Manufacturing Account (Cambridge International A-Level Accounting)

Manufacturing accounts

Spec point — how to prepare a manufacturing account, to differentiate between direct and indirect expenses and to include factory profit

What is the total cost of production?

• The total cost of production is the total of the direct costs and the indirect costs

• This is adjusted due to the work in progress not being finished

  • Add the value of the work in progress from the beginning of the year

  • Subtract the value of the work in progress from the end of the year

    • This is similar to dealing with inventory when calculating the net purchases for a trading business

• Cost of production

  • = Direct materials
  • • Direct labour
  • • Direct expenses
  • • Factory overheads
  • • Opening work in progress
  • • Closing work in progress

Exam Hint 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?

• STEP 1 Calculate the cost of materials consumed

  • Start with the opening inventory of raw material

  • Add the purchases of raw materials

    • Subtract purchases returns

  • Add carriage inwards

  • Subtract the closing inventory of raw materials

• STEP 2 Calculate the prime cost

  • Start with the cost of materials consumed
  • Add direct labour
  • Add direct expenses

• STEP 3 Calculate the cost of factory overheads

  • Add together any costs linked to the factory but not the production

    • The production costs should be included in the prime cost

• STEP 4 Add the prime cost and the factory overheads

• STEP 5 Adjust for the work in progress to calculate the cost of production

  • Add the opening balance for the work in progress to the current total cost
  • Subtract the closing balance for the work in progress
  • This final value is the cost of production

• STEP 6 Add the factory profit to calculate the transfer value

  • You will have to find the mark-up on the cost of production

Layout of a manufacturing account

Exam Hint Remember the finished goods do not appear on the manufacturing account. They appear on the statement of profit or loss.

Worked Example Comfy Chairs is a manufacturer of specialist garden chairs. It applies a rate of factory profit of 30%.

The following information is available from the business for the year ended 31 August 2023.

	$
Inventory at 1 September 2022
Raw materials	45 000
Work in progress	6 000
Finished goods	51 000
Inventory at 31 August 2023
Raw materials	53 750
Work in progress	8 000
Finished goods	42 000
Purchases of raw materials	160 000
Factory rent	24 000
Royalties	3 440
Depreciation of factory equipment	6 400
Factory heating and lighting	5 500
Wages of factory operatives	16 000
Wages of factory supervisor	8 000
Factory insurance	4 220

Prepare the manufacturing account of Comfy Chairs for the year ended 31 August 2023.

Answer:

• Identify:

  • The direct materials

    • Raw materials and purchases

  • The direct labour

    • Wages of factory operatives

  • The direct expenses

    • Royalties

• Ignore the inventory of finished goods

• The other costs are the factory overheads

• Prepare the account in the required format

• Multiply the cost of production by 30% to get the factory profit

$216 810 × 30% = $65 043

Final answer: Comfy Chairs Final answer: Manufacturing Account for the year ended 31 August 2023
Final answer: Cost of material consumed
Final answer: Opening inventory of raw materials		Final answer: 45 000
Final answer: Purchases of raw materials		Final answer: 160 000
		Final answer: 205 000
Final answer: Less: Closing inventory of raw materials		Final answer: (53 750)
		Final answer: 151 250
Final answer: Direct wages - factory operatives		Final answer: 16 000
Final answer: Direct expenses - royalties		Final answer: 3 440
Final answer: Prime cost		Final answer: 170 690
Final answer: Factory overheads
Final answer: Factory rent	Final answer: 24 000
Final answer: Factory insurance	Final answer: 4 220
Final answer: Wages - supervisor	Final answer: 8 000
Final answer: Factory heating and lighting	Final answer: 5 500
Final answer: Depreciation of factory equipment	Final answer: 6 400	Final answer: 48 120
		Final answer: 218 810
Final answer: Add: Opening work in progress		Final answer: 6 000
		Final answer: 224 810
Final answer: Less: Closing work in progress		Final answer: (8 000)
Final answer: Cost of production		Final answer: 216 810
Final answer: Factory profit		Final answer: 65 043
Final answer: Transfer value		Final answer: 281 853