Manufacturing Accounts - Part 2

The full manufacturing account follows this structure:

Manufacturing Account for the year ended 31 December 20XX

	$	$
Direct materials:
Opening raw materials inventory	X
Add: Purchases of raw materials	X
Carriage on raw materials	X
Less: Closing raw materials inventory	(X)
Direct materials used		X
Direct labour		X
Direct expenses		X
Prime cost		X
Factory overheads:
Indirect materials	X
Indirect labour (supervisor wages, etc.)	X
Factory rent	X
Factory power	X
Depreciation — factory machinery	X
Other factory overheads	X
Total factory overheads		X
Manufacturing cost		X
Add: Opening work in progress		X
Less: Closing work in progress		(X)
Cost of production		X

Key rules:

• Carriage on raw materials (inwards) → goes in the manufacturing account with direct materials.
• Factory depreciation → factory overhead in manufacturing account.
• Office depreciation → income statement expense.

Cambridge exam tip: The examiner expects the account to be presented with clear sub-totals: direct materials used, prime cost, total factory overheads, manufacturing cost, and finally cost of production. Losing a sub-total costs 1 mark.

Work in progress (WIP) is the value of goods that are partially completed at the end of the accounting period. They are not raw materials (processing has started) and not finished goods (processing is not complete).

Why WIP matters: Some of the production costs incurred in the period relate to goods NOT yet completed. These costs are 'carried forward' in WIP and will be part of next period's cost of production.

The logic:

• Opening WIP = costs from last period that relate to goods being finished THIS period → added.
• Closing WIP = costs incurred THIS period that relate to goods not yet finished → deducted.

Formula: Cost of production = Manufacturing cost + Opening WIP − Closing WIP

Worked logic example: Manufacturing cost incurred this year = $50,000 Opening WIP = $3,000 (work from last year being finished now) Closing WIP = $4,500 (work started this year, not yet complete) Cost of production = $50,000 + $3,000 − $4,500 = $48,500

Cambridge exam tip: The most common WIP error is adding closing WIP and deducting opening WIP (the wrong way around). Remember: Opening WIP is an asset brought IN; closing WIP is an asset carried OUT. You bring IN what was started before; you carry OUT what is unfinished now.

Once the manufacturing account is complete, cost of production flows into the income statement.

Income statement trading section for a manufacturer:

	$	$
Revenue (Sales)		X
Cost of sales:
Opening finished goods inventory	X
Add: Cost of production (from manufacturing account)	X
Less: Closing finished goods inventory	(X)
Cost of sales		(X)
Gross profit		X

Three distinct inventory accounts in a manufacturing business:

1. Raw materials — appears in the manufacturing account.
2. Work in progress — appears in the manufacturing account.
3. Finished goods — appears in the income statement trading section.

All three inventories appear as current assets in the statement of financial position.

Expenses in the income statement (NOT in the manufacturing account):

• Salaries of office/admin staff
• Selling expenses: advertising, sales staff commissions, carriage outwards
• Distribution expenses
• Office rent, office stationery
• Depreciation on office equipment

Cambridge exam tip: A frequent exam question gives a mixed list of expenses and asks you to prepare both the manufacturing account and the income statement. Sort every item first: is it a direct cost? Factory overhead? Or an income statement expense? Do this before you start writing the accounts.