Manufacturing Businesses (Edexcel IGCSE Accounting)

Revision Note

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:

Type of direct cost

Definition

Example

Direct material

These are the raw materials used to make the goods

Wood, nails, glue, paint, varnish, etc

Direct labour

These are the wages for those who directly make, assemble or package the goods

Factory workers, assembly employees, etc

Direct expenses

These are the other costs that are directly linked to the production of the goods

Royalties, hire of tools or machinery, consultant fees, etc

  • 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

Examiner Tips and Tricks

Which of the following is a direct cost for a manufacturing business?

A

The wages of staff taking phone calls in the factory

B

The rental charge paid for the factory

C

The charge paid to an inventor for using their design

D

The monthly charge paid to the bank

Answer

A

This is an indirect cost

B

This is an indirect cost

C

This is the correct answer

D

This is an indirect cost

Raw Materials, 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

Type of inventory

Definition

Financial statement affected

Raw materials

The resources in stock which are needed to make the goods

Appears in the manufacturing account, and as a current asset in the statement of financial position

Work in progress

The goods which are in the process of being made and are partly completed

Appears in the manufacturing account, and as a current asset in the statement of financial position

Finished goods

The goods which are completely finished and are waiting to be sold to customers

Appears in the income statement for the inventory values, and as a current asset in the statement of financial position

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