Accounting In Manufacturing And Trading Concerns

A motor car manufacturer, for instance, buys steel, rubber, aluminum, plastic, etc, that is used to manufacture motor vehicles that are sold to dealers (the trading concern). These dealers, in turn, sell vehicles to the customer.

From an accounting point of view the activities of manufacturing and trading enterprises are very similar, especially their administration, sales and financing activities. Therefore, the accounting principles and most of the procedures can be applied to both manufacturing and trading concerns. The main difference between the two is their method of cost accumulation and cost determination for (1) inventory valuation and (2) the calculation of the cost of goods sold. The difference arises from the fact that trading enterprises buy completed goods, while manufacturers make the goods sold by dealers.

The 'accounting cost of goods manufactured' item in the manufacturing enterprise therefore correspondents to the 'accounting cost of good purchased' item in the trading enterprise. In both cases these amounts represent the cost of finished goods available for sale. The trading enterprise, having bought its goods in a 'finished' form, experiences little difficulty in determining their cost. The manufacturing enterprise, on the other hand, has to account for the cost of converting the raw materials into finished goods (also know as manufacturing costs).

In converting the raw materials into finished products, the manufacturer makes use of labor, machinery and equipment and also incurs other manufacturing costs such as power consumption, maintenance of machinery, etc. All these costs must be added to the cost of the raw materials to determine the cost of manufactured goods for any period.

Therefore, the accounting records of a manufacturing enterprise must be extended to make provision for recording the various additional costs manufacturer to manufacturers.

The three most important elements of manufacturing costs are material, labor and manufacturing overheads. In accounting costing terminology, material and labor costs together are known as primary costs, while the accounting term conversion costs represents the combination of labor and general manufacturing costs.

By virtue of the nature of a manufacturing enterprise's activities, it will require more accounting ledger accounts than a trading enterprise. The ledger must provide for aspects such as machinery and equipment, inventory, raw materials, work-in-progress, finished goods, etc. It is necessary to devote special attention to the various inventory accounts.

At any given time, a manufacturer will have different types of inventory on hand: material inventory ready for use in the manufacturing process; Partially completed products still in the process of being manufactured; And finished goods that must be dispatched to dealers. Inventory accounting records and different accounting inventory accounts must be kept in order to determine the costs of each type of inventory at the end of a financial period. All three inventory accounts are asset accounts and are usually kept according to a perpetual accounting inventory system. At the same time they are control accounts supported by the appropriate subsidiary records

Source by Michael Russell

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