MANUFACTURING ACCOUNTS Manufacturing simply means the conversion or transformation of raw materials into finished goods.Manufacturing accounts therefore are the final accounts prepared by business organizations which are engaged in the manufacturing of goods for sale. They are prepared by business organizations which are engaged in the manufacturing of goods for sale. They are prepared to ascertain the cost of goods manufactured during the financial year. PURPOSE OF MANUFACTURING ACCOUNT The purpose of manufacturing accounts are: 1.Toascertain the cost of the goods manufactured 2.To ascertain the amount of any profit on the manufacturing process. COST COMPONENTS/ COST CLASSIFICATION Certain costs make up the manufacturing account. Such costs include: 1.Cost of raw materials consumed 2.Direct costs 3.Indirect costs 4.Prime cost 5.Cost of work-in-progress 6.Cost of finished good 7.Selling and distribution cost. 1.Cost of raw materials consumed:This is the cost of raw materials which have been used up in the manufacturing process. This will be found by: a.Taking opening inventory of raw materials b.Adding purchases of raw materials c.Deducting closing inventory of raw materials There are two kinds of materials: a.Direct materials:These are materials which can be directly traced to, or identified with a product e.g. flour of a loaf of bread and limestone in a cement. b.Indirect Materials:These are also raw materials used in production but cannot be directly traced to, or identified with a product. Note that the cost of raw material used during a period will include the cost of raw materials purchased as well as the cost of carriage inwards. 2.Direct Cost:This is any cost directly incurred that can be traced to the number of units produced. Such costs include direct labour and direct expenses. a.Direct labour:Direct labour is the mental or physical efforts put into production. The reward of such inputs is known as direct or manufacturing wages e.g. Machine operators. b.Direct Expenses:These are expenses which have direct identification with production e.g. royalties. 3.Indirect Cost:This is any cost which cannot be traced directly to the units of goods produced. It is also referred to as production or factory overhead. It covers several units of production. It can also be subdivided into indirect labour and indirect expenses.
4.Prime cost:These are costs that can be traced to a particular production unit. They are directly related to the manufacturing process. These are: i.Direct material ii.Direct labour iii.Direct expenses iv Other direct expenses 5.Cost of work in progress:These are costs of goods which are partly completed and are in various stages of production. They are neither raw materials nor finished goods and so, could be referred to as Semi finished goods. 6.Cost of finished goods:This is the total cost incurred in turning raw materials into finished goods. It includes various costs at various stages of production e.g. cost of raw materials, cost of labour, direct and indirect expenses and work in progress. It is also referred to as cost of production or cost of goods completed. 7.Administrative expenses:These are expenses incurred outside manufacturing. They are charged to the statement of profit or loss e.g. Office rent and rates, Managers' salary, Depreciation of office equipment etc. 8.Selling and distribution cost:These expenses are also incurred outside manufacturing and are charged to statement of profit or loss. They are incurred in the course of selling and distributing the finished goods e.g., advertising, carriage outwards, discount allowed, depreciation of delivery van, sales men salary etc. 9.Total cost:This is the total cost of production plus administrative cost plus selling and distribution cost
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