Manufacturing Business

Question 1

What is the difference between a manufacturing business, a retail business and a wholesale business?

Answer 1

Manufacturing: Business which makes goods by using machinery and labour. Often on a large scale
Retail: Business selling in small quantities to the general public
Wholesale: Business selling in large quantities to retailers

Question 2

Explain the term manufacturing

Answer 2

Making goods by using inputs (materials) and adding labour to produce an output (goods)

Question 3

What is manufacturing cost?

Answer 3

Those costs that manufacturer incures to change the raw materials into finished goods

Question 4

What is the purpose of preparing a manufacturing section in the income statement?

Answer 4

To calculate production cost

Question 5

Define the term direct raw materials

Answer 5

Raw materials used in each unit in the production process. Easy to identify and can be measured

Question 6

Define the term direct labour

Answer 6

Labour of the staff directly involved in producing the final product in the factory

Question 7

Define the term direct expenses

Answer 7

Expenses directly linked to the product produced

Question 8

Define the term indirect materials

Answer 8

materials used in the production process that cannot be part of the final product

Question 9

Define the term indirect labour

Answer 9

Labour of the staff not directly involved in the manufacturing process e.g. cleaners, accountants etc.

Question 10

Define the term prime cost

Answer 10

Total cost of the direct raw materials and direct labour spent on the product in manufacturing

Question 11

Define the term factory overheads, with examples

Answer 11

Those factory costs that can be linked with the manufacturing process, but that’s not directly identifiable as part of the cost of the finished product
For example telephone, rent, depreciation etc.

Question 12

Define the term work in progress

Answer 12

Products whose manufacturing is started in the production process, but have not been completed at the end of the financial year

Question 13

How is cost of raw materials calculated?

Answer 13

Opening stock of raw materials
Add purchases of raw materials
Add carriage inwards of raw materials
Less closing stock of raw materials

Question 14

Explain the difference between direct and indirect cost, with examples

Answer 14

Direct: the costs that can be directly linked to manufacturing of a product e.g. raw materials
Indirect: not directly linked to the specific product

Question 15

How is the carriage on purchases of raw materials recorded

Answer 15

Added underneath purchases of raw materials as part of the cost of raw materials

Question 16

How is prime cost calculated?

Answer 16

Direct raw materials + direct expenses + direct labour costs (direct wages; factory wages)

Question 17

How is the unit cost of production

Answer 17

Production of goods completed divided by number of items produced = cost per unit

Question 18

What is the difference between fixed costs and variable costs?

Answer 18

Fixed: part of the total cost that doesn’t depend on the number of items produced
Variable: part of the total cost that’s directly linked to the unit produced

Question 19

How is the total cost of production calculated?

Answer 19

Fixed cost + variable cost

Question 20

What is royalties?

Answer 20

A fee to pay the owner of an asset in exchange for the right to use it

Question 21

Define the concept unit price

Answer 21

Cost of making one article