Manufacturing account explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
A manufacturer needs one more statement than a trader. The manufacturing account collects every cost of making goods in the year, raw material, factory wages and factory overheads, and ends in the cost of production, which then goes to the trading account as the cost of the goods made. Our financial statement preparation team builds this account for manufacturing clients whose books treat factory and office costs as one.
Prime cost is raw material consumed plus direct wages and direct expenses. Add factory overheads to get factory cost, adjust for opening and closing work-in-progress, and the result is the cost of production. AS 2 decides what belongs: costs of purchase and conversion are included; abnormal waste, storage not needed in production, administrative overheads that do not help bring goods to their condition and selling costs are excluded (paragraph 13).
What AS 2 puts into cost
| AS 2 paragraph | Content | What it means for the account |
|---|---|---|
| 6 | Cost = purchase, conversion and other costs of bringing inventory to present location and condition | The manufacturing account holds these |
| 7 | Purchase cost includes duties and taxes not recoverable, freight inwards; trade discounts and rebates are deducted | Carriage inwards goes in; purchase returns come off |
| 8 | Conversion costs include direct labour and a systematic allocation of fixed and variable production overheads | Direct wages and factory overheads |
| 9 | Fixed overheads allocated on normal capacity; unallocated overheads are an expense | Idle capacity cost goes to profit and loss |
| 12 | Interest and borrowing costs are usually not part of cost | Not in the account |
| 13 | Abnormal waste, storage costs (unless needed in production), non-contributing administrative overheads, selling and distribution costs are excluded | Charged to the profit and loss account |
Our guide to AS 2 on inventories covers valuation of stock and cost formulas in full.
The format in four steps
- Raw material consumed = opening stock of raw material + purchases + carriage inwards - purchase returns - closing stock of raw material.
- Prime cost = raw material consumed + direct wages + direct expenses.
- Factory cost = prime cost + factory overheads (indirect wages, factory rent, power, factory depreciation, factory insurance, with outstanding and prepaid adjustments).
- Cost of production = factory cost + opening work-in-progress - closing work-in-progress.
The cost of production is taken to the trading account on the debit side, in place of purchases, with opening and closing stock of finished goods. See final accounts of a sole proprietor for the trading account itself.
Worked example: Deshmukh Furniture Works, year ended 31 March 2026
The entity and all figures in this example are invented for illustration.
Deshmukh Furniture Works makes wooden tables. Its figures:
- Raw material: opening stock 60,000; purchases 4,40,000; carriage inwards 10,000; purchase returns 8,000; closing stock 70,000.
- Direct wages 1,20,000; job-work charges (direct expense) 18,000.
- Factory overheads: indirect wages 36,000; factory rent 48,000; power paid 30,000 with 4,000 outstanding; depreciation on machinery 24,000; factory insurance paid 8,000 with 2,000 prepaid.
- Work-in-progress: opening 45,000; closing 55,000.
- Finished goods: opening stock 90,000; closing stock 1,10,000.
- Sales 11,60,000. Units produced: 1,180 tables.
- Not part of cost: office salaries 90,000, carriage outwards 15,000, and a loss of 12,000 from an abnormal fire-damage waste of material (AS 2, paragraph 13). The purchases figure of 4,40,000 above is stated after taking out this 12,000 of material, so the loss is not inside raw material consumed.
Manufacturing account for the year ended 31 March 2026
| Particulars | Amount | Amount |
|---|---|---|
| Opening stock of raw material | 60,000 | |
| Add: purchases | 4,40,000 | |
| Add: carriage inwards | 10,000 | |
| Less: purchase returns | (8,000) | |
| 5,02,000 | ||
| Less: closing stock of raw material | (70,000) | |
| Raw material consumed | 4,32,000 | |
| Direct wages | 1,20,000 | |
| Direct expenses (job-work) | 18,000 | |
| Prime cost | 5,70,000 | |
| Factory overheads | ||
| Indirect wages | 36,000 | |
| Factory rent | 48,000 | |
| Power (30,000 + 4,000 outstanding) | 34,000 | |
| Depreciation on machinery | 24,000 | |
| Factory insurance (8,000 - 2,000 prepaid) | 6,000 | |
| Total factory overheads | 1,48,000 | |
| Factory cost | 7,18,000 | |
| Add: opening work-in-progress | 45,000 | |
| 7,63,000 | ||
| Less: closing work-in-progress | (55,000) | |
| Cost of production | 7,08,000 |
Workings: 60,000 + 4,40,000 + 10,000 - 8,000 = 5,02,000; 5,02,000 - 70,000 = 4,32,000. Prime cost 4,32,000 + 1,20,000 + 18,000 = 5,70,000. Overheads 36,000 + 48,000 + 34,000 + 24,000 + 6,000 = 1,48,000. Factory cost 5,70,000 + 1,48,000 = 7,18,000. Cost of production 7,18,000 + 45,000 - 55,000 = 7,08,000.
Cost per unit. 7,08,000 / 1,180 tables = 600 a table.
Trading account, using the cost of production
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| To Opening stock of finished goods | 90,000 | By Sales | 11,60,000 |
| To Cost of production | 7,08,000 | By Closing stock of finished goods | 1,10,000 |
| To Gross profit c/d | 4,72,000 | ||
| Total | 12,70,000 | Total | 12,70,000 |
Working: cost of goods sold 90,000 + 7,08,000 - 1,10,000 = 6,88,000; gross profit 11,60,000 - 6,88,000 = 4,72,000.
Items kept out of the account. Office salaries of 90,000 and carriage outwards of 15,000 go to the profit and loss account (administrative and selling costs, AS 2 paragraph 13), and the abnormal waste of 12,000 also goes there as an expense. Including them in factory cost would overstate the cost of closing stock.
Check: left side of the trading account 90,000 + 7,08,000 + 4,72,000 = 12,70,000 = right side 11,60,000 + 1,10,000 = 12,70,000. Cost of production 7,08,000 = 1,180 units x 600.
If goods are transferred at market price
Some firms transfer finished goods to the trading account at a price above cost, to see the profit of the factory separately. The extra is a manufacturing profit; it is shown in the manufacturing account, and a provision removes the unrealised profit in closing stock, because stock should not be carried above cost (AS 2, paragraph 5). The worked figures above use cost, with no manufacturing profit.
Common mistakes
- Putting office salaries in factory overheads: AS 2 excludes administrative overheads that do not contribute to bringing goods to their condition.
- Forgetting outstanding and prepaid adjustments on factory expenses.
- Using closing stock of raw material and closing work-in-progress interchangeably: they are separate lines.
- Including selling costs such as carriage outwards in the cost of production.
- Valuing stock above cost by carrying manufacturing profit into closing stock.
Need help with a manufacturing account?
If factory and office costs are mixed in your books, or your closing stock is valued without a costing basis, we can split the accounts and build the cost sheet. Our financial statement preparation service prepares the manufacturing, trading and profit and loss accounts together.
Key takeaways
- Prime cost = raw material consumed + direct wages + direct expenses.
- Factory cost adds factory overheads; cost of production adjusts for work-in-progress.
- AS 2 includes costs of purchase and conversion and excludes abnormal waste, selling costs and non-contributing administration.
- Cost of production replaces purchases in the trading account.
- Cost per unit = cost of production / units produced.
Read next
- Final accounts of a sole proprietor
- Capital expenditure v revenue expenditure
- AS 2 Valuation of Inventories
- Depreciation accounting
Disclaimer: Based on the Accounting Standards issued by the Institute of Chartered Accountants of India as on 1 April 2025, the Companies (Accounting Standards) Rules, 2021 as amended up to G.S.R. 169(E) of 10 March 2026, the Companies Act, 2013 and the ICAI guidance named in the article, as consulted on 4 October 2026. The worked example uses invented figures. Later amendments should be checked on icai.org and mca.gov.in. This article is general information, not legal advice; check the official text before acting.