Manufacturing Accounts
Peter Marshall Bsc (Econ) BA MBIM is a Fellow of the Society of Business Teachers, and an experienced educator in business subjects. He is also a prolific author and his books have been translated and sold worldwide. He lives in London, UK.
We need to show two important cost figures in the manufacturing account:
- prime cost—the sum of the costs of direct labour, direct materials and direct expenses; and
- overheads—the sum of all costs which cannot be directly related to output (e.g. factory rent).
Three stages of the production process are shown in a manufacturing account:
- 1.Raw materials consumed.
- 2.Adjustment for stocks of partly finished goods (work in progress).
- 3.Finished goods transferred to trading account.
The cost of raw material consumed is arrived at like this:
Opening stocks |
600 |
Add purchases |
200 |
|
800 |
Less closing stocks |
150 |
Cost of raw material consumed |
650 |
The prime cost is found by adding the direct wages and direct expenses to cost of raw materials consumed.
Work in progress is calculated similarly:
Opening stocks |
600 |
Less closing stocks |
150 |
Work in progress adj. |
450 |
Purchases do not come into this equation.
The end product of the manufacturing account is the value of the stock of finished goods (just as the gross profit is the end product of the trading account). This value is then transferred to the trading account, just as the trading account transfers its gross profit to the profit and loss account.
Suppose Armstrong Engineering is a manufacturer who at the end of the year to 31 October 200X has a stock of raw materials valued at £5,500 and work in progress valued at £9,500. The firm started the year with a stock of raw materials worth £4,000 and work in progress valued at £8,000. During the year it purchased a further £40,000’s worth. The factory wages bill was £4,500 and the cost of power used solely in the factory was £1,600.
Figure 70 shows how you would write up its manufacturing account.
