A manufacturing account is prepared in addition to the trading and profit and loss accounts. It is produced for internal use, mainly for the owners and managers of organisations.
DIVISION OF COSTS
Costs in a manufacturing business are divided into different types. These can be defined as Prime Costs and Production Costs.
Cost of Production = Prime Cost + Factory Overheads+ Opening Work in Progress- Closing Work in Progress.
A direct cost is known as a prime cost,
- direct materials
- direct labour
- direct expenses.
If a cost cannot easily be traced to the item being manufactured, then it is an indirect cost and will be included under indirect manufacturing costs.
Examples of Indirect Costs:-
- Wages to Cleaners
- Rent of a factory
- Factory lighting
- Factory Power
Administration expenses include manager and administrative salaries, legal and accountancy fees, depreciation of machinery.
Selling and distribution expenses include sales staff salaries and commission, carriage outwards, depreciation of delivery vans, promotion and display expenses.
Financial charges include expenses items such as bank charges and discounts allowed, bad debts.
Administration expenses, selling and distribution expenses and financial charges are charged to the Profit and Loss account part of the manufacturing account.
Rent can be allocated as following in the manufacturing account:- Ø Selling and Distribution
- Factory Part
- Administration Buildings
Only one figure of rent may be paid, and can be apportioned using a range of methods including Ø Floor area
- Property valuations of each part of the buildings and land