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Manufacturing accounts
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A manufacturer makes the goods it sells. A manufacturing account works out the cost of producing them.
Three kinds of inventory
Raw materials: materials not yet used in production.
Work in progress: partly finished goods still in production.
Finished goods: completed goods ready for sale.
Each has an opening and closing balance.
Work in progress: partly finished goods still in production.
Finished goods: completed goods ready for sale.
Each has an opening and closing balance.
The manufacturing account
Direct materials (raw materials used) = opening inventory of raw materials + purchases of raw materials − closing inventory of raw materials.
Prime cost = direct materials + direct labour + direct expenses (such as royalties).
Add factory overheads (indirect costs such as factory rent, factory power, supervisors' wages, depreciation of machinery).
Add opening work in progress, less closing work in progress.
= Production cost of goods completed, transferred to the income statement (instead of purchases).
Prime cost = direct materials + direct labour + direct expenses (such as royalties).
Add factory overheads (indirect costs such as factory rent, factory power, supervisors' wages, depreciation of machinery).
Add opening work in progress, less closing work in progress.
= Production cost of goods completed, transferred to the income statement (instead of purchases).
Example
Raw materials used £50 000, direct labour £35 000, direct expenses £3000. Find prime cost.
- Prime cost = direct materials + direct labour + direct expenses
- 50 000 + 35 000 + 3000
Answer: £88 000
Inventory types: raw materials, work in progress, finished goods. Prime cost = direct materials + direct labour + direct expenses. Add factory overheads and adjust for work in progress to get production cost, which goes to the income statement.
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