IGCSE Accounting 0452 - 5.5 Manufacturing Accounts

Objective

Prepare manufacturing accounts, income statements, and statements of financial position.

Manufacturing Accounts

Manufacturing accounts track the costs associated with producing goods. They are prepared to determine the cost of goods manufactured (COGM).

The key components of manufacturing accounts are:

• Direct Materials
• Direct Labour
• Manufacturing Overheads

The calculation for COGM is:

$$COGM = Direct Materials + Direct Labour + Manufacturing Overheads - Opening Stock of Work-in-Progress - Closing Stock of Work-in-Progress$$

Manufacturing Accounts - Example

The following is an example of a manufacturing account:

Account	Amount (£)
Opening Stock of Work-in-Progress	1,500
Direct Materials Consumed	5,000
Direct Labour	3,000
Manufacturing Overheads	2,000
Closing Stock of Work-in-Progress	1,000
Cost of Goods Manufactured	9,500

Income Statement

The income statement shows the profitability of a business over a period. It calculates gross profit and net profit.

The formula for gross profit is:

$$Gross Profit = Revenue - Cost of Goods Sold$$

The formula for net profit is:

$$Net Profit = Gross Profit - Operating Expenses$$

Income Statement - Example

The following is an example of an income statement:

Item	Amount (£)
Revenue	20,000
Cost of Goods Sold	12,500
Gross Profit	7,500
Operating Expenses	4,000
Net Profit	3,500

Statement of Financial Position (Balance Sheet)

The statement of financial position shows a company's assets, liabilities, and equity at a specific point in time. The fundamental equation is:

$$Assets = Liabilities + Equity$$

Key components include:

• Assets:
• Current Assets (e.g., cash, receivables, inventory)
• Non-Current Assets (e.g., property, plant, and equipment)
• Liabilities:
• Current Liabilities (e.g., payables, loans)
• Non-Current Liabilities (e.g., long-term loans)
• Equity:
• Share Capital
• Retained Earnings

Statement of Financial Position - Example

The following is an example of a statement of financial position:

Assets	Amount (£)
Current Assets	8,000
Non-Current Assets	15,000
Total Assets	23,000
Liabilities & Equity	Amount (£)
Current Liabilities	5,000
Non-Current Liabilities	10,000
Total Liabilities	15,000
Equity	8,000
Total Equity	8,000
Total Liabilities & Equity	23,000

Relationship between Manufacturing Accounts, Income Statement, and Statement of Financial Position

The Cost of Goods Manufactured (COGM) from the manufacturing accounts is used in the income statement to calculate the Cost of Goods Sold (COGS). The COGS then impacts the gross profit and ultimately the net profit. The net profit contributes to the retained earnings within the equity section of the statement of financial position.