prepare manufacturing accounts, income statements and statements of financial position
5.5 Manufacturing Accounts
What Are Manufacturing Accounts? 🏭
Manufacturing accounts are like a recipe book for a factory. They keep track of every ingredient (cost) used to make a product and how much the finished product is worth.
Key Cost Components 💰
- Direct Materials – the raw materials that become part of the product.
- Direct Labour – the workers’ wages directly involved in production.
- Manufacturing Overhead – indirect costs such as electricity, depreciation of machinery, and factory rent.
Step‑by‑Step Example: ABC Widgets
Let’s walk through a simple example.
- ABC Widgets starts the month with £5,000 of raw materials in stock.
- During the month, it purchases £10,000 of new materials.
- At the end of the month, the closing stock of materials is £3,000.
- Direct labour costs for the month total £4,000.
- Manufacturing overheads incurred are £2,000.
Calculate Cost of Production
First, find the Cost of Production using the formula:
Cost of Production = Opening Stock + Purchases – Closing Stock + Direct Labour + Overhead
Plugging in the numbers:
Cost of Production = £5,000 + £10,000 – £3,000 + £4,000 + £2,000 = £18,000
Cost of Goods Manufactured (COGM)
COGM is the total cost of goods that were finished during the period.
Assume the factory finished 200 widgets during the month.
COGM = Cost of Production = £18,000
Cost of Goods Sold (COGS)
COGS is the cost of the goods that were actually sold.
Suppose 150 widgets were sold, and the closing finished goods inventory is 50 widgets.
First, find the cost per widget:
Cost per Widget = COGM ÷ Total Finished Goods = £18,000 ÷ 200 = £90
Then, COGS:
COGS = Cost per Widget × Units Sold = £90 × 150 = £13,500
Income Statement (Profit & Loss) 📈
The income statement shows how much money the company made or lost during the period.
| Description | Amount (£) |
|---|---|
| Sales Revenue (150 widgets × £120 each) | 18,000 |
| Cost of Goods Sold | 13,500 |
| Gross Profit | 4,500 |
| Operating Expenses (e.g., admin £1,000) | 1,000 |
| Net Profit | 3,500 |
Statement of Financial Position (Balance Sheet) 📊
The balance sheet shows what the company owns (assets) and what it owes (liabilities) at a specific point in time.
| Assets | £ |
|---|---|
| Cash | 2,000 |
| Raw Materials Inventory | 3,000 |
| Finished Goods Inventory | 4,500 |
| Factory Equipment (net of depreciation) | 12,000 |
| Total Assets | 21,500 |
| Liabilities & Equity | £ |
|---|---|
| Accounts Payable | 1,500 |
| Loans Payable | 5,000 |
| Retained Earnings (Net Profit of £3,500 + previous retained £1,000) | 4,500 |
| Total Liabilities & Equity | 21,500 |
Quick Review Checklist ??
- Did you calculate Cost of Production correctly?
- Can you explain the difference between COGM and COGS?
- Are the income statement and balance sheet balanced?
- Do you understand how each cost element affects the final profit?
Analogy Recap 🚀
Think of manufacturing like baking a cake:
- Ingredients (raw materials) + Oven time (labour) + Recipe tweaks (overhead) = Cake (finished product).
- The cost of the cake is the sum of all ingredients and effort.
- When you sell the cake, you subtract the cake’s cost from the selling price to see how much you earned.
Master these steps and you’ll be able to prepare any manufacturing account with confidence! 🎉
Revision
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