Accounting for
Manufacturing Businesses



Previous lesson: Perpetual and Periodic Inventory
Next lesson: The Manufacturing Cost Statement






Manufacturing

Manufacturing means to make a product, whether by hand or by machine or both. The word manufacture originates from Latin manu facere meaning "make by hand"; (manus = "hand" and facere = "to make").

Unlike trading businesses, manufacturing businesses do not buy products at a low price and sell at a higher price. Instead manufacturing businesses make products, which they then sell.


Here is the income statement for a trading business (including the calculation of the cost of goods sold):

Income statement trading business

We can see that the cost of the goods sold was determined as follows:

Cost of goods sold equation

The formula above was based on the calculation of the value of closing inventories:

Closing inventories formula



The income statement for a manufacturing business is a bit different to that of a trading business:

Income statement manufacturing business



Finished goods

Here is a key term in manufacturing businesses:

Finished goods: Inventories that have been fully manufactured and are ready for sale.


In a manufacturing business the closing value of finished goods are calculated as follows:

Closing inventory equation

The cost of finished goods that were sold (cost of sales) is thus calculated by saying:

Cost of sales formula


Alrighty. So that's manufacturing businesses - not too bad so far, right?




Previous lesson: Perpetual and Periodic Inventory
Next lesson: The Manufacturing Cost Statement



Read Other Questions Relating to This Lesson
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Adjusting Entry Preparation Manufacturing Business 
#1) How to prepare a journal entry for the transactions related to inventories of raw material, goods in process, & finished goods? #2) How to prepare …



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