Manufacturing accounts help you calculate the true cost of production, compare profits, and identify areas where factory operations can be optimized.
Manufacturing Account Explained with Example
If you run a factory or small manufacturing business, this article is your roadmap to understanding your true production costs. Most businesses ignore the manufacturing account — and it costs them lakhs. Learn how to maintain stock reports, track daily consumption, pass correct entries in Tally, and prepare real manufacturing accounts like Ram's Steel Unit. With step-by-step formats and real Tally-style visuals, this guide is practical, not just theory.
🧾 What is a Manufacturing Account?
A manufacturing account is a financial statement that shows the cost of producing goods in a factory setup. It includes raw materials, labor, and all production-related expenses. It's used by manufacturers to calculate the cost of goods manufactured (COGM) before preparing the trading account.
🔍 Why Is It Different From a Trading Account?
Unlike trading businesses that purchase goods for resale, manufacturers make goods themselves. So, before selling, they need to calculate the cost of making the product — that's what a manufacturing account does. The result then flows into the trading account for gross profit calculation.
| Manufacturing Account | Trading Account |
|---|---|
| Prepared before Trading A/c | Prepared after Manufacturing A/c |
| Shows cost of production | Shows gross profit |
| Used by manufacturers | Used by traders and manufacturers both |
🏭 Purpose of Manufacturing Account
- Helps calculate the total production cost
- Tracks inventory like raw materials and WIP
- Helps business decide pricing and profitability
- Assists in cost control and process efficiency
- Provides data for profit and loss account preparation
🧮 Format of Manufacturing Account
A typical manufacturing account includes the following:
- Opening and closing stock of raw materials
- Purchases of raw materials
- Direct wages (factory workers)
- Factory overheads: Power, fuel, repairs
- Depreciation on factory equipment
- Work-in-progress adjustments
📌 Real-Life Example: Ram's Steel Fabrication
Let's say Ram owns a steel fabrication unit. Here are his monthly figures:
- Raw Materials Opening: ₹1,00,000
- Purchases: ₹3,00,000
- Closing Stock: ₹80,000
- Direct Wages: ₹1,20,000
- Factory Rent + Power: ₹50,000
- Depreciation: ₹10,000
Total Cost of Production:
₹1,00,000 + ₹3,00,000 – ₹80,000 + ₹1,20,000 + ₹50,000 + ₹10,000 = ₹5,00,000
This ₹5,00,000 is transferred to the trading account as the cost of goods manufactured for the month. Eventually, it impacts the balance sheet through inventory valuation.
| Particulars | Amount (₹) |
|---|---|
| Opening Stock of Raw Materials | 1,00,000 |
| Add: Purchases | 3,00,000 |
| Less: Closing Stock of Raw Materials | (80,000) |
| Direct Wages | 1,20,000 |
| Factory Overheads (Rent + Power) | 50,000 |
| Depreciation on Machinery | 10,000 |
| Total Cost of Production | 5,00,000 |
📋 Essential Records Every Manufacturing Business Should Maintain
⚠️ Reality Check: Most small and medium manufacturing businesses in India do not maintain these records properly due to lack of time, trained staff, and awareness about their importance for costing and GST compliance.
1 Stock Register (Raw Material & Finished Goods)
Maintains daily inward and outward movement of inventory with batch details.
| Date | Item Name | Inward Qty | Outward Qty | Balance | Unit | Rate (₹) | Value (₹) | Remarks |
|---|---|---|---|---|---|---|---|---|
| 01-Oct-2025 | Steel Sheets | 500 | - | 500 | Kg | 80 | 40,000 | Purchase from ABC Ltd |
| 02-Oct-2025 | Steel Sheets | - | 200 | 300 | Kg | 80 | 24,000 | Used in Job #123 |
| 03-Oct-2025 | Steel Sheets | 300 | - | 600 | Kg | 82 | 49,200 | Purchase from XYZ Traders |
2 Daily Material Consumption Report
Tracks how much material is consumed per production batch for accurate costing.
| Date | Batch/Job No. | Raw Material | Qty Used | Unit | Rate (₹) | Cost (₹) | Product Code | Remarks |
|---|---|---|---|---|---|---|---|---|
| 02-Oct-2025 | JOB-123 | Steel Sheets | 200 | Kg | 80 | 16,000 | PROD-A1 | Normal consumption |
| 02-Oct-2025 | JOB-123 | Welding Wire | 5 | Kg | 150 | 750 | PROD-A1 | - |
| 03-Oct-2025 | JOB-124 | Steel Sheets | 150 | Kg | 82 | 12,300 | PROD-B2 | Rush order |
3 Work-in-Progress (WIP) Register
Tracks semi-finished goods for closing inventory and process tracking.
| Date | Job No. | Item Name | Stage | Qty | Unit | % Complete | Expected Date | Remarks |
|---|---|---|---|---|---|---|---|---|
| 05-Oct-2025 | JOB-123 | Steel Frame | Cutting Done | 10 | Pcs | 40% | 08-Oct-2025 | Awaiting welding |
| 05-Oct-2025 | JOB-124 | Machine Base | Welding Done | 5 | Pcs | 75% | 06-Oct-2025 | Painting pending |
| 05-Oct-2025 | JOB-125 | Gate Panel | Assembly | 8 | Pcs | 90% | 06-Oct-2025 | QC tomorrow |
4 Production Logbook
Records shift-wise production output, machine usage, and any breakdowns.
| Date | Shift | Item Produced | Qty | Unit | Machine No. | Operator | Downtime | Remarks |
|---|---|---|---|---|---|---|---|---|
| 06-Oct-2025 | Morning | Steel Gates | 12 | Pcs | M-01 | Ramesh K | 0 hrs | - |
| 06-Oct-2025 | Evening | Steel Gates | 10 | Pcs | M-01 | Suresh P | 1 hr | Power cut |
| 07-Oct-2025 | Morning | Machine Base | 8 | Pcs | M-02 | Vijay M | 0 hrs | Rush order |
5 Power & Fuel Usage Report
Tracks electricity or diesel consumed for production equipment.
| Date | Meter Reading | Units Used | Rate/Unit (₹) | Cost (₹) | Usage Area | Shift | Remarks |
|---|---|---|---|---|---|---|---|
| 01-Oct-2025 | 15420 | 120 | 8 | 960 | Factory Floor | Full Day | Normal usage |
| 02-Oct-2025 | 15565 | 145 | 8 | 1,160 | Factory Floor | Full Day | Extra shift |
| 03-Oct-2025 | 15690 | 125 | 8 | 1,000 | Factory Floor | Full Day | - |
6 Scrap Register
Tracks damaged or rejected output for cost recovery.
| Date | Scrap Item | Qty | Unit | Reason | Scrap Value (₹) | Disposed To | Remarks |
|---|---|---|---|---|---|---|---|
| 04-Oct-2025 | Steel Offcuts | 25 | Kg | Production waste | 500 | Local Scrap Dealer | Normal scrap |
| 05-Oct-2025 | Rejected Gate | 2 | Pcs | Welding defect | 800 | Scrap Yard ABC | Operator error |
| 07-Oct-2025 | Paint Waste | 5 | Ltr | Expired material | 0 | Disposed | - |
💼 Pro Tip: Even simple Excel or Google Sheets can be powerful when used to maintain these records consistently. Later, migrate them into Tally for reports, audit and GST returns.
🛠️ How to Maintain in Tally
Use Stock Items for Raw Materials and Finished Goods. Set up BOM (Bill of Materials) to define material consumption. Record production via Stock Journal (input: Raw Materials, output: Finished Goods). Allocate factory expenses using Cost Centers. Tally will auto-calculate stock and cost.
Key Tally Features to Use:
- 📌 Stock Journal (Production Entry)
- 📌 BOM (Bill of Materials)
- 📌 Cost Center for Factory Wages
- 📌 Inventory Vouchers and Reports
📈 How It Reflects Financial Performance
- Helps calculate cost per unit
- Finds wastage and control points
- Gives base for trading account and profit tracking
- Helps improve pricing strategy and budgeting
- Essential for preparing accurate financial statements
💡 Tips for Business Owners
- Use Tally or Excel to maintain monthly records
- Reconcile inventory and production reports monthly
- Review direct and indirect costs separately
- Compare planned vs actual production regularly
❓ Frequently Asked Questions
Q1 What is a Manufacturing Account and why is it prepared?
A manufacturing account is prepared by production-based businesses to calculate the total cost of converting raw materials into finished goods. It helps track raw material usage, labor costs, overheads, and wastage.
Q2 How to maintain a manufacturing account in Tally Prime?
In Tally, you can use Stock Items, enable BOM (Bill of Materials), and pass Stock Journal entries for daily production. Expenses like wages, power, and depreciation should be allocated via cost centers.
Q3 What are the daily records required in a manufacturing business?
Key records include stock register, daily raw material consumption, production logbook, WIP report, scrap register, and power usage. These are essential for correct costing, inventory control, and GST filing.
Q4 What is the difference between a manufacturing account and cost sheet?
A manufacturing account is a ledger-style report used for accounting purposes. A cost sheet is a management report that shows detailed cost per unit or batch.
Q5 Is there a ready format for daily production report?
Yes, you can start with simple Excel formats that include fields like date, item name, quantity used, units, operator, and remarks. Later, migrate to Tally or ERP software.
💡 Still have questions? Drop them in the comments below and I'll answer them personally!
🔚 Final Words
If you run or manage a factory, the manufacturing account isn't optional — it's essential. It reveals how efficiently your business converts inputs into profit. Understanding how it connects to your balance sheet and overall financial health is crucial for long-term success.
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