Manufacturing of goods and services is the transformation of raw materials into finished goods. Some firms have to manufacture their goods before selling them to the general public e.g Coca-Cola, Nestle etc. where as some merely sell products which are acquired in finished form. A manufacturing organisation will acquire raw materials, engage labour, and other inputs necessary to change the raw materials into finished goods. The main aim of preparing the manufacturing account is to ascertain the cost of goods manufactured during the financial year. It is an extension of the trading account.

PURPOSE OF MANUFACTURING ACCOUNTS
The purpose of manufacturing accounts are as follows
To ascertain the cost of goods manufactured.
To ascertain the amount of any profit on the manufacturing process.

You will also need to know that there are three types of stock in manufacturing account;
raw materials,
finished goods
work in progress.

For a manufacturing business, the manufacturing costs are divided into the following types:
i) Direct material costs
Direct material costs are those materials used directly in the manufacture of products i.e. materials that can be identified in the final products. E.g. in the manufacture of tables, direct materials consists of timber, nails, glue etc.
ii) Direct labor costs
These are wages paid to those who are directly involved in the manufacture of a product e.g. in the manufacture of tables; direct labor consists of wage paid to those workers who saw, shape of join the piece of timber into table.
iii) Direct expenses
These are expenses that must be incurred in the manufacture of a product. That is, they can be directly allocated a particular unit of a product e.g. live charges for a special equipment used in the process of manufacture, royalties
NB: The sum of all the direct costs is known as prime costs
iv) Indirect manufacturing costs / factory overheads
These are any other expenses (apart from the direct costs) for items being manufactured:
E.g. cleaners’ wages, factory rents, depreciation of plant and equipment, factory power and lighting
NB: prime cost + indirect manufacturing costs = PRODUCTION COSTS
v) Administrative Expenses
These are expenses that are administrative in nature, that is, expenses incurred in the process of panning, controlling and directing the organization.
e.g. office rents, office electricity, depreciation of office machinery, secretarial salaries.
vi) Selling and distribution expenses
These are expenses incurred in the process of selling, promoting and distributing the goods manufactured. E.g. advertising expenses, carriage outwards, depreciation of motor van, salesmen salaries etc.
vii) Finance Costs
These are expenses such as bank charges, discount allowed.

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