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Final Accounts for Sole Proprietors - Non-manufacturing

Manufacturing Cost Calculation

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

Particulars Amount
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

 

Manufacturing Cost Calculation

Further details about the components of manufacturing cost are

1. Direct materials or Raw materials consumed

Opening inventory of raw materials xxxx
Add: Purchases 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-

Particulars Units Amount Particulars Unit Amount
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

Direct manufacturing wages is that amount which is paid to the employees or workers who are directly involved in the production of goods.

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:

  1. Cost of freight paid,
  2. The material used to construct a product for sale,
  3. 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.

By-Products

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
Depreciation Rs. 25,000
Rent Rs. 5,000
Ans:

Calculation of total manufacturing cost:

Particulars Amount
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
Indirect material 40000
Indirect labor 20000
Depreciation 25000
Rent 5000 90,000
          Total manufacturing cost 2,70,000

 

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