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The manufacturing account

Financial statements for a

manufacturing business

1.1 Manufacturing entities

In most respects the financial statements of a manufacturing entity show no major or
fundamental differences from what you have already studied. Its statement of
financial position will be very similar, although it is worth noting that the asset of
inventory in a manufacturing entity is likely to comprise raw materials, work-in-
progress and finished goods.

The statement of profit or loss will be almost identical. The one exception is that
instead of the cost of finished goods purchased in the year, the trading account will
show the cost of finished goods manufactured in the year.

1.2 Why is a manufacturing account needed?

Manufacturers may sell their finished products directly to the public, or may sell them
to another trading entity such as a wholesaler or retailer. The statement of profit or
loss is used to bring together the income and expenditure of trading and operating
the entity, and this still applies to a manufacturing entity. However, the calculation of
the cost of goods sold by a retail or wholesale entity is relatively straightforward, that
is, opening inventory, plus purchases, less closing inventory. Calculating the cost of
goods manufactured is often more detailed than this, as the manufacturing entity will
incur not only the cost of materials but also labour costs and other expenses incurred
during the manufacturing process. The manufacturing account is used to bring
together the costs of manufacturing during the accounting period.

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