Manufacturing accounts

Cost headings

• Direct materials: raw materials that become part of the product (cost consumed = opening + purchases + carriage inwards - closing).
• Direct labour: wages of workers who make the product.
• Direct expenses: costs traced to units made, such as royalties per unit or hire of a special machine.
• Prime cost = direct materials + direct labour + direct expenses.
• Factory overheads (indirect costs): factory supervisors, indirect labour, factory rent, power, depreciation of plant.
• Work in progress (WIP): partly finished goods. Add opening WIP, deduct closing WIP.
• Production cost of goods completed = prime cost + factory overheads + opening WIP - closing WIP.

Worked layout

Manufacturing account for the year ended 31 December 2025

Apportioning costs between functions

Costs shared by the factory and the office are apportioned: for example rent by floor area (here 75% factory, 25% office), insurance by value, electricity by meter readings or usage. The factory share goes to the manufacturing account; the office share is an expense in the statement of profit or loss.

In the statement of profit or loss, cost of sales = opening finished goods + production cost (+ any finished goods bought in) - closing finished goods.

Closing inventory in the statement of financial position has three parts: raw materials, work in progress and finished goods.

Worked example

Using the figures above, find the production cost per unit if 20,000 units were completed.

1. Prime cost = 62,000 + 48,000 + 4,000 = 114,000.
2. Factory overheads = 50,500.
3. Production cost = 164,500 + 6,200 - 7,700 = 163,000.

Answer: Cost per unit = 163,000 / 20,000 = £8.15.

Check yourself

1. Opening raw materials £5,000; purchases £40,000; carriage inwards £800; closing raw materials £6,300. Calculate the cost of raw materials consumed.
   Show answer

   £39500. 5,000 + 40,000 + 800 - 6,300 = 39,500.

2. Raw materials consumed £39,500; direct wages £31,000; royalties £2,500; factory supervisor's salary £12,000. Calculate prime cost.
   Show answer

   £73000. 39,500 + 31,000 + 2,500 = 73,000. The supervisor is a factory overhead.

3. Prime cost £96,000; factory overheads £38,000; opening work in progress £4,500; closing work in progress £6,000. Calculate the production cost of goods completed.
   Show answer

   £132500. 96,000 + 38,000 + 4,500 - 6,000 = 132,500.

4. Insurance of £9,000 is apportioned two-thirds to the factory and one-third to the office. How much appears in the manufacturing account?
   Show answer

   £6000. 9,000 x 2/3 = 6,000.

5. Which is a direct expense?
   • Factory rent
   • Depreciation of factory machinery
   • A royalty paid for each unit produced
   • Salary of the factory manager
   Show answer

   A royalty paid for each unit produced. A royalty per unit can be traced to each unit made.

6. Where is closing work in progress shown?
   • Deducted in the manufacturing account and shown as a current asset
   • Added in the statement of profit or loss
   • Deducted from revenue
   • As a factory overhead
   Show answer

   Deducted in the manufacturing account and shown as a current asset. Partly finished goods are not yet part of completed production; they are inventory.

Practise with instant feedback Print this lesson

Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting specification (issue 2), Unit 1 and Appendices 6 to 8

Last updated 8 November 2026. Spotted a mistake? Tell us.