In order to find the profit of a firm which is buying goods for resale, a Trading and Profit and Loss Account is prepared. In the trading section the cost price of the goods sold is compared with the selling price of those goods.

In a firm which is manufacturing the finished goods from raw materials the cost of production must be compared with the sales to find gross profit. What is included in the cost of production?

The cost of production can be divided into 3 elements – materials, labour and overheads.

Materials are the natural resources which are used in the manufacture of any product for example; wool for a coat, cotton for a shirt, gold for a watch.

Labour is the human resource which uses the materials and equipment and is paid wages or salary.

Overheads are other expenses incurred for example; light and heat, rates, depreciation and insurance.

Each of these 3 elements can be classed as either direct or indirect.

A direct cost is one which can be traced directly to the item made. For example: the cloth in a shirt or the wages of the sewing machinist. The total of the direct costs is known as prime cost, the basic cost without which there could be no finished article.



Direct materials + direct wages + direct expenses = prime cost




An indirect cost is one which cannot be directly identified with any particular product for example; electricity or supervisor’s wages. Indirect costs are also known as overheads and add to the cost of production.



Prime cost + factory overheads = cost of production



During the year these manufacturing costs are recorded and controlled by the cost accountant. At the end of the period the total figures are passed to the financial accountant for the preparation of the manufacturing account.

The manufacturing account is drawn up in addition to the trading and profit and loss account and shows the calculation of the factory cost of production. The factory cost of production is carried forward to the trading account where it is compared with sales to find gross profit. The profit and loss section is the same as that of a trading firm.

Preparation of a manufacturing account

The aim in the manufacturing account is to find the factory cost of production – the final figure. The manufacturing account must contain all costs incurred in the factory – and only those. It therefore includes the following:
· direct materials – purchases of raw materials along with any adjustments necessary for example; opening and closing stocks, carriage and returns
· direct wages – including any accruals/prepayments
· direct expenses (if any) – royalties, the preparation of special templates or
designs

These 3 direct costs, added together, give prime cost.

· factory overheads – all indirect expenses incurred in the factory, including any
accruals/prepayments.


Factory overheads added to prime cost give the factory cost of production.

Direct materials
)
+
)
Direct wages
)
=
Prime cost
+
)
Direct expenses
)



Prime cost
)
+
)
=
Factory cost of production
Factory overheads
)




Manufacturing accounts: example 1


The figures below have been provided by School Furnishers plc.

a) Put a tick (3) against those items which are direct costs.

b) Total these to calculate the prime cost.

c) Total the indirect costs (those you have not ticked).

d) Add the indirect costs to the prime cost to find the factory cost of production.


Materials
£
wood for desks and chairs
50,000
machine lubricants (oils)
120
paints and varnishes
3,400
upholstery tweeds
12,600
cleaning materials
200
Labour
joiners’ wages
40,000
metal workers’ wages
11,000
factory supervisors’ salaries
24,000
factory cleaners’ wages
1,500
Other expenses
factory lighting and heating
620
insurance of factory machinery
700
royalties to Ergodesign plc
1,000
depreciation of factory machinery
2,000


Manufacturing accounts: suggested solution to example 1

a)
Materials
£
wood for desks and chairs 3
50,000
machine lubricants (oils)
120
paints and varnishes3
3,400
upholstery tweeds 3
12,600
cleaning materials
200
Labour
joiners’ wages 3
40,000
metal workers’ wages 3
11,000
factory supervisors’ salaries
24,000
factory cleaners’ wages
1,500
Other expenses
factory lighting and heating
620
insurance of factory machinery
700
royalties to Ergodesign plc
1,000
depreciation of factory machinery
2,000


b) £ £
wood for desks
50,000
paints and varnishes
3,400
upholstery tweeds
12,600
joiners’ wages
40,000
metal workers’ wages
11,000
Royalties to Ergodesign plc
1,000
118,000
Prime cost
c)
machinery lubricants
120
cleaning materials
200
factory supervisor’s salaries
24,000
factory cleaner’s wages
1,500
factory lighting and heating
620
insurance of factory machinery
700
depreciation of factory machinery
2,000
29,140
Indirect costs
(factory overheads)
d)
prime cost
118,000
factory overheads
29,140
147,140
Factory cost of production


Manufacturing accounts: task1

The figures below have been provided by Falkirk Bookbinders plc.

a) Put a tick (3) against those items which are direct costs.

b) Total these to calculate the prime cost.

c) Total the indirect costs (those you have not ticked).

d) Add the indirect costs to the prime cost to find the factory cost of production.

Materials
£
leather for book covers
40,000
ink for book titles
8,000
maintenance materials
6,500
gold leaf for lettering
25,000
parchment for restoring books
20,000
Labour
wages for maintenance workers
64,000
book-binder’s wages
136,800
title writer’s wages
28,000
supervisor’s wages
32,000
Other expenses
insurance of equipment
9,000
electricity
4,200
rent and rates of factory
45,000
depreciation of equipment
25,000






Manufacturing accounts: task 2

The figures below have been provided by Refreshers plc, manufacturers of bottled fruit drinks.

a) Put a tick (3) against those items which are direct costs.

b) Total these to calculate the prime cost.

c) Total the indirect costs (those you have not ticked).

d) Add the indirect costs to the prime cost to find the factory cost of production.

Materials
£
apples
150,000
sugar
4,200
cleaning materials
5,400
grapes
62,200
staff overalls
18,000
bottles
32,000
Labour
wages of fruit processors
105,000
bottlers’ wages
86,400
quality control staff wages
54,000
packers’ wages
33,500
Other expenses
depreciation of fork lift trucks
20,000
general factory expenses
17,250
gas and electricity
5,300



Manufacturing accounts: example 2

The following figures have been supplied by Woodcraft plc. You are required to calculate the following:

a) cost of raw materials used during the year
b) prime cost
c) factory overheads
d) factory cost of production.


£
Opening stock of raw materials
2,000
Purchases of raw materials
60,000
Closing stock of raw materials
3,000
Factory wages
36,000
Insurance of factory building
900
Depreciation of manufacturing equipment
2,500
Lighting and heating of factory
800
Factory rates
520



Manufacturing accounts: suggested solution to example 2


£
a) Opening stock of raw materials
2,000
Add purchases of raw materials
60,000
62,000
Less closing stock of raw materials
3,000
Cost of raw materials used
59,000







b) Raw materials used
59,000
+ Factory wages
36,000
Prime cost
95,000


c) Insurance of factory buildings
900
Depreciation of manufacturing equipment
2,500
Lighting and heating of factory
800
Factory rates
520
Factory overheads
4,720


d) Prime cost
95,000
Total overheads
4,720
Factory cost of production
99,720


Manufacturing accounts: task 3

The following figures have been supplied by Iron Designs plc. You are required to calculate the following:

a) cost of raw materials used during the year
b) prime cost
c) factory overheads
d) factory cost of production.


£
Opening stock of raw materials
20,000
Purchases of raw materials
104,800
Closing stock of raw materials
17,200
Factory wages
122,300
Factory supervision
52,400
Depreciation of factory machinery
48,000
Factory heat and light
4,000
Factory general expenses
16,410








Manufacturing accounts: task 4

The following figures have been supplied by Pewter Products plc. You are required to calculate the following:

a) cost of raw materials used during the year
b) prime cost
c) factory overheads
d) factory cost of production.


£
Opening stock of raw materials
35,200
Purchases of raw materials
296,380
Closing stock of raw materials
38,410
Factory wages
105,265
Rent of factory buildings
29,200
Depreciation of factory machinery
52,900
Gas and electricity
4,200
Maintenance of factory machinery
16,750








Manufacturing accounts: example 3


The figures below have been provided by Partygoers plc for the year ended 31 December. You are required to prepare a Manufacturing Account to show the following:

a) cost of raw materials consumed
b) direct wages
c) prime cost
d) total factory overheads
e) factory cost of production.

£
Purchases of raw materials
115,000
Returns of raw materials
580
Opening stock of raw materials
10,000
Closing stock of raw materials
8,800
Direct wages
68,000
Direct wages due
7,400
Factory overheads
Power
2,400
Insurance of factory buildings
1,300
Insurance of factory buildings prepaid
645
Light and heat
2,100
Depreciation of factory machinery
5,500
Supervisors’ wages
23,200







Manufacturing accounts: suggested solution to example 3



Manufacturing account of Partygoers plc for year ended 31 December



£ £
Opening stock of raw materials
10,000
+ Purchases of raw materials
115,000
- Returns of raw materials
580
114,420
124,420
- Closing stock of raw materials
8,800
Raw materials consumed
115,620
Direct wages (68,000+7,400)
75,400
Prime cost
191,020


+Factory overheads:
Power
2,400
Insurance of factory buildings (1,300-645)
655
Light and heat
2,100
Depreciation of factory machinery
5,500
Supervisor’s wages
23,200
33,855
Factory cost of production
224,875