STUDY MATERIAL C2
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THE MANUFACTURING ACCOUNT
bring together the revenue and expenditure of trading and operating the business, and this
still applies to a manufacturing business. However, the calculation of the cost of goods sold
by a retail or wholesale organisation is fairly straightforward, that is, opening inventories,
plus purchases, less closing inventories. Calculating the costs of manufacturing products is
often more complex than this, as the fi rm will incur not only the cost of materials but also
labour costs and other expenses incurred in manufacturing. The manufacturing account is
used to bring together the costs of manufacturing during the period.
12.2.1 Inventories in manufacturing organisations
The manufacturing process will involve three stages:
Stage 1 . The acquisition of raw materials.
Stage 2 . The modifi cation or processing of those materials, with the addition of labour and
other expenses.
Stage 3 . The production of fi nished goods.
However, some raw materials purchased during a period will still be unmodifi ed at the end
of the period, while some will only be partly modifi ed. In addition, there will be some fi n-
ished goods produced during the period that remain unsold. The organisation might also
buy in ready-made items for sale. Therefore, at the beginning and end of a period, there
could be four types of inventories on the statement of fi nancial position:
●
raw materials;
●
work in progress (partly fi nished goods);
●
fi nished goods;
●
bought-in goods.
It is important to remember that the trading account must still be used to show the sales
revenue earned and the cost of goods sold, not the cost of goods manufactured. The trad-
ing account will therefore bring together opening inventories of fi nished goods, cost of
completed goods manufactured during the period, less closing inventories of fi nished
goods. The manufacturing account will contain all of the manufacturing costs, with adjust-
ments for opening and closing inventories of raw materials and work in progress.
It is also important to appreciate that the manufacturing account is used solely to bring
together expenses – it does not include any revenue from sales.
12.3 Costs to include in the manufacturing
account
We have already mentioned that the cost of raw materials will be contained within the
manufacturing account. The calculation of raw materials consumed in the manufactur-
ing process is exactly the same as the calculations you have previously used in the trading
account of retail and wholesale organisations, that is:
●
opening inventories of raw materials;
●
plus purchases of raw materials (including carriage inwards and less returns);
●
less closing inventories of raw materials.
However, other manufacturing costs must also be considered.
The following terms are considered key to understanding the manufacturing account.