What is a Manufacturing Account? Meaning, Features, and More.

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There are only two types of sellers of goods in the market, one is manufacturers, and the other is traders. The manufacturer produces finished goods, and the trader deals with the finished goods. A seller can be both a manufacturer and a trader because one who manufactures also trades. Any seller who is involved from preparing raw materials to producing finished goods is called a manufacturer.

Whatever goods are available in the market, they are mainly raw materials, semi-finished goods, and finished goods and these are exchanged. The manufacturer obtains or prepares raw materials, semi-finished goods, etc., and converts them into finished goods, in which he has to bear various types of expenses like labour charges, land, machinery, electricity charges, etc.

It is very important for the manufacturer to manage the expenses incurred in the production of finished goods because, without expense management, one cannot know how much has been spent in the production of finished goods. All the economic activities taking place in the process of producing finished goods are recorded in the manufacturing account and the cost is calculated. If any manufacturer wants to systematically trace the expenses incurred in manufacturing goods, he can prepare Manufacturing Account.

What is a Manufacturing Account?

Manufacturing account is a financial statement of a business and shows all the economic activities related to the manufacturing of finished goods and semi-finished goods. It is also known as production account. It is used to calculate the cost of production or the cost of manufacturing. It is a nominal account due to which all the expenses related to manufacturing are recorded on the debit side and all the income during manufacturing is recorded on the credit side.

If opening stock of raw material and work in progress is available, then it is recorded on the debit side and if closing stock of raw material and work in progress is available then it is recorded on the credit side. After recording all the related transactions, the cost of production or cost of manufacturing is arrived at and transferred to the trading account. It is not mandatory to prepare manufacturing account as it is prepared only to calculate the cost of production. Whether to prepare it or not depends entirely on the business.

Features of Manufacturing Account

Following are the features of manufacturing account:

1. Financial Statement:

Manufacturing account is the financial statement of a manufacturing business as it shows a summary of the expenses and income incurred during manufacturing. It is a part of the financial statements which include Balance Sheet, Profit and Loss Account, Trading Account, Manufacturing Account, Cash Flow Statement, etc. The definition of financial statements may differ from business to business. This is the first financial statement for a manufacturing business.

2. Manufacturing Expenses and Income:

Manufacturing Account only shows data of manufacturing expenses and income as it is used to calculate manufacturing cost. Manufacturing expenses include purchase of raw materials, labour, carriage, rent, electricity, factory insurance, repairs, maintenance, depreciation, etc. and manufacturing income includes sale of scrap, etc. Both help in determining the manufacturing cost.

3. Nominal Account:

Manufacturing account is a nominal account due to which all the expenses are recorded on the debit side and all the income is recorded on the credit side. In the manufacturing account, only those transactions are recorded that are involved in the manufacturing process like purchase of raw materials, wages, carriage, sale of scrap, etc. All transactions relating to finished goods are recorded in the trading account and profit and loss account.

4. Cost of Manufacturing:

The main feature of the manufacturing account is to calculate manufacturing cost or production cost. For this, all the manufacturing expenses, opening stock, etc. are recorded on the debit side and all the manufacturing income, closing stock, etc. are recorded on the credit side, then whatever remains on the credit side is called manufacturing cost or production cost. The manufacturing cost is transferred to the trading account so that trading can be done.

5. Price Determination:

Manufacturing account helps in determining the price of the product as it provides the cost of manufacturing the product. The main reason for preparing manufacturing account is to calculate the cost so that the price of the product can be determined accordingly. All transactions related to the manufacturing process are recorded in the manufacturing account to calculate the manufacturing cost. Manufacturing account results may be incomplete.

6. Help in Planning:

Manufacturing account helps management in planning as it provides all the data related to manufacturing. Management can use manufacturing accounts to make various types of decisions such as how to reduce the cost of the production, which costs are being wasted, which costs can be reduced, etc. Every transaction that occurs in the manufacturing process affects future transactions of the goods, so a decision taken now can have an impact in the future.

Read Also:

• Objectives of Manufacturing Account
• Format of Manufacturing Account
• Contents of Manufacturing Account

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