1. Manufacturing accounts
ACC 206
Tobedza

2. What is manufacturing account?
• A manufacturing account is prepared in
addition to the income statement. It is
produced for internal use only. People other
than the owners and managers of the
organisation concerned rarely see a
manufacturing account.

3. Divisions of costs
In a manufacturing business the costs are divided
into different types.
Direct materials
Direct labour
Direct expenses
Plus
Indirect manufacturing costs
Plus
Administration expenses
Selling and distribution expenses
Financial charges
Prime cost
Production
cost
Total
cost
The prime cost item and the production cost item are shown in the
manufacturing account. The administration expenses, selling and
distribution expenses and financial charges appear in the income statement.

4. Direct and indirect costs
Direct costs (or prime cost) are costs that can be
traced to the item being manufactured. E.g. cost of
raw material including carriage inwards on those raw
material, hiring of special machinery for a job.
Indirect manufacturing costs (or indirect costs or
sometimes known as factory overhead expenses) are
those costs which occur in the factory or other place
where production is being done, but which cannot
easily be economically traced to the item being
manufactured. E.g. wages of cleaners, rent of factory,
factory power/lighting, depreciation of machinery, cost
of operating forklift trucks.

5. Administration expenses
• Administration expenses consist of such items
such as managers’ salaries, legal and
accountancy charges, the depreciation of
accounting machinery and secretarial salaries.

6. Selling and distribution expenses
• Selling and distribution expenses are items
such as sales staff’s salaries and commission,
carriage outwards, depreciation of delivery
vans, advertising and display expenses.

7. Financial charges
• Financial charges are expense items such as
bank charges and discount allowed.

8. From the explanation above, tick in the
appropriate column for each of the following
cost…

9.
Direct
material
Direct
labour
Direct
expenses
Indirect
manufacturing
costs
Administration
expenses
Selling and
distribution
expenses
Financial
charges
1).Purchases of raw
material
2).Direct wages
3).General factory
expenses
4).Depreciation of
machinery
5).Commission on
sales
6).Factory rent
7).Carriage inwards
of raw material
8).Royalties paid
9).Inventory of raw
material
10).Administration
salaries
11).Indirect labour
12).Bank charges
13).Carriage
outwards
14).Discount allowed
15).Factory lighting

10. Format of financial statements
• Manufacturing account section
– Put into series of steps by:
1. Add opening inventory of raw materials to purchases
and subtract the closing inventory or raw material
2. Add in all the direct costs to get the prime cost
3. Add in all the indirect manufacturing costs.
4. Add the opening inventory of work-in-progress and
subtract the closing inventory of work-in-progress to
get the production cost of all goods complete in the
period.

11. • Trading account section of the income
statement
– Includes
• Sales
• Less: COGS-Opening inventory of finished good
– Add: Production cost of goods complete b/d
– Less: Closing inventory of finished good
• =Gross profit

12. • Profit and Loss section of the income
statement
– Includes:
• All administration expenses
• Add all selling and distribution expenses
• Add all financial charges
• The gross profit then subtract by the total of the
calculation above. This calculation will become net
profit.

13. • Example and activity for manufacturing
account and income statement are provide in
the manufacturing account example & activity
document. (as a work sheet)