South African Grade 11 and 12 Accounting: Manufacturing Accounts - Production Cost Statement

This post assumes that you are familiar with the ledger accounts of a manufacturing business. This post and this post look at the ledger accounts.

The Production Cost Statement

At the end of the year, we will make a new financial statement that summarises some of the information from the manufacturing accounts in the General Ledger. This is to help people reading the financial statement understand how certain key figures -- such as Cost of Sales -- were arrived at. By putting it into a financial statement, we make the information more accessible to people, as everything is explained quite clearly. Imagine having to dig through the ledgers every time you wanted to work out the net operating expenses, for example, and you'll quickly see the benefit!

In order to show manufacturing information in an accessible way, we draw up a couple of statements and notes to those statements.

Production Cost Statement

The first statement drawn up is a production cost statement. This is essentially the Work-in-Progress Account, but in the form of a statement.

For example, suppose we have a Work-in-Progress Stock account as follows:

An example Work-in-Progress Stock account

The resulting Production Cost Statement would look like this:

An example Production Cost Statement

Note that the coloured "+", "-", and "=" are there to help with understanding, and are not normally part of the statement.

Notes to the Financial Statements for the Production Cost Statement

Also note that the statement refers to notes for Direct Materials Cost, Direct Labour Cost, and Factory Overhead Cost. These are drawn up as notes to the financial statements, and are also essentially ledger accounts in statement form. The Direct Materials Cost note is based on the Raw Materials Stock account, the Direct Labour Cost note is based on the Direct Labour Cost account, and the Factory Overhead Cost note is based on the Factory Overhead Cost account. Continuing the above example, the notes would look like this (the notes are empty for now, but I'll put numbers in when I get a chance):

Example Notes to the Financial Statements for the Production Cost Statement - error in note 1 to be corrected!

Note that any custom duties would be added in Note 1 above.

Again, note that the coloured signs on the left of each note are just there to help, and are not usually included!

Cost of Finished Goods Sold

This note bridges the gap between the Production Cost Statement and the Trading Statement (or Income Statement). It is essentially the Finished Goods Stock ledger account in the form of a statement:

Example of the Cost of Finished Goods Sold note.

The cost of finished goods sold is the same as Cost of Sales.

Once again, the coloured signs on the left are not normally included. Also, note that the "Total Cost of Production of Finished Goods" amount is the total from the Production Cost Statement.

Trading Statement

The trading statement is the last of these additional statements, and is just used to show how the Gross Profit is calculated. It is essentially the same as the first three lines of an income statement.

Example of a Trading Statement

An important reminder

Marks are sometimes deducted in tests and exams if negative amounts are not shown in brackets. For example, in the Trading Statement, the Cost of Finished Goods Sold amount should be enclosed in brackets, because it represents an expense.