Manufacturing Account Format

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.

Cost of goods manufactured formula
   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.

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.

Manufacturing account closing journal entry
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 after closing journal entry
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.

Manufacturing account for the month of December 31 2017
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.

Closing journal entry
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.

Manufacturing trading profit and loss account for the month of December 31 2017
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.

Manufacturing Account Format August 16th, 2018Team

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