Manufacturing and Company Accounts: notes

Prime Cost and Factory Overhead

• Prime cost: direct materials, direct wages and direct expenses. Example: materials $4,000 plus wages $3,000 gives $7,000.
• Factory overhead: indirect factory costs such as rent and power. Example: rent $1,200 plus power $800 gives $2,000.
• Manufacturing account: records all factory costs and calculates the cost of production.

Cost of Production and Work in Progress

• Cost of production: prime cost plus factory overhead plus opening work in progress, less closing work in progress. Example: $7,000 plus $2,000 plus $500, less $300, gives $9,200.
• Work in progress: goods only partly finished at period end. Example: closing work in progress of $300 is shown as a current asset.

Share Capital and Dividends

• Share capital: money paid to the company for shares. Example: 2,000 ordinary shares at $1 each gives $2,000.
• Ordinary shares: normal shares with voting rights, paid dividends after preference shares.
• Preference shares: fixed dividend paid before ordinary shareholders, usually with no vote. Example: 10% on $5,000 gives $500.
• Dividend: part of profit paid to shareholders. Example: an ordinary dividend of $4,000 is paid from profit.

Reserves, Debentures and Appropriation

• Reserves: profit kept back in the business. Example: a general reserve of $3,000.
• Debentures: long term loans with fixed interest, paid whether or not there is profit. Example: $10,000 at 8% gives $800 interest a year.
• Appropriation account: shares out net profit. Example: net profit $20,000, less general reserve $3,000, preference dividend $500 and ordinary dividend $4,000, leaves $12,500 retained profit.
• Balance sheet: shareholders' funds are share capital plus reserves plus retained profit. Example: $10,000 plus $3,000 plus $12,500 gives $25,500. Debentures appear as a long term liability.