CIMA BA3 Syllabus C. PREPARATION OF ACCOUNTS FOR SINGLE ENTITIES - Manufacturing Accounts - Notes ^{1 / 2}

Why are manufacturing accounts needed?

If a business is simply buying and selling goods, then:

Sales - Cost of goods sold = Gross Profit

Cost of goods sold = 
+ Opening inventories
+ Purchases 
- Closing inventories 

However, if the business is manufacturing good itself then a little more work is needed in order to calculate the cost of actually making the goods, and the calculation statement is known as a manufacturing account.

Production Costs

If a business actually makes the goods that they will sell, we need to calculate the cost of producing the goods and use this instead of 'purchases' in the trading account. 

There are two types of production costs

1. Direct Costs

   These are the costs directly associated and measurable for each unit produced. 

   They are directly related to the level of production.

   The main direct costs are:
   Direct materials 
   Direct labour
   Direct expenses ( e.g. packaging and royalty)

   The total of the direct costs is known as the prime cost.

2. Indirect Costs

   These are all other costs concerned with production i.e. other costs in the factory. 

   Examples include:
   Rent of the factory
   Lighting and heating of the factory
   Indirect labour (supervisor salaries) 
   Depreciation of factory plant and equipment

   Indirect costs are also known as overheads.

Inventories

A manufacturing company is likely to have three types of inventories.

• Finished Goods

  These are goods that have been completely produced and are ready for sale. 

  The cost of goods sold in the trading account will be:
  + Opening inventory of finished goods
  + Cost of production
  - Closing inventory of finished goods

• Raw Materials

  The business will be buying raw materials for production, for example, wood - if they are manufacturing desks, and is also likely to carry inventories of raw materials at the beginning and the end of the period. 

  In the manufacturing account we need to know the raw materials actually used in production during the period. 

  This will be:
  + Opening inventory of raw materials
  + Purchases of raw materials
  - Closing inventory of raw materials

• Work In Progress

  These are goods that we are producing but are not yet finished at the end of the period (they will be finished during the next period and will then be finished goods ready for sale). 

  The total production costs will include the cost of the work that has been done on this work-in-progress, but we require the cost of producing the cost of goods that have been finished. 

  This will be:
  + Opening inventory of work-in-progress
  + Total production costs
  - Closing inventory of work-in-progress.

Pro-forma Manufacturing Account

Example

The following balances have been extracted from the books of Cow Ltd. as at 30/6/2019

Additional Information

• At 30/6/2019, inventories were as follows:

  Raw materials 23,800
  WIP 33,360
  Finished goods 103,200

• Electricity and maintenance expenses are to be split 80% to the factory and 20% to the company's offices.

• At 30/6/2019, an electricity bill of $3,840 remained unpaid, and maintenance costs paid in advance amounted to $3,640.

Produce a manufacturing account and a statement of profit and loss:

Statement of profit and loss