Exam code:4AC1
Manufacturing businesses
What are manufacturing businesses?
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Manufacturing businesses make the goods that they sell
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They purchase raw materials in order to create their 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
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This calculates the total cost involved in making goods
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An income statement
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This calculates the profit or loss made on the goods sold
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A statement of financial position
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This is prepared in a similar way to other non-manufacturing businesses
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Direct & indirect costs
What are direct costs?
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Direct costs are costs that can be directly linked to the production of the goods
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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
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Prime cost = Direct material + Direct labour + Direct expenses
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What are indirect costs?
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Indirect costs are not directly linked to the production of the goods
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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:
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Factory rent
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Depreciation of machinery
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Indirect wages such as cleaners
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Factory heating and lighting
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Examiner Tips and Tricks
Which of the following is a direct cost for a manufacturing business?
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A |
The wages of staff taking phone calls in the factory |
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B |
The rental charge paid for the factory |
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C |
The charge paid to an inventor for using their design |
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D |
The monthly charge paid to the bank |
Answer
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A |
This is an indirect cost |
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B |
This is an indirect cost |
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C |
This is the correct answer |
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D |
This is an indirect cost |
Raw materials, 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
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Raw materials
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Work in progress
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Finished goods
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All three types of inventory have opening and closing balances
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Type of inventory |
Definition |
Financial statement affected |
|---|---|---|
|
Raw materials |
The resources 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 |
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Work in progress |
The goods which are in the process of being made and are partly completed |
Appears in the manufacturing account, and as a current asset in the statement of financial position |
|
Finished goods |
The goods which are completely finished and are waiting to be sold to customers |
Appears in the income statement for the inventory values, and as a current asset in the statement of financial position |
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