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 the manufacturing account?
A manufacturing account is a financial statement that shows the total costs of producing goods in a factory for a given period. It helps companies track and manage their production expenses.
- It records raw materials used, direct labor, and manufacturing overheads.
- The account is prepared to determine the cost of goods manufactured during the period.
- It precedes the trading account to separate production costs from trading activities.
2. What are the two types of manufacturing accounting?
The two main types of manufacturing accounting are job order costing and process costing. They help businesses track and calculate the cost of production.
- Job order costing is used when products are made per specific customer orders or jobs.
- Process costing is used for mass production of similar goods in continuous processes.
- Each method helps calculate the cost of goods manufactured differently, depending on the production style.
3. What is another name for a manufacturing account?
A manufacturing account is also known as a production account. Both terms refer to the same financial statement in manufacturing businesses.
- It is sometimes called a cost of goods manufactured account.
- The purpose remains to record and calculate production costs for a period.
- This account is different from the trading or profit and loss account, as it deals only with manufacturing expenses.
4. What is manufacturing accounting?
Manufacturing accounting refers to tracking, recording, and reporting all financial transactions related to producing goods. It ensures that the real costs of production are known and controlled.
- It includes managing costs for materials, labor, and overheads.
- It calculates the cost of goods manufactured and helps in setting product prices.
- Manufacturing accounting supports budgeting, financial planning, and efficiency improvements.
5. How is a manufacturing account prepared?
A manufacturing account is prepared by listing all production costs for a period, leading up to the total cost of goods produced.
- Start with opening stock of raw materials and add purchases, subtract closing stock to get materials used.
- Include direct labor and manufacturing overheads.
- Combine all costs to find the total cost of production, then calculate the cost of goods manufactured.
6. What is included in a manufacturing account?
A manufacturing account includes all expenses related to the production of goods during a specific period.
- Direct materials (raw materials consumed in making products)
- Direct labor (wages paid to workers directly involved in production)
- Manufacturing or factory overheads (indirect costs like power, depreciation, and factory rent)
7. Why is manufacturing accounting important for businesses?
Manufacturing accounting is crucial for controlling production costs and enhancing business profits.
- It tracks material, labor, and overhead costs accurately.
- Helps set competitive product prices by knowing true manufacturing costs.
- Supports financial planning and helps minimize waste.
8. How does a manufacturing account differ from a trading account?
A manufacturing account and a trading account serve different purposes in business accounting.
- Manufacturing account records all production-related expenses and calculates the cost of goods manufactured.
- Trading account shows the buying and selling of goods plus gross profit or loss.
- The manufacturing account comes before the trading account in financial statements.
9. Who prepares the manufacturing account?
The manufacturing account is usually prepared by the accountant or finance team within a manufacturing company.
- They gather data on raw materials, labor, and overhead expenses.
- They ensure all production-related costs for the accounting period are accurately recorded.
- This information is then used to create the manufacturing account and, later, the trading account.
10. What are the benefits of maintaining a manufacturing account?
Maintaining a manufacturing account offers several advantages for production businesses.
- It provides a clear view of production costs and cost control opportunities.
- Helps set appropriate product prices and improve budget planning.
- Assists in identifying areas of waste and improving efficiency.
11. What is the formula for calculating the cost of goods manufactured?
The cost of goods manufactured helps businesses find the total production cost for a period. The formula is:
- Direct materials used + direct labor + manufacturing overheads
- Then add opening work-in-progress and subtract closing work-in-progress:
Using this formula ensures accurate manufacturing accounting and helps in preparing financial statements.
12. What is work-in-progress in a manufacturing account?
Work-in-progress (WIP) refers to products that are still being manufactured and not yet completed.
- It includes the cost of materials, labor, and overhead spent on unfinished products.
- Both opening and closing WIP are recorded in the manufacturing account to calculate accurate production costs.
- Opening WIP is added, and closing WIP is subtracted during cost calculations.
