. All indirect expenses come in profit or loss A/c. The usual format consists of columns with particulars like raw materials, the wages, other factory expenses including rent of factory, repair, and maintenance of factory building and machines, units, amount both for opening work and closing work side by side. Particulars in closing work include trading A/c i.e transfer of the cost of production, by the sale of scrap. Profit and loss in trading and manufacturing is a must for all organizations to get an idea about the final profit or loss in the manufacturing concern. 

4. What is the actual purpose of maintaining a manufacturing account?

The manufacturing account can give the actual information regarding the cost of the raw materials used in the manufacture and all other expenses during the progress of the manufacturing work. It has the ability to give information about the following things at a glance.  

  • The cost of materials

  • The cost of labor

  • Expenses due to repair and maintenance of equipment and factory building.

  • Factory overhead expenses

  • Expenses for rent, electricity, planning and designing the organization, etc.

  • Expenses due to bank charges

  • Expenses due to the depreciation of machines and plant

  • Expenses due to promoting, distributing, transporting, and selling of products.

5. What is the difference between direct and indirect labor costs?

Direct and indirect labor costs vary in their nature; they both are included in the manufacturing account but under different heads. Direct labor is the wages to the laborers directly involved in the manufacturing of goods. They directly act on the goods to be sold. However indirect labor means the other types of labor involved in the whole work like cleaning, sweeping, supervising, transporting, maintaining the machines, and inspecting the whole work. This kind of labor is basically included under the head of overhead expenses.

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