Topic 15 - Manufacturing

Question 1

Why do firms prepare manufacturing accounts?

Answer 1

• Calculate cost of production for the factory
• Use cost of production to calculate cost of sales and gross profit

Question 2

What are the 3 types of inventories?

Answer 2

Raw materials inventory: Inventory of crude or processed material that can be converted by manufacture into a saleable good. The raw materials are the resource needed to make finished goods.

Work in progress inventory: Goods which have started their manufacturing process so are no longer included in the raw materials inventory, but have not yet reached a stage where they are fit to be sold. These are the partly completed goods at the end of the financial year.

Finished goods inventory: Goods which have fully completed the manufacturing process and are available to be sold.

Question 3

What are the direct costs?

Answer 3

• Cost of raw materials consumed
• Direct labour (e.g. direct wages)
• Direct expenses (e.g. royalties, hire of special equipment)
• Prime cost (variable costs)

Question 4

What are the indirect costs?

Answer 4

• Factory overheads (fixed costs)

Question 5

When will a manufacturer decide to purchase finished goods instead of making them?

Answer 5

• If it is cheaper to purchase them
• When they do not possess the necessary resources (skills, capital)
• When they do not have the capacity to manufacture them on time (unexpected demand)