Manufacturing Accounts

Manufacturing Accounts deal with working out the cost of making products rather than buying them.  The production costs therefore replace the purchases in the Income Statement.  However before we get there we need a separate statement to show the costs involved in making the items.

There are two types of costs in a Manufacturing account

• Direct Costs – related to production
• Raw Materials, Direct Expenses, Direct Labour and Royalties

• Indirect Costs - Costs which are clearly linked to manufacturing but not directly attributable
• Supervisors wages, depreciation of machinery

NB  If it is not to do with manufacturing then put it in the Income Statement!!

Below is an example of a manufacturing account.  Please note we have had to make adjustments for closing inventory of raw materials and work in progress.  These will be used next year.  Work in progress are items which have started being produced but not yet complete.  Think of a loaf of bread fresh out of the over and not yet cut and wrapped!

 What is Factory Profit

Manufacturers want to gauge how efficiently their factory runs

They compare their own manufacturing cost with the cost of ‘buying in’ from another supplier (A ‘make or buy’ decision)

This does not show how profitable the factory is though.  Firms may therefore decide to ‘add in’ a factory profit of a certain percentage.   This increases the manufacturing (or production) cost.

NB Increasing production cost lowers the Gross and Net Profit from Trading.

This enables the manufacturing element of the business to be kept separate from the Retail element – allowing ‘Profit Centres’.

Production Cost                                        £115,500

Add Factory Profit (10%)                          £ 11,550

Transfer Price                                            £127,050

Doing this has therefore increased our production cost to the retail element of the business allowing the manufacturer to show a profit.

Since we added in a Factory profit in the manufacturing account (thus lowering Gross Profit) we must add it back into the accounts in the profit and loss account after Net profit to give a revised Net Profit for the group as a whole.

 A sample Income statement showing this is shown below