Financial Reporting
Manufacturing Businesses
Manufacturing account questions require you to build up the cost of production from raw materials through to finished goods — correctly classifying prime cost, factory overheads, and work in progress to arrive at the cost of goods manufactured.
Structure your manufacturing account in three clear stages: (1) Cost of raw materials consumed, (2) Prime cost = raw materials + direct labour + direct expenses, (3) Factory cost of production = prime cost + factory overheads ± work in progress. Always adjust for opening and closing WIP before transferring the cost of goods manufactured to the income statement.
Key Concepts to Revise
Raw Materials Consumed
Opening inventory + Purchases − Closing inventory = Raw materials consumed
This is the first line of the manufacturing account
Prime Cost
Raw materials consumed + Direct labour + Direct expenses
These are direct costs — traceable directly to each unit produced
Factory Overheads
Indirect costs of the factory — e.g. factory rent, factory insurance, depreciation of machinery, indirect labour
Added to prime cost to give factory cost of production
Work in Progress (WIP)
Factory cost of production = Prime cost + Factory overheads + Opening WIP − Closing WIP
WIP is partially finished goods — always adjust before the transfer figure
Cost of Goods Manufactured
The transfer figure from the manufacturing account to the income statement — treated as the equivalent of “purchases” for a trading business
Then: Opening finished goods + Transfer − Closing finished goods = Cost of sales
Income Statement Link
The manufacturing account feeds into the trading section: Revenue − Cost of sales = Gross profit
Administration and selling expenses are not part of manufacturing cost — deducted after gross profit