Financial Statements
Manufacturing Accounts
One of the most demanding topics — questions require you to prepare a full manufacturing account calculating prime cost and cost of production, followed by a trading section and income statement. Three separate inventory figures (raw materials, WIP, finished goods) must all be handled correctly.
Keep the three sections clearly separate: (1) Prime Cost = direct materials + direct labour + direct expenses. (2) Cost of Production = Prime Cost + factory overheads ± WIP. (3) Cost of Sales uses finished goods inventory around Cost of Production. Common mistake: mixing up which inventory figure belongs in which section.
Key Concepts to Revise
Prime Cost
Direct materials used + direct labour + direct expenses. Direct materials = opening RM + purchases − closing RM.
Cost of Production
Prime Cost + factory overheads + opening WIP − closing WIP. This figure transfers to the trading section as the cost of goods manufactured.
Factory vs Office Costs
Factory overheads (rent, depreciation of machinery, supervisor wages) go in the manufacturing account. Admin costs go in the income statement.
Three Inventory Figures
Raw materials (manufacturing account), Work in Progress (manufacturing account), Finished Goods (trading/income statement). Never mix them up.
Past Paper Questions
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