Manufacturing Business

Manufacturing Business

Profit and loss account of a trading business must contains the cost of goods actually sold. The cost of goods purchased and held in stock must be excluded. For same reason the profit and loss account of a manufacturing business must only contain the manufacturing costs of goods actually sold in the period.  The manufacturing costs of goods not sold must be excluded.As with a trading business it will probably be necessary to stock-take at the beginning and end of the period, but if controls are goods and there have been efficient checks, it may not be necessary.

The profit and loss account of a manufacturing business has certain similarities with the profit and loss account of a trading business.

The gross profit (Net profit + Expenses) is the different sales and the manufacturing cost of the goods sold. The manufacturing cost includes the cost of raw materials, bought in components, and also such things as factory wages and the costs of the factory, such as power and depreciation of machinery.

Sometimes the manufacturing costs are shown in separate manufacturing account (In big manufacturing companies). This leads to a manufacturing profit which is carried forward to the profit and loss account, with other costs being deducted in the profit and loss account. However, it is more common to have just the profit and loss account, with the manufacturing section set out at the top and leading to the manufacturing profit.

An illustrated and Simplified Example

J.J.S Ltd manufactures ans sells suitcases.

  • Sales in the year to 30 June were $1000000.
  • Purchase of materials and components in the year totaled $400000.
  • Stock at 30 June was $365000 and at the previous 30 June it was $320000
  • Wages of production staff were $216000
  • Factory rent was $110000
  • Factory power costs were $40000
  • Other production costs were $40000
  • Salaries of salesmen, administration staff and management totaled $82000
  • Other overheads were $66000
Profit and loss account example of a manufacturing business

J.J.S ltd report

Note that the costs are split into two sections. All costs relating to the product and manufacturing go into the top part of statement. These contribute to the cost of manufacturing and to the subtotal which is the manufacturing profit.Overheads costs go below this subtotal.

Taxation and Appropriation

The above example, have ended at the “Net Profit” or “Net Loss” stage. But better wording would be “Net profit before Tax” or “Net Loss before Tax”. Then tax charges must be deducted from it, so that we have “Net Profit after Tax” or “Net Loss after Tax”. If there has been a loss, it may be possible to add back a tax adjustment.

Appropriation is the divining up of the profit after tax. In the case of sole trader it is not necessary  because it goes straight to the sole trader’s capital account. It is important to ensure that Appropriation are not classed as an expenses account, unlike interest is an expense. It is a bad mistake.

The following is an example of the bottom part of the profit and loss account of a partnership. The partnership is Mr. Jack and Mr. Smith with equal shareholding

  • Profit before Tax:      130,000
  • Less Tax:                       30,000
  • Profit after Tax:          100,000
  • Mr Jack 50% :              50,000
  • Mr Smith 50% :           50,000