Introduction to Financial accounting 1
Session on manufacturing companies
Pure traders as opposed to manufacturers :
- Example of a trader : a garment shop selling dresses
- The purchased goods are identical to the goods sold
- What is the value added of such a business
- Skill in following the fashion
- Offer fashionable garments in a downtown location
- Make a shop welcoming
- Manage the supply
- Manage the dead stocks
- The trading account of a trader
- Example of a manufacturer : a small toy manufacturer
- It makes toys out of wood and tape : the example of "Chinese
- The raw materials : planks and tape spools
- The finished goods : Chinese snakes
- The concept of work in progress stock : piles of tiles cut from planks
- Compute for a manufacturer the equivalent of the cost of goods sold
(purchases - delta stocks for a trader)
- Direct manufacturing costs : Raw Materials (adjusted for delta RM stocks),
Direct labor, Other
- Indirect mfg costs (Overhead mfg costs) :
- Indirect labor (maintenance, forklift truck drivers)
- This yields the cost of manufactured goods : Finished goods and Work in
- Adjustment for the variation in WIP
- This yields the Cost Of the finished Goods Produced (COGP)
- COGP is equivalent to the Purchases of a trader
- COGP adjusted for variation in Finished goods will lead to the Gross
margin of the manufacturer
- The dresses of the garment store were also manufactured by someone
- RM : pieces of cloth, thread, buttons...
- Machines : Sewing machines
- Pieces of cloth also were manufactured by someone
- Machines : weaving machines (looms)
- The flying jenny
- The various contemporary technologies (flying, air, water, telescopic
- The Jacquard weaving machines
- The cards (that lead to computer cards)
- The problems in Lyon
- The Canuts
- The Trade Unions
Manufacturing companies & the manufacturing account :
Manufacturing companies as opposed to trading companies : examples
Examples of Service companies too.
Manufacturing costs of goods produced : Direct costs + Indirect costs (in the factory)
Direct costs : Raw materials, labor, other direct costs (eg. : electricity consumed by a press)
Prime costs = total direct costs
Examples : fork lift truck drivers salaries, repair shop people salaries, repair shop other expenses, plant supervisors salaries, etc.
Total manufacturing expenses
The three types of stock of a manufacturing company :
- raw materials (also called direct materials) stock,
- work-in-progress stock,
- finished goods stock.
- Adjusting raw material costs of manufactured goods with Opening and Closing raw materials stock.
- Adjusting total manufacturing expenditures with Opening and Closing work-in-progress stock, to obtain Total manufacturing cost of goods produced
- The disputable case of adding some "manufacturing profit" to the manufacturing cost of goods produced
- Why ? To compare in-house production costs (+ some profit) to outside sourcing cost.
- Market value of goods produced
The Manufacturing cost of goods produced over the accounting period (or, if we add "profit", the Market value of goods produced)
Once it has been computed, we credit the Manufacturing account for that amount
And we debit the "Finished goods stock account" for the same amount
The "Total manufacturing cost of goods produced", of a manufacturing firm, is the equivalent of the "Purchases", of a trading firm.
Adjusted for the variation in Finished goods stock, it provides the COGS (in the Trading account).
The trading account of a manufacturing firm
Put the "Total manufacturing cost of goods produced" in lieu of the "Purchases"
I.e. debit the Trading account and credit the Finished goods stock account.
Read chapter 6