How to prepare the Manufacturing Account

Cost Accounting

What you need

• A trial balance or cost list showing opening and closing raw material stock, purchases of raw materials and carriage inwards.
• Direct cost details: direct labour (direct wages) and direct expenses such as royalties or contract work charges.
• A list of factory overheads such as indirect labour, factory rent, depreciation of machinery, factory insurance and factory electricity.
• The value of work in progress (WIP) stock at the beginning and end of the period.

Step by step

1. 1

   Gather the data and understand the vertical format

   Separate every cost into three groups: direct costs (raw materials, direct wages, direct expenses), factory overheads (indirect costs), and work-in-progress stock. The example is Perniagaan Setia, a furniture factory, for the year ended 31 December. A Manufacturing Account is usually set out vertically: the top calculates prime cost, followed by overheads, and finally an adjustment for work in progress to reach the production cost.

2. 2

   Calculate the cost of raw materials used

   Apply the formula: Opening raw material stock + Purchases of raw materials + Carriage inwards − Closing raw material stock. For Perniagaan Setia: RM8,000 + RM42,000 + RM2,000 − RM6,000 = RM46,000. Carriage inwards is added to purchases because it is the cost of bringing raw materials into the factory. This RM46,000 is the cost of raw materials used in production.

3. 3

   Work out the prime cost

   Prime cost is the total of all direct costs: Cost of raw materials used + Direct labour + Direct expenses. For Perniagaan Setia: RM46,000 + RM30,000 (craftsmen's direct wages) + RM4,000 (design royalty) = RM80,000. Prime cost must contain only costs traceable directly to the product; do not include any indirect cost at this stage.

4. 4

   Add the factory overheads

   Total every indirect cost incurred in the factory. For Perniagaan Setia: indirect labour RM10,000 + factory rent RM6,000 + depreciation of machinery RM4,000 + factory insurance RM2,000 + factory electricity RM3,000 = RM25,000. Then add this to prime cost: RM80,000 + RM25,000 = RM105,000. Factory overheads exclude office costs and selling costs.

5. 5

   Adjust for work in progress (WIP)

   Production cost = (Prime cost + Overheads) + Opening WIP − Closing WIP. For Perniagaan Setia: RM105,000 + RM5,000 − RM7,000 = RM103,000. Opening WIP is added because that work is completed this year, while closing WIP is subtracted because it is not yet finished. The result of RM103,000 is the production cost, or cost of goods manufactured.

6. 6

   Transfer the production cost to the Trading Account

   The production cost is transferred to replace purchases. The double entry is: Debit Trading Account RM103,000; Credit Manufacturing Account RM103,000. In the Income Statement (trading section), the RM103,000 is entered in the cost of sales area together with opening and closing finished goods stock, instead of a purchases-of-finished-goods figure used by an ordinary trader.

7. 7

   Check labels and consistency

   Make sure the three types of stock are not mixed: raw materials and WIP appear only in the Manufacturing Account, while finished goods stock appears in the Trading Account. Label each subtotal clearly (cost of raw materials used, prime cost and production cost) so the examiner can follow each stage and the working is easy to recheck.

Second example

Kilang Harmoni manufactures cabinets for the year ended 31 December. The cost of raw materials used is opening stock RM5,000 plus purchases RM30,000 less closing stock RM4,000, giving RM31,000 (there is no carriage inwards here). Adding direct wages RM20,000 and a royalty RM2,000 gives a prime cost of RM53,000. Building rent of RM12,000 is shared between the factory and the office in a 2:1 ratio, so only RM8,000 belongs to the factory; adding depreciation of machinery RM3,000 and indirect labour RM6,000 makes the factory overheads RM17,000. Prime cost plus overheads is therefore RM70,000. Finally, add opening WIP RM3,000 and subtract closing WIP RM5,000 to obtain a production cost of RM68,000. Notice that only RM8,000 of the rent enters the Manufacturing Account; the remaining RM4,000 is recorded as office expenses in the Income Statement.

Common mistakes

Related chapter: Cost Accounting →

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