Factory Overheads

Definition of Factory Overheads Factory overheads are the aggregate of indirect materials, labor, and other costs that cannot be identified conveniently with the articles produced or services rendered. The benefits arising from these costs cannot be associated with a specific cost unit. Instead, they are apportioned across the cost units on an equitable basis. Overheads are an element of cost but…

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Production Cost

Definition and Explanation Production cost is also known as factory cost and cost of goods manufactured. It is the sum of prime cost and production overheads. This figure is presented in a special ledger account called the manufacturing account. The figures disclosed in the trial balance of a manufacturing concern may relate to raw materials, direct labor, and factory overheads. These figures are…

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Vertical Presentation of Manufacturing Account

Manufacturing accounts are often presented in a vertical format. This way of preparing final accounts is regarded as advantageous and is, therefore, in common use today. An example of a manufacturing account in vertical form is shown below.

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Differences Between Trading and Manufacturing Concerns

This article outlines the differences between trading and manufacturing concerns. Nature of Purchases Trading Concern: These businesses purchase merchandise in a ready shape to be sold. For example, a furniture dealer purchases furniture from a manufacturer and sells it to customers without additional processing. Manufacturing Concern: Manufacturing institutions use labor and machinery to convert…

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Stocks of a Manufacturing Concern

A manufacturing business would hold the following stocks at the beginning and end of each financial year: raw materials, finished goods, and work-in-progress. An overview of how to account for these stocks is given below. Raw Materials Accounted for when calculating the cost of raw materials used in the manufacturing statement. Finished Goods These goods are ready for sale. They are accounted for…

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Work-in-Process (WIP)

At the end of any financial period, certain goods in every manufacturing concern have been partially processed. As such, they are no longer raw materials. However, at the same time, they are not fully processed and cannot be called finished goods. Such goods are called work-in-progress, unfinished goods, or work-in-process. If the production cycle of a factory is relatively short, the value of wor…

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Valuation of Work-in-Progress

Definition and Explanation Due to its peculiar nature, the valuation of work-in-progress should include the cost of raw materials used thus far, as well as the cost of direct labor and the production expenses used to bring the material into the state of work-in-progress. Valuation Methods for Work-in-Progress The valuation methods used for work-in-progress are relatively complex. However, in gener…

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Accounting Treatment of Work-in-Progress

Accounting Treatment of Work-in-Progress Any work-in-progress at the beginning of the financial year becomes part of the goods manufactured in that year, despite being fed into machines (in the form of raw materials and labor, etc.) in the previous year. The value of work-in-progress should, therefore, be excluded from the cost of goods manufactured in the year in which they were fed into the mach…

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Trading Account of a Manufacturing Company

In the trading account of a manufacturing company, the production cost figure (as calculated by drawing up the manufacturing statement) should be used in place of the purchases figure. Opening stock of finished goods should be added to production cost (or cost of goods manufactured) to arrive at the value of goods available for sale. The value of the closing stock of finished goods should be deduc…

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How to Prepare Income Statements for a Manufacturing Company

Introduction The income statement for merchandising and manufacturing companies differs in the reporting of the cost of the merchandise (goods) available for sale and sold during the period. This lecture will clarify how to prepare the income statement for a manufacturing company.  A manufacturing company has no need to prepare a manufacturing account, statement of production, or a cost sheet, bef…

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