The manufacturing account is an account in the general ledger which is used to accumulate all the manufacturing costs of goods completed by a business during an accounting period.
For a manufacturing business the manufacturing account needs to be prepared before completing the trading and profit and loss accounts.
Manufacturing Account Formula
The manufacturing cost of goods completed for an accounting period is calculated using the cost of goods manufactured formula as follows.
| Raw material purchases |
| + Beginning raw material inventory |
| – Ending raw material inventory |
| = Raw materials consumed |
| + Direct labor |
| + Direct expenses |
| + Beginning WIP inventory |
| – Ending WIP inventory |
| + Manufacturing overhead |
| = Cost of goods manufactured |
In the formula raw material purchases is equal to the gross raw material purchases of the business including carriage inwards less any purchase returns, allowances, and discounts. To be classified as direct it must be possible to easily identify, track or count the materials to a particular unit of production.
Direct labor is the gross wage cost of all the labor associated with manufacturing products. The labor included must relate to those employees who are directly working on the products being produced. As with materials it must be possible to easily identify, track or count the labor to a particular unit of production.
Direct expenses are costs other than direct materials or labor which can be directly associated with units of production. An example of a direct cost would be a royalty cost paid on each product.
The adjustment for work in process inventory is necessary as the purpose of the account is to show the manufacturing cost of goods completed during the accounting period regardless of when they started in production.
Manufacturing overhead is all the other costs necessary to run the manufacturing operation but which cannot be directly associated with the product such as indirect labor, indirect materials, and other indirect manufacturing costs.
The use of the formula is summarized in the diagram below.
How to Prepare Manufacturing Account
The manufacturing account is prepared by closing the temporary cost accounts and adjusting the raw materials (RM) and the work in process (WIP) inventory accounts using a closing journal entry as shown below.
| Account | Debit | Credit |
|---|---|---|
| Raw material purchases | 35,000 | |
| Beginning RM inventory | 4,000 | |
| Ending RM inventory | 6,000 | |
| Direct labor | 50,000 | |
| Direct expenses | 4,000 | |
| Beginning WIP inventory | 9,000 | |
| Ending WIP inventory | 11,000 | |
| Manufacturing overhead | 20,000 | |
| Manufacturing account | 105,000 | |
| Total | 122,000 | 122,000 |
Each cost account is closed and the balances transferred to the manufacturing account. In addition the inventory accounts are adjusted to reflect the beginning and ending balances. The balancing debit entry to the manufacturing account of 105,000 represents the manufacturing cost of goods completed during the accounting period.
Example of Manufacturing Account
After the closing journal entry has been posted the ledger manufacturing account would take the format shown in the example below.
| Manufacturing Account | ||||
|---|---|---|---|---|
| Debit | Credit | |||
| RM purchases | 35,000 | |||
| Beginning RM inventory | 4,000 | Ending RM inventory | 6,000 | |
| Direct labor | 50,000 | |||
| Direct expenses | 4,000 | |||
| Beginning WIP inventory | 9,000 | Ending WIP inventory | 11,000 | |
| Manufacturing overhead | 20,000 | |||
| Balance c/d | 105,000 | |||
| Total | 122,000 | Total | 122,000 | |
| Balance b/d | 105,000 | |||
For clarity, in this example each line item is posted to the general ledger manufacturing account. The debit balance brought down of 105,000 represents the manufacturing cost of goods completed for the accounting period.
Manufacturing Account in Final Accounts
In the final accounts the manufacturing account is usually presented in a more readable format. Assuming the figures relate to the month ended 31 December an example of a account might appear as follows.
| Raw materials | 35,000 | |
| Beginning RM inventory | 4,000 | |
| Ending RM inventory | -6,000 | |
| Raw materials consumed | 33,000 | |
| Direct labor | 50,000 | |
| Direct expenses | 4,000 | |
| Prime cost | 87,000 | |
| Manufacturing overhead | 20,000 | |
| 107,000 | ||
| Beginning WIP inventory | 9,000 | |
| Ending WIP inventory | -11,000 | |
| Change in WIP inventory | -2,000 | |
| Manufacturing cost | 105,000 |
Again the account shows the total manufacturing cost of goods completed during the accounting period of 105,000.
In addition the manufacturing account format used in this example shows the cost of the raw materials consumed and the prime cost of manufacturing the products for the accounting period.
Difference Between Manufacturing and Trading Account
The manufacturing account accumulates costs of production and is only used by a manufacturing business. The trading account is used to determine the gross profit on finished goods and is used by both trading and manufacturing businesses.
Manufacturing Account Closed to the Trading Account
For a manufacturing business the balance brought down from the manufacturing account represents the manufacturing cost of goods completed (finished goods) for the accounting period. This cost is transferred to the trading account using a closing journal entry and is the equivalent to the purchases amount used by a merchandising or trading business.
| Account | Debit | Credit |
|---|---|---|
| Trading Account | 105,000 | |
| Manufacturing Account | 105,000 | |
| Total | 105,000 | 105,000 |
The credit entry to the manufacturing account clears the balance on the account and transfers the cost to the trading account of the business.
Manufacturing Trading Profit and Loss Account Format
The trading profit and loss account of a manufacturing business is similar in format to that of a merchandising business except that purchases is replaced by the manufacturing cost of goods completed.
| Net sales | 200,000 | |
| Manufacturing cost of finished goods | 105,000 | |
| Beginning finished goods inventory | 18,000 | |
| Ending finished goods inventory | -16,000 | |
| Cost of goods sold | 107,000 | |
| Gross profit | 93,000 | |
| Expenses | 75,000 | |
| Other income | 7,000 | |
| Net profit | 25,000 |
The use and preparation of the trading and profit and loss accounts are more fully discussed in our trading profit and loss account post.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.