In a manufacturing business the gross return for goods sold con stitutes practically the whole of the "gross product of trading," and the cost of manufacture and the expenses of the concern constitute the total charges against such gross return. The accounts commonly employed are :— (2) The Trading Account, which shows the difference realised between cost and sale price of goods sold during the year (the "gross profit ").
(3\ The Profit and Loss Account, in which the trading and other expenses of the business are set-off against the gross profit brought from trading account, leaving the " net profit" for the year or other period.
The cost of production of the finished articles turned out by a factory in any one year will be the cost of raw materials plus the cost of labour and factory expenses ; it is these matters which (with necessary adjustments for starting and concluding stock of raw materials and work in progress) consequently form the basis of a "Manufacturing Account" as under :— In connection with the above statement lc, must be said that while it is universally admitted that the charges for factory expenses, cost of superin tendence, and depreciation of plant and machinery are part of the cost of production, they are not invariably debited to the manufacturing or trading accounts. It is said that in his mind the manufacturer reckons only upon a basis of the cost of raw materials plus labour, in considering what articles may have cost him and in fixing their selling price ; the question is a controversial one, and beyond the mention of the fact of its existence a detailea consideration of its merits is to be avoided in an abbreviated description.
It is to be observed that it is only such costs and expenses as go to make up the total cost of production that are included in the manufacturing account, and that anything which will not conform to this standard must be relegated to the other accounts.
Having, by means of the manufacturing account, ascertained the cost of manufactured products, it remains to consider their sale. The trading account, of which a form is appended, forms the first part of such process.
The above account will serve to show how the cost, not only of goods manufactured, but also of ready-made goods purchased for re-sale, is charged against the total sales year, and that the result and balance repre sents the gross profit—i.e. the margin between the cost of production and
selling price.
From the trading account the gross profit is transferred to the profit and loss account, and is there subjected to deduction of the general ex penses of the business, and the expenses of selling the goods and obtaining payment therefor as opposed to the expenses incurred in producing them. The form commonly employed follows that set out on next pige, =being specimen form No. 5.
The subject of profit and loss, and the method and principle of the account, is also treated, it may be remarked, in the article on PROFIT.
The warehouse expenses are included in the above account with the general expenses of the concern ; they may, if preferred, be charged in the trading account rather than in the profit and loss account.
The basis on which the foregoing accounts are designed is, it is con tended, one mainly of fact as opposed to estimate ; it must, however, be mentioned that other methods of stating such accounts exist, In t some of them are open to objection on account of the creation in them of artificial entities, and their liability to misuse.
It is frequently contended that the profit derived by a manufacturer consists partly of profit on manufacturing per se, and partly of profit on trading in the products manufactured ; the accounts are sometimes split to show this division, and the transactions are represented as if the manufac turing department had made its products and had sold them at current trade prices to the trading department, which in its turn had re-sold them to the public at large at such enhanced price as it was able to obtain.
The manufacturing and trading accounts then assume the following form ; the figures correspond to those in the specimen forms 3 and 4 previously given.
The weakness of this method lies in the facts that, (1) stock of manu factured goods on hand at end of period is, in the trading department's account, valued at the cost to that department, viz. current trade prices; (2) the cost to the trading department is probably in excess of the cost to the firm itself in its manufacturing department; and consequently (3) manu factured stock appears in the balance sheet at over its cost price, and an unearned and unrealised profit is taken credit for in the balance of profit and loss.