Exam code:4AC1
Manufacturing account
What is the total cost of production?
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The production cost is the total of the direct costs and the indirect costs
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This is adjusted due to the work in progress not being finished
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Add the value of the work in progress from the beginning of the year
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Subtract the value of the work in progress from the end of the year
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This is similar to dealing with inventory when calculating the net purchases for a trading business
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Cost of production
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= Direct materials
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+ Direct labour
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+ Direct expenses
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+ Factory overheads
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+ Opening work in progress
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– Closing work in progress
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Examiner Tips and Tricks
A business might use a factory and an office. Only the factory expenses are included in the cost of production.
How do I complete a manufacturing account?
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STEP 1
Calculate the cost of raw materials consumed-
Start with the opening inventory of raw material
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Add the purchases of raw materials
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Subtract returns outwards
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Add carriage inwards
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Subtract the closing inventory of raw materials
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STEP 2
Calculate the prime cost-
Start with the cost of raw materials consumed
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Add direct labour
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Add direct expenses
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STEP 3
Calculate the cost of factory overheads-
Add together any costs linked to the factory but not the production
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The production costs should be included in the prime cost
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STEP 4
Add the prime cost and the factory overhead -
STEP 5
Adjust for the work in progress to calculate the production cost-
Add the opening balance for the work in progress
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Subtract the closing balance for the work in progress
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This final value is the production cost
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Examiner Tips and Tricks
Remember the finished goods do not appear on the manufacturing account. They appear on the income statement.
Worked Example
Comfy Chairs is a manufacturer of specialist garden chairs. The following information is available from the business for the year ended 31 August 31 2023.
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$ |
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Inventory at 1 September 2022 Raw materials Work in progress Finished goods |
45 000 6 000 51 000 |
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Inventory at 31 August 2023 Raw materials Work in progress Finished goods |
53 750 8 000 42 000 |
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Purchases of raw materials |
160 000 |
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Factory rent |
24 000 |
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Royalties |
3 440 |
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Depreciation of factory equipment |
6 400 |
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Factory heating and lighting |
5 500 |
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Wages of factory operatives |
16 000 |
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Wages of factory supervisor |
8 000 |
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Factory insurance |
4 220 |
Prepare the manufacturing account of Comfy Chairs for the year ended 31 August 2023.
Answer
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Identify:
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The direct materials
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Raw materials and purchases
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The direct labour
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Wages of factory operatives
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The direct expenses
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Royalties
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Ignore the inventory of finished goods
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The other costs are the factory overheads
Prepare the account in the required format.
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Comfy Chairs Manufacturing Account for the year ended 31 August 2023 |
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Opening inventory of raw materials |
45 000 |
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Purchases of raw materials |
160 000 |
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Closing inventory of raw material |
(53 750) |
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Cost of raw material consumed |
151 250 |
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Direct wages – factory operatives |
16 000 |
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Direct expenses – royalties |
3 440 |
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Prime cost |
170 690 |
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Factory overheads |
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Factory rent |
24 000 |
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Factory insurance |
4 220 |
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Wages – supervisor |
8 000 |
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Factory heating and lighting |
5 500 |
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Depreciation of factory equipment |
6 400 |
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48 120 |
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218 810 |
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Opening inventory of work in progress |
6 000 |
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Closing inventory of work in progress |
(8 000) |
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(2 000) |
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