Manufacturing Accounts
Manufacturing Accounts
Overview of Manufacturing Accounts
- Manufacturing accounts are specific accounts created by manufacturing businesses.
- These accounts provide a detailed overview of production costs incurred by the business.
- Manufacturing accounts are divided into Cost of Production and the Trading and Profit or Loss account.
Components of the Manufacturing Account
- The key components of a manufacturing account are: Direct Materials, Direct Labour, and Manufacturing Overheads.
- Direct Materials: This includes the cost of raw materials and consumables used for production.
- Direct Labour: This is the cost of labour directly involved in the production process.
- Manufacturing Overheads: These are indirect costs associated with the production, such as factory rent, power and maintenance costs.
Creation of Work in Progress
- Work in progress refers to the products that have started the manufacturing process but are not yet finished.
- Work in progress is treated as an asset in the Balance Sheet and is valued at the cost of production incurred till date.
Cost of Production
- The total cost of production is calculated by adding Direct Materials, Direct Labour and Manufacturing Overheads.
- Adjustments are done for opening and closing stock of work in progress to reach at the final cost of production.
- Any by-product or scrap is usually deducted from the cost of production.
Trading and Profit or Loss Account
- The Cost of Production is transferred to the Trading and Profit or Loss account to calculate the gross profit.
- All other indirect expenses and incomes are recorded in this account.
- The net profit or loss is calculated by deducting indirect expenses from the gross profit and adding indirect incomes.
Conclusion
- Manufacturing accounts provide a comprehensive view of the costs of production, aiding in operational and strategic decisions.
- Understanding the components and the structure of manufacturing accounts is crucial for anyone involved in running or analysing a manufacturing business.