Manufacturing account

What it means

A financial statement prepared before the income statement by a manufacturing business to determine the cost of goods produced, combining prime cost and factory overheads.

Example

Direct materials, direct labour and factory rent are brought together to show a cost of production of RM120,000.

Why it matters

The cost of production it calculates is transferred into the income statement in place of purchases, so gross profit reflects goods actually made.

In practice

The manufacturing account comes before the income statement and feeds into it. The figure it produces, the cost of production, replaces purchases in the trading section. It is built in stages. Prime cost comes first (direct materials consumed, direct labour and direct expenses). Then factory overheads are added. Finally, opening and closing work in progress are adjusted to reach the cost of goods completed.

Suppose a workshop uses raw materials of RM40,000, direct wages of RM22,000 and factory overheads of RM18,000. These total RM80,000. Add opening work in progress of RM5,000 and deduct closing work in progress of RM7,000. The cost of production is RM78,000.

Students often confuse it with the trading account. The manufacturing account measures the cost of making goods inside the business. The trading account measures gross profit on selling them. Only businesses that make their own goods prepare a manufacturing account. A retailer that buys finished goods does not.

If the layout of a manufacturing account is the hard part, one of our teachers can practise it with you until the stages feel natural. Book a trial class.

Related terms

• Prime cost
• Work in progress
• Cost of sales

Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 5.4 Manufacturing accounts (page 17).

Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.