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.