Exam layout
Manufacturing account format
A manufacturing account works out the cost of goods produced, before the income statement. It builds from direct costs (prime cost) to total cost of production. Here is the layout.
The standard format
- Direct materials used
- Direct labour
- Prime cost
- Add: factory overheads
- Adjust for work in progress
- Cost of production
Filled example
| Cost of raw materials used | RM 20,000 |
| Direct labour | RM 15,000 |
| Prime cost | RM 35,000 |
| Add: factory overheads | RM 10,000 |
| Add: opening work in progress | RM 2,000 |
| Less: closing work in progress | RM 1,000 |
| Cost of production | RM 46,000 |
Notes
- Separate direct costs (prime cost) from indirect factory overheads.
- Adjust for opening and closing work in progress.
- The cost of production is carried to the income statement in place of purchases.
Building and reading this format
A manufacturing account works out the cost of making goods before they are sold. It sits in front of the income statement for a business that makes its own products instead of just buying them. The account is built in layers, and each layer adds one more stage of production.
Layer one is the cost of raw materials used: opening inventory of raw materials, plus purchases (including carriage inwards on them), less closing inventory. This shows the materials actually used, not just bought.
Layer two adds direct labour, which is the wages of workers who make the goods, plus any other direct expenses. The total is prime cost, the cost that can be traced straight to the product.
Layer three adds factory overheads. These are the indirect costs of running the factory, such as factory rent, factory power, depreciation of machinery and the pay of factory supervisors. Prime cost plus overheads gives the total factory cost for the period.
Layer four adjusts for work in progress, which means goods part-finished. Add the opening work in progress and deduct the closing work in progress. This leaves the cost of goods completed in the period.
The result is the cost of production, which is carried to the income statement in place of purchases.
Here is a worked case. Raw materials used are RM40,000 and direct labour is RM25,000, so prime cost is RM65,000. Factory overheads are RM15,000.
Work in progress falls by RM2,000 over the year, so the cost of production is 65,000 + 15,000 + 2,000 = RM82,000. Opening work in progress was higher than closing, so more cost was completed in the year.
Each subtotal helps the reader. Prime cost moves with output, so a rise points to materials or labour. A rise in overheads points to the cost of running the factory.
Marks are mostly lost on which layer a cost belongs to. Putting factory overheads inside prime cost, or direct labour among overheads, blurs the split the account exists to show. Office and selling expenses belong in the income statement, not here.
Carriage outwards is also an income statement item, because only carriage inwards on raw materials belongs in this account. Forgetting the work in progress adjustment, or leaving out the prime cost subtotal, loses method marks.
Head the account "for the year ended" plus the date. Use an inner column for the raw materials calculation, and underline prime cost and cost of production.
If you find it hard to decide which costs are direct and which are overheads, we can help. One of our teachers can sort a set of past-paper costs with you until the split becomes second nature. Book a trial class
Related how-to
These formats are standard accounting practice with our own figures. Check your board's exact requirements on the exam boards page.
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