The Manufacturing Account
A manufacturing account is prepared by a manufacturing firm to work out the cost of producing finished goods in a period. It is prepared before the Trading and Profit and Loss Account.
Prime Cost
Prime cost is the total of all direct costs. Its formula is direct materials used + direct labour + direct expenses. Direct materials used is found as follows:
Key idea
Direct materials used = Opening raw materials + Purchases of raw materials − Closing raw materials.
Production cost = Prime cost + Factory overhead + Opening WIP − Closing WIP.
Production Cost
Production cost is found by adding factory overhead (indirect cost) to prime cost, then adjusting for work in progress (WIP). The production cost is finally transferred to the Trading Account as the cost of finished goods produced.
Example
Indah Factory for the year 2025:
| Opening raw materials | 10,000 |
| Purchases of raw materials | 50,000 |
| Closing raw materials | (8,000) |
| Direct materials used | 52,000 |
| Direct labour | 30,000 |
| Direct expenses | 3,000 |
| Prime cost | 85,000 |
| Factory overhead | 20,000 |
| Opening WIP | 5,000 |
| Closing WIP | (7,000) |
| Production cost | 103,000 |
Three Kinds of Stock
A manufacturing firm keeps three kinds of stock: raw materials, work in progress and finished goods. Raw materials stock is used to find direct materials used; work in progress is adjusted inside the manufacturing account; and finished goods stock is dealt with later in the Trading Account. Factory overhead includes indirect costs such as factory rent, power for machines, depreciation of factory equipment and the wages of factory supervisors. Keeping these overheads separate from office and selling expenses is important, because only factory costs belong in the manufacturing account. The production cost that it produces is then carried to the Trading Account, where finished goods stock and sales are brought in to find the gross profit.
Remember
Prime cost involves only direct costs. Once factory overhead is added it becomes manufacturing cost; after the WIP adjustment it becomes the production cost of finished goods.