Manufacturing Accounts and Costing
This domain tests the preparation of a manufacturing account and the classification of costs. Questions give raw material, labour, overhead and work-in-progress figures and ask for prime cost, production cost and cost per unit, or ask you to classify a cost as direct or indirect, fixed or variable.
Structure of the manufacturing account
Direct materials used = opening raw materials + purchases − closing raw materials. Prime cost = direct materials + direct labour + direct expenses. Production cost = prime cost + factory overheads + opening work in progress − closing work in progress. The production cost is transferred to the trading account in place of purchases. If goods are transferred at cost plus a mark-up, the unrealised profit on unsold stock must be removed.
Cost classification
- Direct costs are traceable to the product: direct materials, direct labour, direct expenses such as royalties.
- Indirect costs or overheads cannot be traced directly: factory rent, supervision, factory power, depreciation of plant.
- Fixed, variable and semi-variable costs describe behaviour as output changes.
- Product costs attach to units produced; period costs, such as administration and selling expenses, are written off in the profit and loss account.
Only factory costs belong in the manufacturing account. Office salaries, advertising and distribution costs stay in the profit and loss account.
Costing methods
Job costing accumulates costs separately for each job or batch. Unit costing divides total cost by the number of units produced to give a cost per unit, which supports pricing and tendering decisions.
Worked example
Opening raw materials 60,000; purchases 400,000; closing raw materials 50,000; direct labour 200,000; direct expenses 20,000; factory overheads 130,000; work in progress opening 40,000, closing 30,000; 7,700 units produced. Materials used = 60,000 + 400,000 − 50,000 = 410,000. Prime cost = 410,000 + 200,000 + 20,000 = 630,000. Production cost = 630,000 + 130,000 + 40,000 − 30,000 = 770,000. Cost per unit = 770,000 ÷ 7,700 = 100 FCFA. Closing work in progress is subtracted because those units are not yet finished.
Traps
- Including office salaries or advertising in factory overheads.
- Adding closing work in progress instead of subtracting it.
- Using selling price instead of cost as the transfer to the trading account.
- Forgetting to adjust for opening and closing raw materials.