How to prepare a manufacturing account

Step by step

1. Add direct materials. Opening raw materials + purchases of raw materials (+ carriage inwards) − closing raw materials = cost of materials used.
2. Add direct labour. Add the wages of the workers who make the goods.
3. Find prime cost. Prime cost = direct materials used + direct labour + any direct expenses.
4. Add factory overheads. Add indirect factory costs, such as factory rent, power and depreciation of machinery.
5. Adjust for work in progress. Add opening work in progress and subtract closing work in progress. This gives the cost of production.
6. Carry the cost of production forward. The cost of production goes to the income statement in place of purchases.

Worked example

Direct materials RM20,000 + direct labour RM15,000 = prime cost RM35,000. Add factory overheads RM10,000 to get RM45,000. Add opening work in progress RM2,000 and subtract closing RM1,000. The cost of production is RM46,000.

Understanding the method

A trader buys goods and resells them, so one purchases figure is enough. A manufacturer turns raw materials into finished goods, pays factory workers and runs machines.

The manufacturing account gathers all these production costs and ends with the cost of goods manufactured. That figure replaces purchases in the income statement.

Prime cost comes first. It is the direct costs, meaning those you can trace straight to the product. These are raw materials used, wages of production workers, and direct expenses such as a royalty per unit.

For materials, you want what was used, not what was bought, so you add opening raw materials and purchases and subtract the closing raw materials.

Factory overheads are the indirect costs of running the factory. Examples are factory rent, depreciation of machinery, power, factory insurance and a supervisor's wages. Prime cost plus overheads gives the total factory cost.

Some goods are part-finished at the start and end of the year. This is work in progress. Add the opening figure and subtract the closing figure, so that the result shows only goods finished in the period.

Here is an example. Opening raw materials are RM5,000, purchases RM40,000, carriage inwards RM1,000 and closing raw materials RM6,000. Materials used are 5,000 + 40,000 + 1,000 − 6,000 = RM40,000.

Add direct wages of RM25,000 to get a prime cost of RM65,000. Factory overheads are rent RM9,000, depreciation of machinery RM4,000 and power RM2,000, which is RM15,000 in total. Total factory cost is RM80,000.

Opening work in progress is RM3,000 and closing is RM2,000. So the cost of goods manufactured is 80,000 + 3,000 − 2,000 = RM81,000.

Watch for shared costs. If rent of RM12,000 is three-quarters factory and one-quarter office, only RM9,000 goes in the manufacturing account.

Carriage inwards on raw materials is a production cost. Carriage outwards is a selling cost and does not belong here.

Common mistakes: putting office or selling costs (such as salespeople's pay) into overheads, and charging a shared cost in full to the factory. Others are swapping the opening and closing figures for work in progress, and counting a cost both here and in the income statement. For each figure, ask whether it is a cost of making the product and whether it is direct or indirect.

If you struggle to decide which costs are direct and which are overheads, we can help. One of our teachers can work through a manufacturing account with you and check your layout. Book a trial class

Related skills

• How to prepare an income statement for a sole trader

The methods here are standard accounting practice, with original figures. For your exam board's exact requirements, see exam boards and Sources.