BUSINESS ORGANISATIONS

Up until now we have dealt with the accounts of: Sole Traders Partnerships Companies

These businesses purchase stock and hope to resell it to make a profit.

MANUFACTURING ACCOUNTS

Lets now consider a business who actually manufactures (makes) the stock that they are to sell.

For example:Bannerman Trading Company manufacture desks.

List some of the things/costs that are involved in producing a desk:

Cost of Goods Produced

The manufacturer must ascertain the Cost of Goods he produces.

In order to do so, another Account must be produced:

A MANUFACTURING ACCOUNT

This Account is prepared FIRST and the Cost of Production is then transferred to the Trading and Profit and Loss Account

THE MANUFACTURING ACCOUNT

This Account contains ALL of the Costs of Producing the goods.

These costs can be divided into 2 distinct groups:

PRIME (First) COSTS OVERHEADS (Running Costs)

PRIME COSTS

These costs show the first, direct costs the business faces in producing the products.

These are: DIRECT LABOUR eg Factory Wages DIRECT MATERIAL eg Cost of Raw

Materials, Carriage on Raw Materials DIRECT EXPENSES eg Expenses which

would vary directly with the quantity of goods produced

OVERHEADS

These are all the expenses of running the factory, but which cannot be easily traced to the products being made They do NOT vary directly with the quantity of

goods produced

Factory Power Factory Rent Factory Rates

Factory Heat + Light

Factory Repairs

Depreciation of Factory Machinery

CONCLUSION

TOTAL COST OF PRODUCTION =

PRIME COSTS + OVERHEADS

We now have enough information to look at how a Manufacturing Account is prepared. Lets try Exercise 1

EXERCISE 1

Below is the details of PRODUCTION COSTS of Bannerman Trading Company for the year ended 31 December

1 January Stock of Raw Materials 50031 December Stock of Raw Materials 700Raw Materials Consumed 8000Carriage Inwards 200Direct Manufacturing Wages 21000Royalties 150Indirect Wages 9000Rent of Factory 440Factory Maintenance Costs 400General Indirect Expenses 310

WORK IN PROGRESS

Since the Manufacturing Account has to show the Cost of Goods completed during the Accounting period, an adjustment is required for goods partly completed at the beginning and end of the accounting period

Work-in-progress is the term given to goods only partly completed at the beginning and end of the financial year

We can therefore have an Opening Stock of Work in Progress Closing Stock of Work in Progress

Opening Stock of W-In-P

Goods only PART COMPLETE at the beginning of the accounting period must be included in this accounting period since this is when they will have been completed and therefore available for sale

Closing Stock of W-In-P

Goods only PART COMPLETE at the end of the accounting period must be carried forward to the next accounting period, since this is when they will be completed.

As such they should NOT be included in this year’s costs.

W-In-P Rule

ADD Opening Stock of Work in Progress

SUBTRACT Closing Stock of Work in Progress

Exercise 1 cont

Work in Progress at 1 Jan £400Work in Progress at 31 Dec £650

Lets complete the Manufacturing Account using this information.