Author: Amrut Chitragar
Published on: January 13, 2023
Last Updated: July 11, 2025
📌 Disclaimer: This post is for educational purposes only. It does not constitute legal or professional advice. Please consult a tax expert for your specific situation.
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: A Practical Guide to Financial Performance for Factory Businesses
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. Don’t wait for audit season — learn how to take control today.
🧾 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.
| 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
🧮 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
| 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 |
This ₹5,00,000 is transferred to the Trading Account as the cost of goods manufactured for the month.
📋 Essential Records Every Manufacturing Business Should Maintain
⚠️ Reality Check: Most small and medium manufacturing businesses in India do not maintain these records properly.
🚧 Why Most Businesses Fail to Maintain Proper Records
- ⏳ Lack of Time: Factory owners are busy managing daily orders, labor, and materials — paperwork comes last.
- 👷♂️ No Trained Staff: Many units don’t hire dedicated accountants or data entry operators to manage registers.
- 📉 No Awareness: Business owners don’t understand how daily data helps in costing, pricing, GST, or tax saving.
- 📂 Manual Dependency: Reliance on verbal info or old books leads to confusion and errors.
- 🧾 Only Audit-Focused: Records are created only at year-end for auditors — not for real-time decision making.
✅ Solution: Start simple with Excel or Google Sheets. Once the habit forms, link it to Tally or ERP. Even one well-maintained sheet can save lakhs in cost leakages.
Now, let’s look at each important register and how it should be maintained:
📋 Important Records for Manufacturing Businesses
🔹 Stock Register (Raw Material & Finished Goods):
Maintains daily inward and outward movement of inventory with batch details. Helps in stock valuation and loss control.
| Date | Item Name | Inward Qty | Outward Qty | Balance | Remarks |
|---|
🔹 Daily Material Consumption Report:
Tracks how much material is consumed per production batch. Useful for costing and checking variances.
| Date | Raw Material | Qty Used | Unit | Product Code | Remarks |
|---|
🔹 Work-in-Progress (WIP) Register:
Tracks semi-finished goods. Useful for closing inventory and process tracking.
| Date | Item Name | Stage | Qty | Expected Completion | Remarks |
|---|
🔹 Production Logbook:
Records shift-wise production output, machine usage, and breakdowns if any.
| Date | Shift | Item Produced | Qty | Operator | Remarks |
|---|
🔹 Power & Fuel Usage Report:
Tracks diesel or electricity consumed for production-related equipment.
| Date | Meter Reading | Units Consumed | Usage Area | Remarks |
|---|
🔹 Scrap Register:
Tracks damaged or rejected output and scrap disposal. Useful for cost recovery.
| Date | Scrap Item | Qty | Reason | Scrap Value |
|---|
🔹 Stock Journal Vouchers (Tally Production):
Entry for converting raw materials to finished goods in Tally.
| Date | Voucher No. | Consumed Items | Produced Item | Remarks |
|---|
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.
Use Stock Items for Raw Materials and Finished Goods. Set up BOM 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.
- 📌 Stock Journal (Production Entry)
- 📌 BOM (Bill of Materials)
- 📌 Cost Center for Factory Wages
- 📌 Inventory Vouchers and Reports
Create stock items for Raw Materials and Finished Goods. Define Bill of Materials (BOM) for each product. Use Stock Journal to convert materials into finished goods. Allocate wages and overheads through Cost Centers. Tally will auto-adjust stock and reflect real-time production cost. No separate manual account needed — it's all tracked in entries!
📈 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
💡 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 (FAQs)
1. 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.
2. 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.
3. 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.
4. 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. Both serve different analysis goals but complement each other.
5. Is there a ready format for daily production report or material consumption report?
Yes, you can start with simple Excel formats that include fields like date, item name, quantity used, units, operator, and remarks. Later, this can be migrated into Tally or ERP software for automation and reporting.
🔚 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.
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