1. Manufacturing accounts
By Nenae 11GS

2. What is manufacturing account?
A manufacturing account is prepared in addition to the income statement. It is produced for internal use only. People other than the owners and managers of the organisation concerned rarely see a manufacturing account.

3. Divisions of costs
In a manufacturing business the costs are divided into different types.
Direct materials
Direct labour
Direct expenses
Prime cost
Production cost
Plus
Total cost
Indirect manufacturing costs
Plus
Administration expenses
Selling and distribution expenses
Financial charges
The prime cost item and the production cost item are shown in the manufacturing account. The administration expenses, selling and distribution expenses and financial charges appear in the income statement.

4. Direct and indirect costs
Direct costs (or prime cost) are costs that can be traced to the item being manufactured. E.g. cost of raw material including carriage inwards on those raw material, hiring of special machinery for a job.
Indirect manufacturing costs (or indirect costs or sometimes known as factory overhead expenses) are those costs which occur in the factory or other place where production is being done, but which cannot easily be economically traced to the item being manufactured. E.g. wages of cleaners, rent of factory, factory power/lighting, depreciation of machinery, cost of operating forklift trucks.

5. Administration expenses
Administration expenses consist of such items such as managers’ salaries, legal and accountancy charges, the depreciation of accounting machinery and secretarial salaries.

6. Selling and distribution expenses
Selling and distribution expenses are items such as sales staff’s salaries and commission, carriage outwards, depreciation of delivery vans, advertising and display expenses.

7. Financial charges
Financial charges are expense items such as bank charges and discount allowed.

8. From the explanation above, tick in the appropriate column for each of the following cost…

9. Indirect manufacturing costs Administration expenses
Direct material
Direct labour
Direct expenses
Indirect manufacturing costs
Administration expenses
Selling and distribution expenses
Financial charges
1).Purchases of raw material
2).Direct wages
3).General factory expenses
4).Depreciation of machinery
5).Commission on sales
6).Factory rent
7).Carriage inwards of raw material
8).Royalties paid
9).Inventory of raw material
10).Administration salaries
11).Indirect labour
12).Bank charges
13).Carriage outwards
14).Discount allowed
15).Factory lighting

10. Format of financial statements
Manufacturing account section
Put into series of steps by:
Add opening inventory of raw materials to purchases and subtract the closing inventory or raw material
Add in all the direct costs to get the prime cost
Add in all the indirect manufacturing costs.
Add the opening inventory of work-in-progress and subtract the closing inventory of work-in-progress to get the production cost of all goods complete in the period.

11. Trading account section of the income statement
Includes
Sales
Less: COGS-Opening inventory of finished good
Add: Production cost of goods complete b/d
Less: Closing inventory of finished good
=Gross profit

12. Profit and Loss section of the income statement
Includes:
All administration expenses
Add all selling and distribution expenses
Add all financial charges
The gross profit then subtract by the total of the calculation above. This calculation will become net profit.

13. Example and activity for manufacturing account and income statement are provide in the manufacturing account example & activity document. (as a work sheet)