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FUNDAMENTALS OF FINANCIAL ACCOUNTING
THE MANUFACTURING ACCOUNT
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factory cost of goods completed;
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the adjustment for work in progress at the beginning and end of the period.
You should appreciate that the only difference in the trading account from that of a non-
manufacturing organisation is the substitution of ‘ factory cost of goods completed ’ for
‘ purchases ’ .
Manufacturing accounts are quite straightforward if you take care with your workings,
and adopt a methodical approach. Make sure that you clearly label workings, and cross-
reference them to the fi nancial statements: this is much clearer than attempting to squash
them on to the face of the fi nancial statements themselves, as some of them may involve
several elements to their calculation. A suggested approach is as follows:
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Step 1 . Read the question completely before starting. Note particularly if a statement of
fi nancial position is required or not.
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Step 2 . Label the trial balance with the destination of the various items. If a statement of
fi nancial position is not required, you will not need all of the items on the statement of
fi nancial position (e.g. bank balances, receivables, payables).
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Step 3 . Set out a page of workings before you start. Work through the notes to the fi nan-
cial statements, in the order given, and make the necessary adjustments:
(A) adjust the trial balance fi gures for any accruals and prepayments, then split between
manufacturing and the rest of the income statement.
(B) calculate depreciation and split between manufacturing and the rest of the income
statement;
(C) calculate any other adjustments, for example, bad debts and allowance for receivables;
(D) adjust for any other items, such as goods on sale or return, errors and corrections.
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Step 4.
(A) Enter the sales, less any returns inwards in the trading account.
(B) Enter opening inventories of fi nished goods in the trading account.
(C) Commence your manufacturing account and enter all relevant fi gures, using your
workings where necessary:
– raw materials opening inventories, plus purchases, less closing inventories
(remember to adjust for returns outwards and carriage inwards);
– other direct costs, for example, wages, direct power, to give prime cost;
– indirect factory costs (production overheads);
– adjust for work in progress (add opening inventories, deduct closing inventories);
– the fi nal result is the factory cost of goods completed.
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Step 5 . Complete the trading account:
(A) less closing inventories of fi nished goods;
(B) this gives cost of goods sold;
(C) the difference between sales and cost of good sold is gross profi t.
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Step 6 . Prepare the remainder of the income statement, using your workings where
necessary.
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Step 7 . Prepare the statement of fi nancial position (if required), remembering that you
are likely to have several types of closing inventories to show.