Manufacturing accounts and cost/management accounting fundamentals
What the examiner tests
This domain tests the manufacturing account and basic cost and management accounting: cost classification, cost of production and break-even.
Core rules
- Direct materials consumed = opening raw materials + purchases − closing raw materials.
- Prime cost = direct materials + direct labour + direct expenses.
- Factory cost or cost of production = prime cost + factory overheads + opening work in progress − closing work in progress.
- Cost classification: direct costs can be traced to a unit; indirect costs are overheads. Fixed costs do not change with output in total; variable costs change with output. Contribution = selling price − variable cost.
- Break-even units = fixed costs ÷ contribution per unit. Management accounting uses these figures for planning and control.
Worked example
Opening raw materials N$5,000; purchases N$25,000; closing raw materials N$4,000. Direct labour N$12,000; direct expenses N$2,000; factory overheads N$8,000; opening work in progress N$1,500; closing work in progress N$2,500. Materials consumed = 5,000 + 25,000 − 4,000 = N$26,000. Prime cost = 26,000 + 12,000 + 2,000 = N$40,000. Cost of production = 40,000 + 8,000 + 1,500 − 2,500 = N$47,000. If 9,400 units are produced, unit cost = 47,000 ÷ 9,400 = N$5. Break-even: selling price N$20, variable cost N$12, fixed costs N$40,000. Contribution = N$8 per unit; break-even = 40,000 ÷ 8 = 5,000 units.
Traps
Do not include administration and selling expenses in factory cost. Do not add closing work in progress; deduct it. Do not treat fixed cost per unit as constant when output changes. Do not call contribution profit. Do not include finished goods inventory in the raw materials calculation.