25Manufacturing Economics

25.1 Introduction

25.1.1 Accounting in Manufacturing

The financial aspects of manufacturing cover such a broad range of activities that to explain them in one chapter is impossible. What is therefore attempted here is an outline of some of the financial features involved in running a manufacturing organisation. Most of what is discussed comes under the classification of ‘Management Accounting’, a term widely used to describe those accounting procedures used as an aid to management.

Within a manufacturing company the finance department utilises accounting information for three basic purposes. The first is decision making; here, information on probable costs and increases or decreases in profits associated with alternative courses of action are analysed. Second, information is provided to assist with efficient control of the manufacturing system; included here will be the preparation of budgets and the subsequent analysis of costs incurred against those planned. Finally, the information is used for reporting and recording; this involves the compilation and updating of financial records and reports, not only for management, but also for shareholders who will be interested in profit and loss accounts and so on, and for the government who will need the information for tax purposes. We will limit our concern here to the decision making and control activities.

25.1.2 The Composition of Manufacturing Costs

Figure 25.1 shows the approximate distribution of ...

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