Manufacturing costs

Introduction

Manufacturing accounts: are prepared by organizations which are engaged in the manufacturing process. It means that these organizations buy raw materials and convert that raw material into finished goods. Manufacturing account is produced for internal use only.

If a business is using manufacturing accounts instead of a figure for purchases the trading account will contain the cost of manufacturing the goods that were manufactured during the period. The manufacturing account is used to calculate and show the cost of manufacturing these goods. The figure it produces that is used in the trading account is known as the production cost.

Types of costs in manufacturing account

1. Prime cost: This is the cost of raw materials consumed, direct labor and other direct expenses.
2. Factory overhead cost: These are indirect expenses which are incurred. They include salaries of supervisors, factory power, rent rates, insurance and depreciation of the plant. They are also called factory overheads.
3. Work in progress: This is the cost of those items which remain incomplete at the end of an accounting period. Work in progress may be valued at prime cost or factory cost. There may be opening and closing work in progress. The difference between work in progress at start and work in progress at the close is added to the factory cost.
4. Direct material cost: Is the cost of all the materials that can be physically identified with a specified product. Direct material is any commodity that enters into and becomes a constituent element of a product.
5. Direct labor cost: Involves the cost of labor which can be specifically traced to or identified with a particular product. Direct labor is the effort of such persons who are directly involved in the production of a good.

Stock of manufacturing company

1. Raw materials: Accounted for when calculating the cost of raw materials used in the manufacturing account.
2. Finished goods: These are goods ready for sale, accounted for when calculating the cost of goods sold in the trading account.
3. Work in progress: This is the cost of those items which remain incomplete at the end of an accounting period. Work in progress maybe valued at prime cost or factory cost. There may be opening and closing work in progress. The difference between work in progress at the start and work in progress at the close is added to the factory cost.