Manufacturing Account


In our lesson on trading and Profit or Loss Account, we discussed the final account of a sole trading firm. In this case, the business entity buys and sells goods already produced or manufactured by another person or entity.
In the manufacturing account setting, we have to look at the accounting processes involved in the manufacturing of a product and the eventual sales point of that product. Thus, manufacturing account involves accounting for the cost of producing a product.
In a manufacturing account, the cost of production is arrived at using the following format
simple format of manufacturing account

***Prime Cost consist of Direct material cost, Direct Labour cost and Direct Expenses
With this, the above format will appear thus
format 2 of manufacturing account


Example 1
PRODUCTION COST OF GOODS COMPLETED
The production cost of goods completed is also called production cost of goods manufactured.
It is transferred to the income statement to take the place of purchases. In other words, it is debited to the trading and profit or loss account. The reason for this is that since the manufacturing firm produces goods and sells them itself, we do not expect it to purchase goods for resale. For this reason, the production cost of goods completed is taken as purchases in the income statement.
However, in some cases where the manufacturing firm runs out of stock, it may be necessary to buy some goods from other firms for resale. In this case, we have purchases of finished goods.
Example 2

Example 3

WORK – IN – PROGRESS
In some cases, the production or manufacturing of a product may not have been completed before the company’s accounting year-end. That is the goods will have been partly produced. Where this happens, the total cost of the partly manufactured goods are determined and treated in the account as work-in-progress. Again, the work-in-progress may happen in two forms – one that was partly manufactured in the previous year and the one that is partly manufactured in the current year.
The value of goods partly manufactured brought forward from previous year is called opening work-in-progress and it is added to the production cost before. The value of work-in-progress for the current year is called the closing work-in-progress and it is deducted from the production cost of goods completed.
MARKET VALUE OF GOODS MANUFACTURED
In the previous instance shown, the production cost of goods manufactured is transferred to the income statement (profit or loss account) at cost and treated in the same manner as purchases for the period. To be realistic, the firm could have paid a higher price for same goods if it had chosen to buy the goods from other entity or person. To bring this fact into consideration, the manufacturing firm will have a mark-up predetermined by the management of the firm. This mark-up is the profit on the manufacture of those goods.

TREATMENT OF MARK-UP
The mark-up is debited (charged) to the manufacturing account and credited to the income statement (profit or loss account). In other words, the mark-up is added to the production cost of the goods completed and taken as profit element in the income statement.

Example 4

FINAL ACCOUNT OF A MANUFACTURING COMPANY
In a manufacturing firm, the final account will include the manufacturing account as an addition to final account of trading firm.
Example 5



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