IGCSE Manufacturing Accounts
In this lesson, we will learn to differentiate between direct and indirect manufacturing cost; and how to calculate direct material cost, direct labour cost, direct manufacturing expenses, factory overheads and prime cost. We will also learn how to prepare the manufacturing account including the recording of work-in-progress to determine the total production cost of our finished goods. Finally, we will learn how to prepare the Income statement and Statement of financial position of a manufacturing company.
Related Lessons:
Calculating Direct and Indirect Costs
Direct Manufacturing Cost includes:
Direct Material Cost is the raw material required to make the finished goods.
To calculation direct material cost:
Opening inventory of raw material + Purchases of raw material + Carriage Inwards of raw material – Closing inventory of raw material
Direct Labour Cost is the wages paid to employees directly involved in producing the finished goods.
Direct Manufacturing Expenses are expenses directly linked to the production of goods.
Examples would be royalty fees, leasing cost of machinery required to produce the goods.
Prime Cost is the total direct cost incurred to produce the finished good. It is calculated by adding direct material cost, direct labour cost, and direct manufacturing expenses.
Indirect Manufacturing Cost is also referred to as Factory Overheads.
These are costs incurred to operate the factory. Therefore, they cannot be directly linked with the manufacturing of the finished goods.
Examples would be wages of factory supervisor, factory rent, depreciation of machinery
Manufacturing Account
A manufacturing account is prepared to calculate the total cost incurred to manufacture the finished goods.
This account list down in details the following:
- Cost of materials consumed
- Direct labour cost
- Direct expenses incurred
- Prime cost
- Details of factory overheads
- Work-in progress
Work-in-progress are goods that are partly completed at the end of the financial year. As such, these are excluded from the cost of production.
With the above information, total cost of finished goods is calculated as:
Prime cost + Factory overheads + Opening work in progress – Closing work in progress
Recording in the Financial Statements
Income Statements
The Income Statement of a manufacturing business is prepared based on the same principle as that of a trading business of a sole proprietor, except for the calculation of cost of sales.
Cost of sales is calculated as follows:
Opening inventory of finished goods + production cost of finished goods + purchases of finished goods – closing inventory of finished goods
Statement of financial position
Likewise, this statement is prepared based on the same principle as that of a trading business of a sole proprietor. However, inventory of a manufacturing company includes raw materials, work-in-progress and finished goods.