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.
In this tutorial I'm going to show you one of the primary differences when accounting for manufacturing businesses (instead of service or trading businesses). This difference can be seen in the income statement.
First, let's recap. Here is the income statement for a trading business (including the calculation of the cost of goods sold):
We can see that the cost of the goods sold was determined as follows:
The formula above was based on the calculation of the value of closing inventories:
The income statement for a manufacturing business is a bit different to that of a trading business:
Where do we get those new lines above about finished goods, and what exactly does this mean?
Here is the definition of this key term for manufacturing businesses:
Finished goods: Inventories that have been fully manufactured and are ready for sale.
The cost of goods sold calculation in the above income statement was derived from a formula...
In a manufacturing business the closing value of finished goods are calculated as follows:
The cost of finished goods that were sold (cost of sales) is thus calculated by saying:
And that is how we got what we did in the income statement above for manufacturing businesses.
Alrighty. So accounting for manufacturing businesses is not too bad so far, right? If you're happy with this lesson move on to the second lesson on the subject, which goes over the manufacturing cost statement.