Manufacturing accounts Cambridge IGCSE Accounting revision
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In plain words
A shop buys its goods ready to sell. A factory has to work out what its goods cost to make. A manufacturing account does this before the statement of profit or loss begins, building the cost up layer by layer.
7 things to know
- Direct costs can be traced to the product: direct materials, direct labour (the wages of the workers who make it) and direct expenses, such as royalties.
- Indirect costs, called factory overheads, cannot: factory rent, factory supervisors' wages, depreciation of machinery, factory power.
- Cost of raw materials consumed = opening inventory of raw materials + purchases of raw materials + carriage inwards − closing inventory of raw materials.
- Prime cost = direct materials + direct labour + direct expenses.
- Cost of production = prime cost + factory overheads + opening work in progress − closing work in progress.
- The cost of production is transferred to the trading section of the statement of profit or loss, where it takes the place of purchases.
- A manufacturer has three inventories: raw materials and work in progress, which are used in the manufacturing account, and finished goods, used in the trading section. All three are current assets.
Worked example
Raw materials consumed cost $60 000. Direct wages are $45 000 and royalties $3000. Factory overheads are $27 000. Work in progress was $5000 at the start of the year and $6500 at the end. Calculate the prime cost and the cost of production.
- Prime cost = 60 000 + 45 000 + 3000 = $108 000.
- Add factory overheads: 108 000 + 27 000 = 135 000.
- Add opening work in progress and deduct closing: 135 000 + 5000 − 6500 = $133 500.
Tips and tricks
- Only factory costs go in the manufacturing account. Office salaries, selling costs and office rent go in the statement of profit or loss.
- Label the prime cost and the cost of production. The labels carry marks, and so does putting each cost in the right section.
It lands in your notebook with its questions as flashcards.
Manufacturing accounts: 6 questions and answers
These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.
Which of these is a direct cost?
It can be traced straight to the product.
What is prime cost?
Direct materials + direct labour + direct expenses.
Which of these is a factory overhead?
It is an indirect cost of the factory.
Where is the cost of production transferred to?
It takes the place of purchases.
Which inventory is used in the trading section, not in the manufacturing account?
Finished goods are ready to sell.
Prime cost $50 000, factory overheads $20 000, opening work in progress $2000, closing work in progress $5000. What is the cost of production?
50 000 + 20 000 + 2000 − 5000.
Quiz
6 questions
Tap an answer and you’ll see straight away whether it’s right, and why.
Worksheet
3 questions, 7 marks. Write your answers on paper, then check them.
Manufacturing accounts
Cambridge IGCSE Accounting 0452 · 7 marks · papermunch.org
Name ______________________________ Date ______________
Explain the difference between a direct cost and an indirect cost.[2]
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A direct cost can be traced to the product being made, such as raw materials. An indirect cost cannot, such as factory rent.
Opening inventory of raw materials is $7000, purchases of raw materials are $52 000, carriage inwards is $1500 and closing inventory of raw materials is $8200. Calculate the cost of raw materials consumed.[3]
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$52 300. 7000 + 52 000 + 1500 − 8200.
Prime cost is $90 000, factory overheads are $24 000, opening work in progress is $3000 and closing work in progress is $4000. Calculate the cost of production.[2]
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$113 000. 90 000 + 24 000 + 3000 − 4000.
Answers: Manufacturing accounts
- 1. A direct cost can be traced to the product being made, such as raw materials. An indirect cost cannot, such as factory rent.
- 2. $52 300. 7000 + 52 000 + 1500 − 8200.
- 3. $113 000. 90 000 + 24 000 + 3000 − 4000.