19 - Manufacturing accounts Flashcards
what are manufacturing accounts for
businesses involved in a production process
what is opening inventory, purchases
OPENING INVENTORY = stock brought forward from the prior period
PURCHASES = items acquired in the current period and are recognised as expenses in statement of profit/loss under cost of sales
where does unsold inventory sit and goods held
this will be sold in the next accounting period so shouldn’t form part of the current year cost of sales expense
goods held at the end of the period are included as an asset in the statement of financial position and as a reduction in cost of sales in statement of profit/loss
what components of inventory do manufacturing businesses have
- finished goods
- raw materials
- work in progress
they will have an opening and closing of each one
what are raw materials/work in progress
basic materials/substances used to manufacture goods
purchased by manufacturing companies to convert into finished goods to be sold
while the raw materials are being converted into finished goods they are classified as work in progress (WIP)
what does work in progress cover
refers to raw materials, labour and overhead costs incurred for products that are at various stages in the production process
define a manufacturing account
= an account in which the cost of producing finished goods is calculated. it is prepared for internal use
what is a prime cost and its implications
PRIME COST = the direct cost incurred in the manufacturing process and varies with the number of goods produced
main components are raw materials, direct labour, direct expenses
changes every time an extra unit is made
what is an indirect cost and its implications
INDIRECT COST = factory costs associated with the manufacturing process which do not change every time an extra unit is made
eg indirect factory wages paid to production managers paid the same amount regardless of units
so indirect costs include fixed costs
other examples = rent, insurance, depreciation on factory machines
also known as production overheads
what is the factory cost of production and its implications
FACTORY COST OF PRODUCTION = total of prime cost + indirect cost
total cost of goods manufactured in the period
to enable final accounts to be prepared on accruals basis, factory cost of production must be adjusted for opening and closing WIP so cost of finished goods produced can be calculated
what is the value of WIP at the reporting date
prime cost + a share of the indirect production costs
what is the result of the comparison of factory cost of production and cost of finished goods produced
if value of WIP has increased = decrease in cost of finished goods produced
if value of WIP has fallen = increase in cost of finished goods produced
formula for cost of finished goods
factory cost of production adjusted for WIP = cost of finished goods produced
once this has been calculated it is transferred to statement of profit/loss
