It is necessary to learn how to prepare income statement for manufacturing business. In a manufacturing business enterprise, there is a need to prepare a manufacturing account, statement of production or a cost sheet, before proceeding ahead to prepare the income statement. In fact, the income statement literally remains the same except that the cost of goods manufactured is transferred to trading account to be treated as finished goods (at par with purchases).
That means the enterprises that carry on manufacturing activity besides trading activity, generally prepare:
1. Manufacturing account (statement of production),
2. Trading and profit and loss account (income statement),
3. Balance sheet (position statement).
The purpose of preparing a manufacturing account is to show – (1) cost of materials consumed, productive wages, direct and indirect expenses of production; resulting in (2) cost of finished goods produced.
Manufacturing account is debited with – opening stock of raw materials + purchase of raw materials during the year – closing stock of raw materials to get ‘raw materials consumed’ debited with productive wages and expenses to get ‘prime cost’ debited with factory expenses to get factory cost; debited with work in progress in the beginning – work in progress at the end of the year and the sale of scrap if any to get the cost of production. The total cost of production is credited to manufacturing account by giving a debit to trading account.
The trading and profit and loss accounts are prepared the same way as they are prepared in the case of merchandising business.
In the case goods are transferred to trading and profit and loss account at a price, cost of production + profit, then that profit should be considered as manufacturing profit.
Prepare manufacturing, trading and profit and loss account for the year ending March 31, 2008 after considering the following information:
1. Stock as on March 31, 2008
Raw materials – Rs.1,50,000
Finished goods – Rs.4,59,600
2. Depreciate plant and machinery by Rs.20,880 and furniture and fittings 20,300. Expenses outstanding are- (a) salaries Rs.8,800; (b) electricity Rs.1,250; (c) rent and taxes Rs.2,320; (d) factory power Rs.2,500