1. BUSINESS ORGANISATIONS  Up until now we have dealt with the accounts of: Sole Traders Partnerships Companies  These businesses purchase stock and hope to resell it to make a profit.

2. MANUFACTURING ACCOUNTS  Lets now consider a business who actually manufactures (makes) the stock that they are to sell.  For example: Bannerman Trading Company manufacture desks.  List some of the things/costs that are involved in producing a desk:

3. Cost of Goods Produced  The manufacturer must ascertain the Cost of Goods he produces.  In order to do so, another Account must be produced: A MANUFACTURING ACCOUNT  This Account is prepared FIRST and the Cost of Production is then transferred to the Trading and Profit and Loss Account

4. THE MANUFACTURING ACCOUNT  This Account contains ALL of the Costs of Producing the goods.  These costs can be divided into 2 distinct groups: PRIME (First) COSTS OVERHEADS (Running Costs)

5. PRIME COSTS  These costs show the first, direct costs the business faces in producing the products.  These are: DIRECT LABOUR eg Factory Wages DIRECT MATERIAL eg Cost of Raw Materials, Carriage on Raw Materials DIRECT EXPENSES eg Expenses which would vary directly with the quantity of goods produced

6. OVERHEADS  These are all the expenses of running the factory, but which cannot be easily traced to the products being made They do NOT vary directly with the quantity of goods produced Factory Power Factory RentFactory Rates Factory Heat + Light Factory Repairs Depreciation of Factory Machinery

7. CONCLUSION TOTAL COST OF PRODUCTION = PRIME COSTS + OVERHEADS We now have enough information to look at how a Manufacturing Account is prepared. Lets try Exercise 1

8. EXERCISE 1  Below is the details of PRODUCTION COSTS of Bannerman Trading Company for the year ended 31 December 1 January Stock of Raw Materials 500 31 December Stock of Raw Materials 700 Raw Materials Consumed 8000 Carriage Inwards 200 Direct Manufacturing Wages 21000 Royalties 150 Indirect Wages 9000 Rent of Factory 440 Factory Maintenance Costs 400 General Indirect Expenses 310

9. WORK IN PROGRESS  Since the Manufacturing Account has to show the Cost of Goods completed during the Accounting period, an adjustment is required for goods partly completed at the beginning and end of the accounting period  Work-in-progress is the term given to goods only partly completed at the beginning and end of the financial year  We can therefore have an Opening Stock of Work in Progress Closing Stock of Work in Progress

10. Opening Stock of W-In-P  Goods only PART COMPLETE at the beginning of the accounting period must be included in this accounting period since this is when they will have been completed and therefore available for sale

11. Closing Stock of W-In-P  Goods only PART COMPLETE at the end of the accounting period must be carried forward to the next accounting period, since this is when they will be completed.  As such they should NOT be included in this year’s costs.

12. W-In-P Rule  ADD Opening Stock of Work in Progress  SUBTRACT Closing Stock of Work in Progress

13. Exercise 1 cont  Work in Progress at 1 Jan £400  Work in Progress at 31 Dec £650  Lets complete the Manufacturing Account using this information.