Manufacturing Businesses (Cambridge (CIE) IGCSE Accounting)

Manufacturing Businesses

What are manufacturing businesses?

• Manufacturing businesses make the goods that they sell

• They purchase raw materials in order to create their goods

What financial statements are prepared for manufacturing businesses?

• Manufacturing businesses prepare the following financial statements

  • A manufacturing account

    • This calculates the total cost involved in making goods

  • An income statement

    • This calculates the profit or loss made on the goods sold

  • A statement of financial position

    • This is prepared in a similar way to other non-manufacturing businesses

Direct & Indirect Costs

What are direct costs?

• Direct costs are costs that can be directly linked to the production of the goods

• Examples of direct costs include:

• The prime cost is the total of the direct costs

  • Prime cost = Direct material + Direct labour + Direct expenses

What are indirect costs?

• Indirect costs are not directly linked to the production of the goods

  • These are also known as factory overheads

• These are the costs involved in keeping the factory running on a day-to-day basis

• Such expenses include:

  • Factory rent

  • Depreciation of machinery

  • Indirect wages such as cleaners

  • Factory heating and lighting

Work in Progress & Finished Goods

What are the types of inventory for a manufacturing business?

• A manufacturing business has different types of inventory

• The goods that they make are at different stages of the production process

  • Raw materials

  • Work in progress

  • Finished goods

• All three types of inventory have opening and closing balances