UNIT 15 MANUFACTURING ACCOUNT

Structure
15.0 Objectives
15.1 Introduction
15.2 Cost of Goods Produced (Cost of Production)
15.3 Form of Manufacturing Account
15.4 Form of Trading Account of a Manufacturing Concern
15.5 Trading Account without Manufacturing Account
15.6 Let Us Sum Up
15.7 Key Words
15.8 Some Useful Books
15.9 Answers to Check Your Progress
15.10 Terminal Questions/Exercises

15.0 OBJECTIVES

After studying this unit you should be able to:

ascertain the cost of goods produced
prepare a manufacturing account
prepare a trading account of a manufacturing concern

15.1 INTRODUCTION
'
In Unit 14 we discussed about the Trading Account of firms engaged in trading activity only.
Such concerns, called trading concerns, can find out the cost of goods sold and the gross
profit by preparing a Trading Account directly. But a manufacturing concern has to find out
the cost of goods produced before it can work out the cost of goods sold and the gross profit.
So the manufacturing concerns first prepare Manufacturing Account for finding out the cost
of goods produced (also called Cost of Production), and then prepare a Trading Account to
ascertain the cost of goods sold and the gross profit. In this unit we shall discuss how to
ascertain the cost of goods produced and how to prepare the Manufacturing and Trading
Accounts of a manufacturer.

15.2 COST OF GOODS PRODUCED (COST OF

PRODUCTION)

As stated above, a manufacturing concern has to work out the cost of goods produced (cost
of production) before finding out the cost of goods sold and gross profit. Let us now learn
how the cost of goods produced is ascertained. The manufacturing concerns purchase raw
materials from the market and convert them into finished goods for sale. For example, a
cotton textile mill buys cotton (raw material) and convert it into cloth in its factory.
Similarly, a sugar mill purchases sugar cane (raw material) and produces sugar. Thus the
cost of goods produced includes two major costs: (i) cost of raw materials consumed, and
(ii) cost of conversion. These are explained below.
Cost of Raw Materials Consumed: The cost of raw materials consumed represents the cost
of raw materials used in the course of manufacture. When you worked out the cost of goods
sold (refer to Unit 14) you adjusted the costs of opening and closing stocks of finished goods
in the cost of goods purchased. Similarly, to work out the cost of raw materials consumed
you have to adjust the costs of opening and closing stocks of raw materials in the cost of raw
materials purchased. For example, a firm purchased raw materials worth Rs. 5,60,000 during
1987 and spent Rs. 5,400 on freight, cartage, etc..The stock of raw materials on January 1,
) Rs. 80,000 and on December 31, 1987 (closing stock) Rs. 90,000.
1987 (opening s t o ~ kwas
Final Accounts-1 The cost of raw materials consumed during 1987 will be worked out as under:
Rs.
Opening Stock of Raw Materials 80,000
Add Purchases of Raw Materials
during the year .
Expenses on Purchases
(freight, cartage, etc.)

Less Closing Stock of

Raw Materials

Cost of Raw Materials Consumed

Cost of Conversion: This includes all expenses incurred in the factory for converting raw
materials into finished goods. Examples are wages paid to workers who are directly
involved in the production of goods (called manufacturing wages or productive wages),
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motive power (steam, electricity or gas consumed in the course of manufacturing), coal, gas
and water, oil and grease, etc. Factory rates and taxes, factory lighting, factory insurance,
repairs to factory building, repairs to plant and machinery, depreciation on factory building,
depreciation on plant, and other factory expenses are also treated as manufacturing
expenses. These are debited to the Manufacturing Account along with the expenses incurred
on purchases of raw materials such as freight, import duty, dock dues, clearing charges, etc.
For caloulating the cost of goods produced there are two more items that are taken into
account. These are (i) scrap, and (ii) Work-in-Progress. Let us understand their meaning and
relevance to cost of production.
Scrap: Scrap is waste material coming out of the manufacturing processes. For example,
cuttings of cloth in ready-made garment factory, metal cuttings in engineering factories, etc.
Any amount realised from its sale should be treated as income and adjusted in the cost of
goods produced.
Work-in-progress: It is quite likely that at the end of the year there may be certain goods
which are still in the process of manufacture. In other words, some work still remains to be
completed in respect of these goods. Take the case of a furniture manufacturer. He may have
some chairs and tables which are still to be polished. Such goods in respect of which the
work is incomplete as at the end of the year are called 'semi-finished goods' or 'work-in
progress'. The cost of semi-finished goods or work-in-progress as at the end of the year
should also to be taken into account while working out the cost of goods produced. It is done
by deducting the cost of semi-finished goods from the total costs incurred during the year.
Just as you have sonie semi-finished goods as at the end of the year, you may have some
semi-finished goods at the beginning of the year. Such goods will be completed and sold
during the current year. So, the cost incurred on them during the previous year should also
be taken into account for the purpose of finding out the cost of all goods completed during
the current year. Therefore, we add the cost of opening work-in-progress to the costs
incurred during the year and deduct therefrom the cost of closing work-in-progress.
Now let us see how cost of goods produced will be worked out after taking into account all
the above items. The following statement will make this clear to you.
Rs.
Cost of Raw Materials Consumed
Add Manufacturing Expenses
.......... ..........
.......... ..........
.......... ..........
--

Less Sale Value of Scrap

Gross Cost of Goods Produced

Add Opening Stock of Work-in-progress

- Less: Closing Stock of Work-in-progress

Cost of Goods Produced
 Look at Illustration 1 and study how the cost of goods produced has been amved at. Manufacturing Account

Illustration 1
The following figures have been extracted from the books of a manufacturing concern. Find
out the Cost of Goods Produced during the year ended December 31, 1987.

Rs.
Stock on January 1, 1987
Raw Materials
Work-in-progress
Stock on December 31,1987
Raw Materials
Work-in-progress
Purchases of Raw Materials
Carriage Inwards
Direct Wages
Motive Power
Depreciation on Machinery

Solution Rs.
Opening Stock of Raw Materials 10,000
Add Purchases of Raw Materials 50.000
Add Carriage Inwards 5,000

Less Closing Stock of Raw Materials.

Cost of Raw Materials Consumed
AddWages
~ o t i v Power
e
Depreciation on Machinery
Gross Cost of Goods Produced
Add Opening Work-in-progress

Less Closing Work-in-progress

Cost of Goods Produced
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Check Your Progress-A
I 1 What is Work-in-progress?

...............................................................................................................................................
2 What is Scrap?

3 Work out the cost of materials consumed from the following data.

Rs.
Opening stock of raw materials 8,000
Closing stock of raw materials 10,m
Purchases of raw materials 75,000
Cardage and freight inwards 7,000
4. Fill in the blanks.
. i) Opening work-in-progress is ........................ for calculating cost of goods produced.
ii) Closing work-in-progress-is ........................ for calculating cost of goods produced.
iii) Value of scrap is ........................ for calculating cost of goods produced.
iv) Depreciation on ........................ is also taken into account for calculating cost of
goods produced.
V) Cost of goods produced is also called .........................
5 Name two items which can be regarded as manufacturing expenses.

15.3 FORM OF MANUFACTURING ACCOUNT

You have already learnt how cost of goods produced can be worked out.by preparing a
statement. You will now learn how a manufacturing concern prepares the Manufacturing
Account for ascertaining the cost of goods produced (cost of production). Look at Figure
15.1 and study the form of Manufacturing Account and see how various items related to cost
of production appear in the Manufacturing Account.
Figure 15.1
Manufacturing Account of ............
for the period ended ..........
Dr. Cr.

Particulars Particulars 1 Amount Amount

Rs. Rs.
To Work-in-progress at By Sale of Scrap ...
the beginning By Work-in-progress ...
To Raw Materials Consumed: at the end
Opening Stock of
Raw Materials By Cost of Goods
Add Purchases of Produced (transferred
Raw Materials to Trading Account)

Less Closing Stock

of Raw Materials
To Carriage Inwards
To Freight, Import
Duty. Dock Dues, etc. ...
To Manufacturing Wages
To Motive Power
To Coal, Gas and Water
To Oil, and Grease
To Factory Lighting
& Heating
To Factory Insurance
To Repairs to Factory Building
To Repairs to Plant I
and Machinery
To Depreciation on Factory 1.

Buildings
To Depreciation on
Plant and ~achibery

...
-
 Let us now prepare the Manufacturing Account from the figures given in Illustration 1. Manufacturing Account

Manufacturing Account of .........

for the year ending December 31,1987

Dr. Cr.

Particulars Amount Amount Particulars Amount Amount

Rs. Rs. Rs. Rs.
- To Work-in-progress
at the beginning I I 59000 I1 By Work-in-progress
at the end
I I
To Raw Materials I I I
By Cost of Goods
Consumed: I I Produced I I
Opening Stock (transferred to
Add Purchases of Trading Account)
Raw Materials

Less Closing Stock

To Carriage Inwards
To Direct Wages
To Motive Power
To Depreciation on Machinery

After studying the form of Manufacturing Account as given in Figure 15.1 and the
Manufacturing Account as prepared above, you will observe the following points:
i) All items of expenses have been shown on the debit side and income from scrap on the
credit side.
ii) The heading of Manufacturing Account, as in case of Trading Account, indicates the
name of the firm and the period of which it is prepared.
iii) Opening and closing stocks of rqw materials have been adjusted in the cost of raw
materials Consumed on the debit side itself.
iv) Opening stock of work-in-progress has been shown on tht: debit side and closing work-
in-progress on the credit side.
v) Expenses on purchases of raw materials have been shown on the debit side separately.
They are adjusted in the cost of raw materials consumed.
vi) Cost of production has been shown on the credit side which makes the totals on both
sides equal. Thus, cost of production is the excess of the debit side total over the credit
side total.

Illustration 2
From the following balances prepare the Manufacturing Account of Mohan for the year
ended March 31, 1987.

Rs.
Work-in-progress
April 1, 1986
March 31, 1987
Materials consumed
Sale of Scrap
Productive Wages
Camage Inwards
Power
Other Factory Expenses
Final Accounts-1 Solution
Manufacturing Account of Mohan
for the year ended March 31,1987
Dr. Cr.
---
Particulars ]-~mount 1 hrtlculnrs Amount Amount
Rs. Rs.

To Work-in-progress By Sale of Scrap 2,500

at the beginning By Work-in-progress
To Materials Consumed at the end 7.800
To Carriage Inwards By Cost of Goods Produced
To Productive Wages (transferred to
To Power Trading Account)
To Other Factory Expenses

15.4 FORM OF TRADING ACCOUNT OF A

MANUFACTURING CONCERN

After preparing the Manufacturing Account, a manufacturer has to prepare the Trading
Account for working out Gross Profit or Gross Loss. The following is the form of the
Trading Account of a manufacturing concern.
Trading Accwnt of ..........
..............
for the period ended
Dr. Cr.

Particulars Amount Amount Particulars Amount Amount

-- -.

Rs . Rs. Rs. Rs .

To Opening Stock of By Sales of

Finished Goods Finished Goods
To Cost of Goods Produced
(transferred from
Manufacturing Account) ... Less Sales Returns
...
To Gross Profit By Closing Stock of
(transferred to Profit and Finished Goods ...
Loss Account) ...

You will notice that the Trading Account of the manufacturer shows fewer items as
compared to the Trading Account of a trader. It is because most of the direct expenses have
already been included in the Manufacturing Account. The Trading Account now shows only
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the cost of goods produced, opening and closing stocks of finished goods. and the net sales.
However, if the manufacturer also purchases some finished goods for resale directly from
the market, this can also be debited to the Trading Account. Look at Illustration 3. You will
understand more clearly the preparation of the Trading Account of a manufacturer.

Illustration 3
On December 3 1,1987, the following balances appeared in the books of Ravi:
Rs.
Balance on January 1, 1987
Raw Materials
Work-in-progress
Finished Goods
Purchases of Raw Materials
Freight Inwards
Manufacturing Wages
Import Duty
 Rs. Manufacturing Account
Dock Dues 1,200
Motive Power 5,000
Oil, Grease, etc. 300
Factory Insurance 500
Factory Rent 12,000
Repairs to Plant and Machinery 600
Depreciation on Plant and Machinery 3,000
Sales of Finished Goods 2.15.000
Sale of Scrap 2,800
Balances on December 31, 1987
Raw Materials 10,800
Work-in-progress 9,200
Finished Goods 32,000
Prepare the Manufacturing Account and the Trading Account for the year ended
December 3 1, 1987.
Solution
Manufacturing Account of Ravi
for the year ended December 31,1987

Dr. Cr.

Particulars Amount Amount Particulars Amount Amount

-
Rs. Rs. Rs. Rs.
To Work-in-progress By Sale of Scrap 2.800
at Commencement 10,600 By Work-in-Progress at the end 9,200
To Raw Materials Consumed:
Opening Stock 12,400 By Cost of Goods
Add Purchases 86,000 Produced (transferred
to Trading Account) 1.54.300
98,400
Less Closing Stock 10,800
- 87,600
To Freight Inwards 3,500
TOImpon Duty 6,000
To Dock Dues 1,200
To Manufacturing Wages 36,000
To Motive Power 5,000
' To Oil, Grease, etc. 300
To Factory Rent, 12,000
To Factory Insurance 500
To Repairs to Plant & Machinery 600
To Depreciation on
Plant & Machinery 3.000

Trading Account of Ravi

for the year ended December 31,1987
br.

Particulars Amount Particulars Amount Amount

.
To Opening Stock of
Finished Goods
To Cost of Goods
Rs

By Sales 1 Rs. Rs.

2.15,00

Manufacmred By Closing Stock of

Finished Goods
To Gross Profit
(transferred to Profit
and Loss Account)
Final Accounts-1
Check Your Progress-B
1 What for a Manufacturing Account is prepared?
, -
................................................................................................................................................
?

...............................................................................................................................................
...............................................................................................................................................
...............................................................................................................................................
2 Name the items shown in the Trading Account of a Manufacturer.

3 State whether the following are True or False. True False

i) Manufacturing Account is prepared in case of traders.
ii) Closing Stock consists of stocks of raw materials,
semi-finished goods and finished goods.
iii) Closing Stock of all items is shown in the
Manufacturing Account.
iv) Royalty based on production is shown in the
Manufacturing Account.
v) Sale of Scrap is shown on the debit side of the
Manufacturing Account.
vi) Repairs to Plant and Machinery are shown in the
Manufacturing Account.
vii) Repairs to Office Building are shown in the Profit and
Loss Account.
viii)Depreciation of Factory Building is shown in the
Profit and Loss Account.

15.5 TRADING ACCOUNT WITHOUT

MANUFACTURING ACCOUNT

Sometimes, you are asked to prepare only the Trading Account of a manufacturer without
preparing the Manufacturing Account. In that case, all expenses on purchases of raw
materials, the manufacturing expenses, the cost of raw materials consumed, and the opening
and closing work-in-progress are also shown in the Trading Account. In this case, it is
necessary to note the items like repairs to plant and machinery and factory building
are, conventionally, shown in the Profit and Loss Accobnt and not in the Trading
Account. Illustration 4 deals,with this type of a situation.

Illustration 4
From the following balances extracted from the books of Natarajan, prepare his Trading
Account for the year ended December 3 1,1987.
Rs.
Opening Stock 60,000
Purchases less Returns 2,25,000
Freight and Dock Charges 21,600
Direct Wages 30,000
Coal, Gas and water 13,600
Other Manufacturing Expenses 4,200
Repairs to Machinery 2,100
Depreciation on Machinery 4,000
Sales less Returns 3,56,000
Closing Stock was valued at Rs. 82,000
 Solution Manufacturing Account '

Trading Account of Natarajan

for the year ended December 31,1987
Dr. Cr.

Particulars Amount Amount

Rs. Rs.
To Opening Stock 3.56.00
To Purchases less Returns
Returns
To Freight and
Dock Charges
To Direct Wages
. To Coal. Gas and Water
To Other Manufacturing
Expenses
To Gross Profit
(transferred to Profit
and Loss Account)

Note: As already stated, the items of 'Repairs to Machinery' and 'Depreciation on Machinery' are to be shown
in the Profit and Loss Account because the Manufacturing Account is not being prepared in this case.

15.6 LET US SUM UP

1 Cost of production consists of (a) cost of materials consumed, and (b) cost of conversion
(all manufacturing expenses).
2 Manufacturing Account is prepired to find out the cost of goods produced (cost of
production).
3 Manufacturing Account is debited with the value of opening work-in-progress,cost of
raw materials consumed, expenses on purchases of raw materials and all manufacturing
expenses.
4 Sale of scrap and the closing work-in-progress are shown on the credit side of the
Manufacturing Account.
5 The balance of the Manufacturing Account represents the cost of the goods produced
during the period. It is transferred to the Trading Account.
6 After ascertaining the cost of goods produced, Trading Account is prepared to find out
the Gross Profit and Gross Loss:

15.7 KEY WORDS --

Cost of Production: It is the cost of goods produced which includes cost of raw materials
consumed and all manufacturing expenses.
Manufacturing Account: An account prepared for ascertaining the cost of production.
Manufacturing Expenses: Expenses incurred in the factory for converting raw materials into
finished goods.
Scrap: Waste material which arises in the course of manufacture.
vork-in-Progress: Goods in respect of which some work still remains to be done. It is also
called semi-finished goods.

15.8 SOME USEFUL BOOKS '

Grewal, T.S. 1987. Double Entry Book-keeping, Sultan Chand & Sons: New Delhi.
(Chapter 8)
Final Accounts-1 Maheshwari, S.N. 1986. Principles and Practice of Accountancy, Arya Book Depot: Delhi
(Chapter 13)
Patil, V.A. and Korlahalli, J.S. 1988. Principles and Practice of Book-keeping, R. Chand &
Co: Delhi. (Chapter 17)

15.9 ANSWERS TO CHECK YOUR PROGRESS

A 3 Rs. 80,000
4 (i) added (ii) deducted (iii) deducted (iv) machinery
(v) cost of production
B 3 (i) False (ii) True (iii) False (iv) True
(v) False (vi) True (vii) True (viii) False

* 15.10 TERMINAL QUESTIONSIEXERCISES

Questions
1 Describe briefly how the cost of goods produced can be ascertained.
How do you deal with the following items in the Final Accounts of a manufacturer?
Explain the nature of each item. State whether it is debited or credited to the
Manufacturing Account or the Trading Account.
a) Coal, Gas and Water
b) Dock Dues and Clearing Charges
c) Work-in-Progress
d) Purchases of Finished Goods
e) Purchases Returns of Raw Materials
f) Sales Returns
g) Opening and Closing Stock of Finished Goods

Exercises
1 From the following balancesextracted from the books of Naresh, prepare
Manufacturing Account and Trading Account for the year ended March 31, 1987.

Rs.
Stock on April, 1986
Raw Materials
Semi-finished Goods
Finished Goods
Purchases of Raw Materials
Purchases Returns
Carriage Inwards
Sales
1,90,000
Sales Returns
Direct Wages
Power
Factory Heating and Lighting
Depreciation on Machinery
Depreciation on Factory Building
Sundry Factory Expenses
Stock on March 3 1, 1987
Raw Materials
Semi-finished Goods
Finished Goods
(Answer: Cost of s bods ~rbducedRs. 1,04,400; Gross Profit Rs. 84,600)

2' From the following balances, you are required to prepare the Manufacturing Account
and Trading Account of Shantilal for the year ended September 30, 1987.
 Rs. Manufacturing Account
Balances on October 1, 1986
Raw Materials
Work-in-progress
Finished Goods
Purchases of Raw Materials
Freight
Octroi
Wages
Motive Power
Repairs to Machinery
Factory Rent & Taxes
Sale of Scrap
Depreciation on Machinery
Sundry Manufacturing Expenses
Sales of Finished Goods
Balances on September 30, 1987
Raw Materials
Work-in-progress
Finished Goods
(Answer: Cost of Goods Produced Rs. 2,09,200, Gross Profit Rs. 1,30,800)

3 Prepare Trading Account for the year ended December 3 1, 1987, from the books of
M. Mukherjee.
Rs.
Stock on January 1, 1987 13,600
Purchases 89,200
Carriage 8 ,ooO
Sales
2,34,100
Returns Inwards 1,400
Returns Outwards 1,200
Wages 24,000
Fuel and Power 12,600
Sundry Factory Expenses 6,800
Stock on December 3 1, 1987 14,500
(Answer: Gross Profit Rs. 94,200)

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Note: These questions and exel-cises will help you to understand the unit better. Try
to write: answers for them. But, do not send your answers to the University for
evaluation. These are for your practice only.