Manufacturing Businesses (Cambridge International A-Level Accounting)
Spec point —
3.1.4
Manufacturing businesses
What are manufacturing businesses?
- Manufacturing businesses make the goods that they sell
- They purchase raw materials in order to create their goods
- Sole traders, partnerships, and limited companies can all be manufacturing businesses
Can manufacturing businesses also purchase goods?
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A manufacturer business might choose to purchase finished goods for resale
- This is in addition to producing their own finished goods
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The advantages of purchasing finished goods:
- It gains more goods for resale without needing to hire more workers
- It allows the workforce to produce other products
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The disadvantages of purchasing finished goods:
- It might be more expensive than producing the goods themselves
- The business has no control of the quality of the purchased goods
What financial statements are prepared for manufacturing businesses?
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Manufacturing businesses prepare the following financial statements
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A manufacturing account
- This calculates the total cost involved in making goods
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An statement of profit or loss
- This calculates the profit or loss made on the goods sold
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A statement of financial position
- This is prepared in a similar way to other non-manufacturing businesses
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Direct & indirect costs
What are direct costs?
- Direct costs are costs that can be directly linked to the production of the goods
- Examples of direct costs include:
| Type of direct cost | Definition | Example |
|---|---|---|
| Direct material | These are the raw materials used to make the goods | Wood, nails, glue, paint, varnish, etc |
| Direct labour | These are the wages for those who directly make, assemble or package the goods | Factory workers, assembly employees, etc |
| Direct expenses | These are the other costs that are directly linked to the production of the goods | Royalties, hire of tools or machinery, consultant fees, etc |
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The prime cost is the total of the direct costs
- Prime cost = Direct material + Direct labour + Direct expenses
What are indirect costs?
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Indirect costs are not directly linked to the production of the goods
- These are also known as factory overheads
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These are the costs involved in keeping the factory running on a day-to-day basis
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Such expenses include:
- Factory rent
- Depreciation of machinery
- Indirect wages such as cleaners
- Factory heating and lighting
Work in progress & finished goods
What are the types of inventory for a manufacturing business?
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A manufacturing business has different types of inventory
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The goods that they make are at different stages of the production process
- Raw materials
- Work in progress
- Finished goods
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All three types of inventory have opening and closing balances
| Type of inventory | Definition | Financial statement affected |
|---|---|---|
| Raw materials | The materials in stock which are needed to make the goods | Appears in the manufacturing account, and as a current asset in the statement of financial position |
| Work in progress | The goods which are in the process of being made and are partially finished | Appears in the manufacturing account, and as a current asset in the statement of financial position |
| Finished goods | The goods which are finished and are waiting to be sold to customers | Appears in the statement of profit or loss for the inventory values, and as a current asset in the statement of financial position |
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