Manufacturing Account Formatting: A Guide With Example Format

Balance sheets, income statements, and cash flow statements offer a broad view of company position and performance. But for manufacturers, that high-level perspective isn’t enough—more detail is needed to track and analyze production costs effectively. That’s where a manufacturing account comes in. It’s a specialized internal report that helps business leaders understand the true cost of manufacturing at a level detailed enough to spot inefficiencies and make critical decisions, such as setting the right price for a product. A well-prepared manufacturing account is also essential for accurately building the income statement, balance sheet, and cash flow statement, which are a business’s three core financial statements, as it supplies key cost data that flows into inventory valuations, cost of goods sold, and operating expenses across the three statements.

This article explains how to prepare a manufacturing account that captures the production details manufacturing accountants and business leaders need to have at their fingertips.

What Is a Manufacturing Account?

A manufacturing account is a specialized internal management report that tracks and summarizes all costs associated with the production process. Serving as a detailed subledger within a company’s accounting system, it captures the costs of direct materials, direct labor, and factory overhead incurred when producing finished goods. Unlike the standardized financial statements required by Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), the manufacturing account is designed specifically for internal use.

Manufacturing managers and business owners use this account to monitor production efficiency and control costs. Its granular visibility into production expenses helps businesses identify opportunities to reduce costs and optimize production processes, all with the intention of improving profitability. This detailed view of manufacturing costs is particularly valuable for small and medium-sized businesses, where even minor inefficiencies can significantly affect the bottom line.

Key Takeaways

• A manufacturing account is a specialized internal report that tracks and summarizes production costs for decision-making purposes.
• It functions as a continuous, detailed record of total manufacturing costs.
• A proper manufacturing account includes the direct materials, direct labor, overhead, and work-in-process adjustments needed to calculate key production metrics.
• Preparing a manufacturing account involves a structured, eight-step process that helps prevent common cost categorization and work-in-process tracking challenges.
• When integrated with manufacturing systems, accounting software automates data collection and provides real-time cost visibility.

Manufacturing Account Formatting Explained

The manufacturing account is a routine internal report that covers a specific accounting period, such as a month, quarter, or year. It pulls data from multiple manufacturing-related general ledger accounts, including raw materials inventory, work-in-process (WIP) inventory, direct labor, and manufacturing overhead. This structure facilitates comprehensive cost tracking across all stages of the production process.

Though related to other cost accounting measures, the manufacturing account serves a distinct purpose: to capture and organize detailed production cost information for internal decision-making. It functions as a continuous recordkeeping system, tracking direct materials, direct labor, and manufacturing overhead as those costs are incurred. This data feeds into the total manufacturing cost (TMC) metric, which reflects the period’s total production costs, regardless of whether goods are completed.

From there, the cost of goods manufactured (COGM) statement adjusts TMC for changes in WIP inventory to present only the cost of products completed during a period. Cost of goods sold (COGS) goes a step further, adjusting COGM for changes in finished goods inventory to show only the costs of goods actually sold during the period. Understanding how these metrics connect can help managers better manage production efficiency—at a granular level (manufacturing account), in summary (TMC), for completed goods (COGM), and in matching costs to revenue (COGS).

How Is a Manufacturing Account Used?

The manufacturing account is integral for cost management. It allows managers to monitor material usage, labor efficiency, and overhead allocation—allowing them to quickly respond to cost variances and production inefficiencies. Regular analyses of the account can also reveal trends in production performance, including seasonal patterns or long-term shifts in cost structures that may call for strategic adjustments. By comparing actual costs against standard or budgeted costs, managers can identify deviations and stay on track with production targets.

The manufacturing account can also inform critical business decisions, such as pricing, make-or-buy evaluations, and production scheduling. For example, managers can use the account to assess whether it’s more cost-effective to manufacture certain goods internally or to outsource them. It also helps pinpoint cost-saving opportunities by highlighting areas where resources could be used more efficiently.

Key Components to Include in a Manufacturing Account

Both GAAP and IFRS outline standards for what constitute capitalizable manufacturing costs through inventory costing guidelines. While they don’t provide an exhaustive list of components, they emphasize consistency in applying chosen costing methods and allow for professional judgment in certain situations. As a result, the structure of a manufacturing account might vary by company or industry—but certain core components are consistently included (or excluded) to ensure accurate and complete tracking of production costs, and these are outlined below.

Direct Materials

Direct materials are the raw materials or building blocks that are directly converted into finished products. They are easily traceable to specific products on production runs. Common examples include timber, textiles, paint, food ingredients, sheet metal, and chemicals.

The inventoriable cost of direct materials includes their purchase price, along with any additional costs required to get them ready for production, such as freight in and handling. The manufacturing account tracks these materials as they move from raw materials inventory into production, using a chosen cost flow method—such as first in, first out; last in, first out; or weighted average.

Direct materials are attributed to specific products or production runs using job order costing or process costing systems, either of which supports precise product costing for profitability analysis. The manufacturing account also tracks scrap and waste to support efficiency analysis and adjust unit costs to account for scrap value. This in-depth tracking shows material usage rates, facilitates inventory optimization, and can be used to maintain consistent and correct cost calculations.

Direct Labor

Direct labor costs are the wages, benefits, payroll taxes, and other compensation paid to the employees who are directly involved in manufacturing the product. These are the factory workers who physically turn raw materials into finished goods. The manufacturing account captures the direct labor costs as they occur during each payroll period so managers can closely monitor labor costs and efficiency.

Overhead Costs

Manufacturing overhead includes a wide variety of production costs that are shared or can’t easily be traced to specific units. For example, indirect materials, such as lubricants and cleaning supplies, are considered overhead because, while necessary, they’re low in value or impractical to assign directly to a product. Overhead also includes indirect factory labor, such as shared supervisors, maintenance workers, and quality control staff, whose work supports overall production rather than individual products. Facility-related expenses—including factory utilities, equipment depreciation, rent, insurance, and property taxes—also fall under manufacturing overhead. Overhead costs can be classified as fixed or variable within the account and are often used in cost-volume-profit analysis and other financial planning efforts.

Because overhead cannot be directly assigned to specific products (unlike direct labor or direct materials), it must be allocated. The manufacturing account plays a key role in this process by serving as a central repository for accumulating and organizing overhead costs. It supplies the data needed to apply overhead using a consistent allocation method—whether through a simple predetermined standard rate or through more refined approaches, such as cost driver-based systems (for example, machine hours) or activity-based costing.

Cost accountants use the manufacturing account to investigate variances between actual and applied overhead, helping to identify and remedy cost control issues. Applied overhead is an estimated amount assigned to products based on an allocation method, and actual overhead refers to the real costs incurred during the period.

Adjustments for Work-in-Process (WIP)

Work-in-process (WIP) represents goods that are partway through the manufacturing process but not yet finished. The manufacturing account includes a WIP inventory account that accumulates the costs—materials, labor, and overhead—of these in-process items. As production progresses, costs flow into the WIP account; when units are completed, those costs transfer from WIP to finished goods inventory.

In job costing systems, the manufacturing account tracks WIP for each specific job or order using individual subaccounts. In process costing systems, WIP is recorded by department or production stage, with equivalent units of production used to properly assign costs.

At the end of each accounting period, the manufacturing account provides the data needed to value the ending WIP inventory. To do this, companies use physical counts or percentage of completion estimates in combination with cost information from the manufacturing account. WIP balances are essential for calculating COGM. They also help managers spot production bottlenecks and maintain optimal WIP inventory levels.

Components That Do Not Need to Be Included in the Manufacturing Account

By definition, the manufacturing account is restricted to production-related expenses, also known as “product costs.” Therefore, it excludes all nonproduction costs, or “period costs,” even if they support the business’s overall operations. These excluded costs are instead recorded in operating and nonoperating expense lines on the income statement. Common examples include:

• Selling expenses, such as sales salaries and advertising
• Administrative expenses, such as office staff salaries and general supplies
• Research and development costs
• Interest charges
• Tax expenses

Separating manufacturing from nonmanufacturing costs is crucial for proper GAAP or IFRS financial reporting. Manufacturing costs are capitalized into inventory and affect balance sheet valuations, while nonmanufacturing costs are expensed on the income statement as they are incurred. This distinction impacts key financial metrics, including gross margin and inventory valuation, which various stakeholders rely on to assess production costs in comparison with other business expenses.

How to Prepare a Manufacturing Account

Preparing a manufacturing account requires careful organization of production costs to ensure accurate and useful reporting. Although accounting software automates many of these steps, understanding the process is essential for proper setup and ongoing maintenance. The specific format may vary from company to company. What matters most is consistent categorization and reporting, which enables meaningful period-to-period comparisons and trend analyses.

Manufacturing accounts can be prepared at different levels—companywide, by department, or for a specific product. The following eight steps focus on aggregating all production costs at the company level. When preparing a manufacturing account for a specific product or department, you’ll need an additional step to allocate direct materials, direct labor, and WIP accordingly. This segmented approach provides more granular insights but requires more sophisticated cost tracking and allocation methods.

1. Gather production cost information. Collect purchase invoices and usage records for all raw materials. Compile direct labor time sheets and payroll data. Identify all factory overhead expenses. Obtain beginning and ending inventory values for raw materials and WIP.
2. Calculate direct materials used. Determine the total value of direct materials consumed in production for the period using the following formula for all raw materials:
   

   Direct materials used = Beginning inventory + Purchases - Ending inventory
   

3. Calculate direct labor costs. Total all wages, shift differentials, and production bonuses for production workers. Be careful to include only labor costs for staff directly tied to production and exclude indirect labor, such as shared supervisors or maintenance staff. In practice, some companies include the benefits and payroll taxes of direct production workers in this step, while others elect to include these as part of manufacturing overhead.
4. Determine prime cost. Add direct materials used and direct labor costs for the period to determine the prime cost, which represents the costs directly traceable to products.
5. Compile manufacturing overhead. List all indirect materials and supplies used in production. Also add indirect labor from shared roles, such as quality control and production supervisors. Include factory related expenses, such as utilities, rent, insurance, and depreciation. Together, these represent the total actual overhead for the period.
6. Calculate factory cost. Add prime cost and total manufacturing overhead to determine TMC, also referred to as factory costs. These terms are often used interchangeably to represent the full cost of production before adjusting for WIP.
7. Adjust for WIP. Calculate the final COGM by adding the beginning WIP inventory to TMC for the period, then subtracting ending WIP inventory.
8. Prepare final statement. Organize all calculations in a clear, structured format. It’s a best practice to verify all calculations and cross-reference against supporting documentation.

Example Format for a Manufacturing Account

The following example demonstrates how to apply the eight steps outlined above to prepare a companywide manufacturing account. Although the report format shown in the final step can be adapted to meet a business’s specific needs, it should always include the basic components. We’ll follow Stewart & Stratford Shoes, a fictional shoe manufacturer known for its high-quality footwear, to show how each step leads to a complete manufacturing account.

Step 1: Gather production cost information

Stewart & Stratford’s accounting team collects the following data for the month of August:

• Raw materials beginning inventory (August 1): $150,000
• Raw materials purchased: $600,000
• Raw materials ending inventory (August 31): $120,000
• Direct labor wages: $350,000
• Production bonuses: $30,000
• Factory overhead expenses: $280,000 (includes utilities, depreciation, indirect labor, and benefits)
• Beginning WIP inventory (August 1): $80,000
• Ending WIP inventory on (August 31): $95,000

Step 2: Calculate direct materials used

Direct materials used = Beginning inventory + Purchases - Ending inventory
= $150,000 + $600,000 - $120,000
= $630,000

This represents the total value of premium materials used in shoe production during August.

Step 3: Calculate direct labor costs

Direct labor costs = Wages + Production bonuses
= $350,000 + $30,000
= $380,000

This sum represents the total cost of skilled labor directly involved in the shoe-making process, including quality and efficiency bonuses.

Step 4: Determine prime cost

Prime cost = Direct materials used + Direct labor costs
= $630,000 + $380,000
= $1,010,000

This is the total of all costs directly traceable to Stewart & Stratford’s shoe production for the month of August.

Step 5: Compile manufacturing overhead

The total manufacturing overhead is $280,000, which includes:

• Factory utilities: $50,000
• Depreciation on specialized shoe-making equipment: $80,000
• Indirect labor (supervisors, quality control, benefits): $100,000
• Factory insurance and other expenses: $50,000

Step 6: Calculate TMC

TMC = Prime cost + Manufacturing overhead
= $1,010,000 + $280,000
= $1,290,000

This represents the TMC, or factory cost, of shoe production activities for August, including both direct and indirect costs.

Step 7: Adjust for WIP

COGM = Beginning WIP + TMC - Ending WIP
= $80,000 + $1,290,000 - $95,000
= $1,275,000

This adjustment accounts for partially completed shoes at the beginning and end of the period.

Step 8: Prepare final statement

The following manufacturing account statement illustrates how the eight-step process creates a clear, organized report that’s easy to understand and analyze.

Common Challenges in Manufacturing Account Formatting

The accuracy and usefulness of a manufacturing account depend on proper formatting and consistency, yet common issues can undermine its cost tracking and reporting reliability. The following challenges require particular attention:

• Overcomplicating the format: Manufacturing accounts should present information clearly and concisely, focusing on essential cost categories and calculations. Excessive detail and unnecessary information can obscure insights, hindering effective decision-making.
• Improper categorization of costs: Misclassifying direct and indirect costs compromises the account’s usefulness, potentially resulting in faulty product costing and pricing decisions. Clear guidelines for categorizing direct materials, direct labor, and manufacturing overhead must be consistently applied across all products and accounting periods, especially to support comparative analyses.
• Inventory errors: Inaccurate inventory counts or valuations, particularly for raw materials and WIP, can significantly distort the manufacturing account. Regular physical counts and proper, consistent inventory valuation methods can help prevent these errors.
• Mishandling WIP: Errors in estimating the completion percentage or value of WIP can produce incorrect COGM calculations. This is especially challenging in industries with long production cycles, where proper tracking of WIP movement between periods is crucial.

Implementing several best practices can help address these challenges:

• Regularly train staff to promote consistent cost classification.
• Document procedures for physical inventory counts and WIP calculations to improve accuracy.
• Use period-end checklists to verify that all necessary adjustments are completed to reduce the risk of errors.
• Regularly review the manufacturing account format for clarity and to ensure that it remains useful to the organization’s evolving needs.

Automating Manufacturing Accounting With Software

Leading accounting and enterprise resource planning (ERP) systems can be a game changer for how manufacturing businesses manage financial operations. These tools create a connected digital ecosystem where financial and production data flow between systems. For example, purchase orders, inventory movements, and supplier invoices can automatically flow from procurement systems into accounting workflows. Time and attendance data may integrate with production scheduling and capacity planning, while shop floor systems can provide up-to-date visibility into material usage, labor productivity, and machine utilization.

When it comes to accounting, software can simplify complex manufacturing accounting processes through automated transaction entry, system-generated journal postings, and integrated cost management tools. Accountants can track product costs across multiple facilities, coordinate supply chain activity, and analyze profitability at varying levels of granularity. For instance, automated data collection reduces the risk of cost misclassification, while real-time inventory tracking supports more accurate WIP valuations. Many systems also include built-in controls that flag anomalies—such as unusual cost variances or transactions that fall outside predetermined parameters—so potential issues can be investigated before they affect financial reporting.

Manufacturing Accounting Made Easy With NetSuite Accounting Software

NetSuite Cloud Accounting Software can help companies address the core challenges of manufacturing account preparation and maintenance. The system automatically tracks and categorizes costs through its tailorable chart of accounts, while built-in controls can be used to consistently apply standardized accounting methods across all transactions. The system’s real-time general ledger delivers continuous account monitoring, reducing the potential for errors in cost classification and, therefore, inventory valuation. Customizable reporting tools simplify the manufacturing account format, presenting essential cost information clearly and without sacrificing detail. Additionally, role-based dashboards provide instant visibility into manufacturing costs, WIP status, production variances, and assorted other manufacturing metrics. The software also maintains a complete audit trail of all cost allocations and adjustments, supporting accurate period-end closing and financial analysis.

When integrated with NetSuite for Manufacturing, as part of the broader NetSuite Enterprise Resource Planning (ERP) System, the technology becomes even more powerful. The manufacturing features enable real-time WIP tracking, automated cost allocation synced to production runs, and detailed product costing. This seamless integration between accounting and manufacturing functions helps businesses maintain more precise and timely manufacturing accounts, which aid in making informed operational and cost control decisions.

Manufacturing accounts are valuable internal management tools that provide granular visibility into production costs—insight into the underlying drivers of production costs that the three core financial statements don’t capture. When properly formatted and maintained, they enable manufacturing businesses to track costs accurately and spot inefficiencies in production processes and cost structures. Although the preparation process requires careful attention to detail and consistent application of accounting methods, accounting software can automate many of the underlying tasks, reducing errors while improving the timeliness and accuracy of cost reporting.

Manufacturing Account Formatting FAQs

Why is the format of your manufacturing account important?

A well-formatted manufacturing account provides clear visibility into production costs and supports more accurate decision-making. Consistent structure ensures proper cost categorization, making it easier for cost accountants to identify major inconsistencies and compare data across periods or departments.

Is a manufacturing account the same thing as a production account?

Yes, in the manufacturing industry, these terms are often used interchangeably to refer to the internal management report that tracks and summarizes costs associated with manufacturing products.

What must a manufacturing account show?

A manufacturing account must show direct materials used, direct labor costs, manufacturing overhead, and work-in-process (WIP) adjustments. In combination, these components show the total cost of goods manufactured (TMC) during the accounting period.