Manufacturing Account

What is Manufacturing Account?

This is an accounting statement that helps in the preparation of final accounts of manufacturing concern of a firm. Certain manufacturing concerns do not prepare cost accounts since they do not have any cost office. These manufacturing concerns ascertain the manufactured cost of goods and also the manufacturing profit or loss during the year. Likewise, the cost of production of the manufactured goods and the profit or loss made by the manufacturing department is found out by the preparation of an account. So, when the required data are presented in a convenient form, it is called manufacturing account. Generally, the cost of production or the cost of goods manufactured is exhibited by the preparation of manufacturing account which helps in the calculation of manufacturing trading and profit and loss account.


The cost - effectiveness of activities related to manufacturing is better done with manufacturing account. Ascertaining the cost of goods, transferring this cost to the trading account is important. The trading account shows a gross profit. Manufacturing account is prepared to find out the cost of goods sold which includes direct expenses and it deals with raw materials and work in progress and not the finished goods. All the production expenses like depreciation on plant and machinery, salary to the factory manager, wages, etc are debited. The cost of finished goods includes direct expenses and the cost of raw materials. Manufacturing account format does not have any standardised format. The manufacturing account format must show quantities and values.


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 which are accounted in this method are direct materials, direct labour, 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 manufacturing account. Manufacturing trading profit and loss account is maintained by all manufacturing organisations to help in the formation of final accounts of manufacturing concern. 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.

  • 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 rate of raw materials will take place next and likewise, the amount will be displayed after the calculation.

FAQs (Frequently Asked Questions)

1. What are the Features of Manufacturing Account?

Ans) Some of the important features of manufacturing account are:

  • All the expenses are debited that are related to manufacturing goods.

  • The figure of opening stock, purchase and closing stock is not shown separately. Instead, it only shows the figures of materials consumed.

  • The opening stock of work in progress is debited to manufacturing account while the closing stock of work in progress is credited.

  • The sale of scrap amount gets credited to manufacturing account.

  • 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?

Ans) The financial statement which considers all the elements of cost, income and expenditure is known to be the trading account. It determines the profitability of the company. On the other hand, manufacturing account determines the expenses that are incurred for manufacturing a product.

In a financial year, the trading account gives the verdict of profit or loss in a company while manufacturing account denotes the cost of the product manufactured.

The information of manufacturing account gets featured in trading account while manufacturing account consists of the expenditure caused by the product manufactured.

A trading account helps in the creation of the final balance sheet of a company. Manufacturing account details the requirement for creating a trading account.

Direct revenue and expenses are displayed in the trading account. Operating expenditure for product manufacturing gets displayed in manufacturing account.