The trading firms prepare the Trading Account, Profit and Loss Account and Balance Sheet. Whereas, the manufacturing firms need to prepare the Manufacturing Account also in addition to these three mentioned above. The Manufacturing Account ascertains the manufacturing costs of the finished goods. We will now discuss the Manufacturing Cost Calculation below.
Manufacturing Cost Calculation
It is the aggregate amount of cost that a business incurs in a particular period of time.
- Manufacturing cost is the same as the cost of goods sold. Thus, the entire amount of this cost is a charge to expenses of that period.
- We charge some amount of this cost to expenses whereas we allocate some to goods produced in that period. Hence, we show that amount as inventory in the Balance sheet.
Manufacturing Costs are classified as below
|Direct materials or raw materials consumed||xxx|
|+ Direct Manufacturing Wages||xxx|
|+ Direct Manufacturing Expenses||xxx|
|+Indirect Manufacturing Expenses or Overhead||xxx|
|Total manufacturing cost||xxx|
Further details about the components of manufacturing cost are
1. Direct materials or Raw materials consumed
|Opening inventory of raw materials||xxxx|
|Less: Closing inventory of raw materials||xxxx|
|Raw materials consumed||xxxx|
Learn more about Balance Sheet here in detail.
Goods remaining unfinished at the beginning and at the end of that accounting period, we show the cost of such unfinished goods (also known as work-in-progress) in manufacturing account as-
|To opening work-in-progress||xxx||xxx||By closing work-in-progress||xxx||xxx|
Thus, we will debit opening work-in-progress and will credit closing work-in-progress to Manufacturing account.
2. Direct Manufacturing Wages
3. Direct Manufacturing Expenses
Direct manufacturing expenses are costs which are other than the cost of material and wages. These expenses are attributable to a specific product or service. For example:
- Cost of freight paid,
- The material used to construct a product for sale,
- Commission and payroll taxes related to the sale of goods and services, etc.
4. Indirect Manufacturing Expenses or Overheads
Overheads are the total cost of indirect material, indirect wages or labor and indirect expenses.
Understand the concept of Trading Account here in detail.
Overhead = Indirect materials + Indirect wages + Indirect expenses
Indirect materials are those materials which are not directly linked with the production of product or service.
Example: small tools, fuel, and lubricants, stores consumed for repair and work maintenance.
Indirect wages is the amount which is paid to the people who are indirectly linked to the production of goods.
Example: wages for maintenance work, holding pay, etc.
Indirect expenses are expenses which are indirectly linked with the production.
Example: depreciation on plant and machinery, rent, training expenses, etc.
A By-product is the secondary or subsidiary product obtained from the main product. It has its own value at the time of sale. These products do not incur any additional cost or expenses.
Examples of a by-product are:
- Molasses is the by-product of sugar manufacturing.
- Buttermilk is the by-product of a dairy which produces butter and cheese.
- Fuel, gas, kerosene are by-products of crude oil, etc.
Amount from the sale of the by-product is recognized as other income or as a reduction in the value of the main product but the correct treatment will be to credit the sales value of by-product to manufacturing account to reduce the cost of the main product to that extent.
Solved Example For You
Q. Calculate the Total Manufacturing Cost.
Number of units produced 10,000
|Direct labor||Rs. 5 per unit|
|Indirect labor||Rs. 20,000|
|Direct material||Rs. 10 per unit|
|Indirect material||Rs. 40,000|
|Direct expenses||Rs. 3 per unit|
Calculation of total manufacturing cost:
|Raw materials (10,000 @ 10 per unit)||1,00,000|
|Add: direct wages (10,000 @ 5)||50,000|
|Add: direct expenses (10,000 @3)||30,000|
|Add: indirect manufacturing expenses|
|Total manufacturing cost||2,70,000|