Manufacturing Account

A manufacturing business prepares a manufacturing account (before the trading section) to find the cost of production of the goods it makes. The first part is the prime cost — the total direct costs:

$\text{Prime cost} = \text{Direct materials} + \text{Direct labour} + \text{Direct expenses}$

• Direct materials (raw materials consumed):

$\text{Direct materials} = \text{Opening raw materials} + \text{Purchases} + \text{Carriage inwards} - \text{Closing raw materials}$

• Direct labour — wages of workers who make the product (e.g. machine operators).
• Direct expenses — other costs traceable to the product (e.g. royalties per unit, hire of special equipment).

Carriage inwards (on raw materials) is part of the cost of materials, so it is added. Carriage outwards (on goods sold) is a selling expense and belongs in the statement of profit or loss, not here.

After prime cost, add the factory (production) overheads — the indirect costs of running the factory:

• indirect materials (e.g. lubricants, cleaning materials),
• indirect labour (e.g. factory supervisor, maintenance staff),
• factory rent, rates, heat and light (the factory's share),
• depreciation of factory machinery and the factory building,
• factory insurance, power.

These are overheads of the factory only. Costs of the office, selling and distribution (e.g. office salaries, advertising, carriage outwards) are NOT factory overheads — they go to the statement of profit or loss.

Where a cost is shared between the factory and the office (e.g. rent of a building used for both), only the factory's share (apportioned, e.g. by floor area) is included here; the rest goes to the profit or loss.

Some goods are part-finished at the start and end of the year — work-in-progress (WIP). The manufacturing account must account for the change in WIP so that the cost of production reflects only goods completed this year:

$\text{Cost of production} = \text{Prime cost} + \text{Factory overheads} + \text{Opening WIP} - \text{Closing WIP}$

• Opening WIP is added — those part-finished goods are completed (and so their cost is incurred) this year.
• Closing WIP is deducted — those goods are not yet finished, so their cost is carried forward to next year.

The cost of production (also called the factory cost of completed goods or production cost of goods manufactured) is the final figure of the manufacturing account. It is then transferred to the trading section of the statement of profit or loss — at cost, or at cost + a factory profit (see the factory profit subtopic).

The standard manufacturing account layout:

Manufacturing account	$
Opening raw materials	X
add Purchases of raw materials + carriage inwards	X
less Closing raw materials	(X)
= Cost of raw materials consumed	X
add Direct labour + direct expenses	X
= Prime cost	XX
add Factory overheads	X
add Opening work-in-progress	X
less Closing work-in-progress	(X)
= Cost of production	XXX

This cost of production then flows into the trading section:

$\text{Cost of sales} = \text{Opening finished goods} + \text{Cost of production (transferred)} - \text{Closing finished goods}$

So a manufacturer's full statement runs: manufacturing account → trading section → profit or loss. Getting each cost into the right section (factory vs office/selling) is the core skill, and is exactly what later subtopics build on.