So far, all previous posts deal with businesses that either sell goods (or products) to customers or services to customers. We have not been dealing with manufacturing company. A manufacturing company not only manufactures products but also sells them to other company. So, the existing preparation of accounts are not enough to record everything (the trading and profit and loss account and the balance sheet statement.) In this case, you will need to have another account drawn up; the manufacturing account.
In manufacturing account, you will need to be aware of new terms;
1) Direct costs – Costs that can be directly traced to making the products. Direct costs are categorised into direct materials, direct labour and direct expenses.
2) Indirect costs – Costs that cannot be directly traced to making the products.
3) Prime costs – All direct costs.
4) Factory overhead – Costs which occur in the factory where the production is being done.
5) Production cost – prime costs + factory overhead (remember this but not that simple).
You will also need to know that there are three types of stock in manufacturing account; 1) raw materials, 2) finished goods and 3) work in progress. As the name implies, you will expect raw materials as the costs in direct materials so it will appear in the manufacturing account. As for finished goods (treat them as you normally do) in the trading account. Lastly, work in progress are products that are partially finished. You will be expected to include them in the manufacturing account to arrive at the Production Cost.
As for now, what is the format of manufacturing account? Manufacturing account has a purpose in arriving at the cost of production – you needed to know how much finished goods have been
Remember that Prime costs = Direct Materials + Direct Labour + Direct Expenses so now
Production cost = Direct Materials + Direct Labour + Direct Expenses + Factory Overhead (+Work In Progress – see below)
1) It is important to know that examiners will have a list of expenses for you to categorize whether there are “factory overhead,” “administration expenses” and “selling and distribution expenses.” A general rule will be to treat factory expenses in manufacturing account and office expenses in profit and loss account. In some cases, you will need to further classified office expenses into “administrative” and “selling and distribution expenses”.
2) Production cost is transferred to trading account. You replaced the purchases from trading account. 3) Lastly, you must remember to post all closing balance of stocks into balance sheet (same treatment like the normal closing stock).
This post is finished.