Are you struggling to create your manufacturing income statement or confused about a merchandise income statement?
All your doubts will be cleared in this article. I’ve included information on what a manufacturing income statement is, its format, three different inventory schedules, and how to create it.
Let’s dive into the article.
What is the Manufacturing Income Statement
The manufacturing income statement is similar to other income statements, but it is more complex compared to service or merchandise income statements.
Unlike the service sector, which has no manufacturing processes, and the merchandise business, which doesn’t produce products, manufacturing businesses need to account for and track the cost of production, making it more intricate.
While there isn’t a universal income statement for all businesses, different industries use it as needed, following the same format. If you’re not familiar with it, let me explain briefly.
An income statement consists of revenue, expenses, and subtracting these to calculate net income at the bottom. Regardless of whether your business is merchandise or manufacturing, most of the accounts will be the same.
Some differ for both statements, and we’ll compare them later, but first, let’s look at the details of the manufacturing profit and loss statement.
Note: An income statement is also referred to as a profit and loss statement.
Unique Inventories
The manufacturing income statement has three unique inventories: raw material, work in progress, and finished goods. Let’s understand each schedule.
Raw Material: Raw materials are used in manufacturing products. This schedule includes beginning raw materials, purchased raw materials, and ending raw materials.
To calculate how much raw material is used, we need to figure out the cost of raw materials.
To calculate, use this formula
\text{Cost of Raw Materials Used} = \text{Beginning Raw Materials} + \text{Purchased Raw Materials} - \text{Ending Raw Materials}
Work in Process: This schedule includes the cost of raw material, direct labor, and other overhead costs that are still in progress in manufacturing but not yet finished.
To calculate the cost of work in progress, use this formula:
\text{WIP Cost} = \text{Raw Materials} + \text{Direct Labor} + \text{Overhead Cost}
Finished Goods: Finished goods are products manufactured and ready for sale. The cost of finished goods is different from manufactured goods.
This schedule is nothing but a combination of the raw materials and work in progress schedules. After combining both of them, some elements become rearranged for better clarity.
Now, let’s explore the format of the manufacturing profit and loss statement.
Income statement for manufacturing company Format
The format of the income statement is straightforward and remains similar when professionals create it, regardless of the type of business.
However, the schedules discussed above are not typically included in the financial statement. They are designed for internal analysis to determine values for income statement accounts.
Instead of including almost all accounts, the manufacturing income statement usually focuses on the cost of goods sold. This is because financial statements are externally used by lenders and investors.
Here’s a simplified version of an income statement:
| Revenue |
| Cost of Goods Sold (COGS) |
| Gross Profit |
| Operating Expenses |
| Operating Income |
| Net Income |
Breakdown of the cost of goods sold:
| Accounts: | Amount |
| Cost of Goods Sold (COGS) | |
| Raw Material Costs | |
| Manufacturing Costs (Direct Labor, Factory Overhead) | |
| Total Manufacturing Costs | |
| Beginning Work in Progress Inventory | |
| Ending Work in Progress Inventory | |
| Cost of Goods Manufactured | |
| Beginning Finished Goods Inventory | |
| Ending Finished Goods Inventory | |
| Cost of Goods Sold | |
| Gross Profit |
Generally, companies do not include all of these accounts because if they do, it negatively impact on their business.
competitors can discern labor costs and make comparisons. Additionally, customers can ascertain the cost of the product and evaluate how selling prices compare to costs.
Manufacturing vs. Merchandise Income Statement
Service Companies: Simple income statements, as they don’t sell goods and have no inventory.
Merchandising Companies (Retail): More complex than service companies due to buying and selling goods, but they don’t manufacture.
Manufacturing Companies: Have different inventory and manufacturing costs, making their income statements more complex.
Comparison Points:
1. Merchandisers record purchases as net purchases, while manufacturers account for them as the cost of goods manufactured.
2. Merchandisers don’t need raw material and finished goods schedules, having fewer inventories than manufacturers.
3. Manufacturers have raw materials, work in process, and finished goods inventory. Although all are included in a single account in the income statement, they are calculated separately.
How to Prepare a Manufacturing Income Statement
To prepare a manufacturing income statement, follow the same format used by other companies.
The majority of the income statement remains consistent across business types, with only a few accounts changing and rearranging for manufacturing companies. Focus on important accounts and use the three schedules:
1. Schedule of Raw Materials Placed in Production
2. Schedule of Cost of Goods Manufactured: Total manufacturing costs broken down into raw materials, work in progress, and finished goods.
3. Shedule of Cost of Goods Sold: Costs dedicated to goods sold during a specific accounting period.
So, using these accounts, professionals create the income statement for a manufacturing company.
Conclusion
Creating financial statements for a manufacturing company may be a bit more complex compared to merchandising and services, but not as challenging as one might think.
Nevertheless, it’s crucial for accountants to have a strong foundation in the other statements. I suggest you read my comprehensive article on the cash flow statement. It will significantly enhance your knowledge.