Manufacturing accounts are prepared by businesses that make their own goods, to find the cost of production.
Cost of production
Prime cost = Direct materials + Direct labour + Direct expenses
Factory cost = Prime cost + Factory overheads
Direct costs can be traced to the product; factory (indirect) overheads cannot. If prime cost is RM55,000 and overheads RM15,000, factory cost is RM70,000.
Remember
- Prime cost = direct materials + direct labour + direct expenses.
- Factory cost = prime cost + factory overheads.