Types of Cost in Manufacturing Accounts

Manufacturing Accounts are prepared by manufacturers to determine the cost of manufacture. Although, no hard and fast rules are laid down for this. In this unit, you will learn about those expenses that make up the cost of manufacture, and the importance and usefulness of this accounting information to the manufacturer.

 OBJECTIVES

At the end of this unit, you should be able to:

1. explain the meaning of manufacturing 
2. explain the types of cost in manufacturing accounts 
3. distinguish between direct and indirect expenses of production • prepare Manufacturing, Trading, Profit and Loss Account. 

Manufacturing

Manufacturing is the process of taking raw materials which nature or some primary industry like agriculture, has provided and turning them into more sophisticated and useful products. Thus, the Steel Industry converts iron to steel, and the oil industry converts crude oil to petrol and other products.

The textile industry takes raw cotton, an agricultural product and converts it into cloth and clothing. These activities are at the roof of much of our national wealth, and the accounting activities connected with them are of great importance. Much of these accounting activities are in the specialized field of cost accounting, which is chiefly concerned with controlling costs to eliminate wasteful activities and keep our goods competitive in price on world markets.

Types of Cost in Manufacturing Accounts

In the preparation of Manufacturing Accounts, it is necessary to discover the total cost of manufacturing goods. The costs are categorized into two main groups, each of which has several alternative names.

Prime Cost or Direct or Variable Cost

The first group of costs, that is, 'Prime Cost' is concerned with those costs, which are directly embodies in the product. Raw materials are typical costs in this first group, as are wages of workers employed in the actual manufacturing process. If I is called Prime Cost — meaning 'first', Direct cost — since the cost is directly associated with the product. A third name is variable cost since it varies fairly directly with the output. For example, if we double the output of cars on a production line, we shall double the quantity of sheet of steel used.

Overheads or Secondary Costs

The second group of costs are not directly embodied in the product, but are necessary to the production process just the same. These are the costs of running the factory, they include such items as factory power light, heat, rent, rates, depreciation, machinery and internal factory transport. Overheads are also called Factory or Works Expenses. They are also called Indirect Costs, since they do not vary with output. Thus a manager's salary will not be doubled just because output is doubled, he will be expected to supervise the factory activities whatever the output may be.