Accounting for
Manufacturing Businesses

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


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

Questions Relating to This Lesson

Click below to see questions and exercises on this same topic from other visitors to this page... (if there is no published solution to the question/exercise, then try and solve it yourself)

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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