The compilation of these Financial Statements Notes makes students exam preparation simpler and organised.
Manufacturing Account
The main aim of accounting is to arrange accounting data in order to ascertain the amount of profit or loss of an entity. For this purpose, we prepare the financial statements. The primary purpose of preparing the Manufacturing Account format is to ascertain the manufacturing costs of finished goods.
Non-manufacturing entities or trading entities are involved in the purchase and sale of goods at a profit. Usually, Manufacturing entities prepare a Manufacturing Account also in addition to Trading Account, Profit and Loss Account, and Balance Sheet.
Manufacturing Account Format
The manufacturing account helps to better the cost-effectiveness of manufacturing activities. After the ascertainment of the costs of finished goods, we need to transfer this cost to Trading Account.
The trading account shows Gross Profit. Whereas, the Manufacturing Account depicts the cost of goods sold and also includes direct expenses. The manufacturing account addresses the raw material and work in progress and does not deal with the finished goods.
We debit all the direct production expenses such as depreciation on plant and machinery and factory building, repairs on plant and machinery and factory building, salary to the factory manager, wages, cartage on raw materials, etc.
Thus, the cost of finished goods includes the cost of raw materials and all direct expenses. All indirect expenses form a part of the Profit and Loss A/c.
However, there is no standardized format of a Manufacturing Account. The following format covers various elements:
Manufacturing Account
For the year ended…
Points to remember:
- In the absence of ledger balances like Inventories, quantity manufactured etc, we need to calculate the figures for Inventories, sales, etc. from the available data.
- The Manufacturing Account format must show the quantities and values.
- Units sold = Opening inventory + units manufactured- closing inventory
- In the absence of specific information, we always assume a “first in-first out” basis, for closing inventory valuation.
Example:
Question:
Mr. Prasad runs a factory which produces caps. Following are the details available in respect of his manufacturing activities for the year ended on 31.03.2018
Prepare a manufacturing Account of Mr. Prasad for the year ended 31.03.2018.
Answer:
In the Books of Mr. Prasad
Manufacturing Account for the year ended 30.03.2018
Working Notes:
Direct Wages = 260000 units @ ₹ 0.70 = ₹ 182000
5,000 units @ ₹ 0.30 = ₹ 1500
Total = ₹ 183500
Hire charges on machinery = 260000 unit @ ₹ 0.50 = ₹ 130000