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Manufacturing Account Definition - Format, Example, Preparation Method

Manufacturing Account Definition

The primary objective of creating a trading account, as described earlier, is to find out the profit arising from business actions (ie buying and selling of goods). But there are many institutions that purchase raw materials instead of purchasing finished goods from the market and manufacture finished goods on their own. Such institutions which are engaged in manufacturing activities, firstly create a factory account to generate the cost of production during the accounting period and thereafter create a business and profit and loss account. You need to know the balance sheet

Manufacturing Account

Features Of Manufacturing Account

  • 1. It is prepared only by those firms which are engaged in manufacturing activities.
  • 2. It is prepared to know the cost of production.
  • 3. All expenses related to factory operations are debited to this account.
  • 4. The cost of production as ascertained by the factory account is transferred to the debit of the trading account.
  • 5. This is the first stage of the final accounts and is prepared before creating a trading and profit and loss account.

Difference Between Manufacturing Account Or Trading Account

Manufacturing account |Trading Account

1. Objective  -

  1. Manufacturing Account - It is made to know the cost of goods produced.
  2. Trading Account - It is made to find the gross profit or gross loss.

2. Stage

  1. Manufacturing Account - This is the first stage of final accounts.
  2. Trading Account - This is the second stage of last accounts.

3. Content

  1. Manufacturing Account - All expenses related to manufacturing operations are written on its debit.
  2. Trading Account - All expenses related to the purchase of manufactured goods are written on its debit.

4. Opening and closing stock

  1. Manufacturing Account - The initial and final balance of raw materials and semi-finished goods are written in it.
  2. Trading Account - The opening and closing stock of goods manufactured and the last closing is written in it.

5. Balance

  1. Manufacturing Account - Its balance is transferred to the trading account
  2. Trading Account - Its balance is transferred to profit-loss account

6. Prepaid By

  1. Manufacturing Account - This is done only by the manufacturing institutions.
  2. Trading Account - This is done to prepare all the entities including the builder.

7. Debit & Credit

  1. Manufacturing Account - It displays only the debit balance which is the cost of production.
  2. Trading Account - It displays debit or credit balance. Debit balance indicates gross loss and credit balance indicates gross profit.

Preparation of Manufacturing Account

Because the purpose of preparing this account is to find the cost of production, so all the expenses related to the production of goods are written into this account. Often the following items are written on its debit side:

  • 1. Cost of raw materials consumed:- This is the first item written on the debit side of a factory account. It is calculated as follows.

Opening Stock of Raw Materials

Add: Net Purchases of Raw Materials

(i.e., Purchases less returns outwards)

Add: Freight and Carriage on purchase of Raw Materials 

Less: Closing Stock of Raw Materials

Cost of Raw-Materials consumed

It is worth remembering that the initial and final properties of the manufactured goods are not written in the construction account. These are written in the trading account.

  • 2. Direct Wages
  • 3. Direct Expenses
  • 4.  Factory Overheads: These include indirect materials, indirect wages and
  • Indirect expenses such as factory rent, factory electricity expenditure, factory building insurance, power and fuel, factory manager's salary, supervisor's salary, etc. are included. Depreciation and repair expenses of machinery and factory building, which used to go to the profit and loss account earlier, are also written in the manufacturing account.
  • 5. Work-in-Progress: Because manufacturing work is a continuous process, it is only natural that some goods remain semi-manufactured at the end of the period. Such semi-manufactured goods are called on-work. The opening stock of the current work is written in the debit side of the manufacturing account and the closing stock of the ongoing work is written on its credit side. The on-going opening stock can also be added to the manufacturing cost in the debit side of the manufacturing account and the closing stock can be reduced from it.

Credit Side:

Sale of Scrap: The amount received from the sale of contaminated or waste goods is displayed in the credit side of the manufacturing account.

Balance: The difference between the two sides of a manufacturing account is called the cost of production. This cost is written on the credit side of the manufacturing account and is transferred to the debit of the trading account.

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