Cambridge IGCSE Accounting · 0452
Chapter 5: Preparation of Financial Statements — Part 5
Section 5.4 · Manufacturing Accounts
Used by businesses that manufacture goods rather than buying finished products for resale. The goal is to calculate the production cost of goods completed, which then flows through the Income Statement to the Statement of Financial Position (SFP).
Classification of Costs
- Direct Costs: Costs directly traceable to production.
- Direct Materials: Raw materials used in production.
- Direct Labour: Wages of workers on the production line.
- Direct Expenses: Royalties or special tool hire.
- Indirect Costs (Factory Overheads): Costs to run the factory but not linked to a specific unit.
Examples: Factory rent, depreciation of factory machinery, supervisor salaries, factory power.
Prime cost = Direct materials consumed + Direct labour + Direct expenses.
Cost of production = Prime cost + Factory overheads + Opening WIP − Closing WIP.
Work in Progress (WIP) Adjustment
Work in Progress represents goods partially completed at the year end. WIP is added at the production cost incurred so far (materials, labour, and share of overheads).
- Opening WIP: Added to current costs — costs from last year being finished this year.
- Closing WIP: Deducted from total costs — costs incurred this year on goods not yet completed.
Closing WIP appears as a current asset in the SFP. Only the production cost of goods completed is transferred to the trading section of the Income Statement as part of cost of sales.
The Final Accounts Chain
- Manufacturing Account → calculates production cost of goods completed.
- Income Statement → production cost enters cost of sales; administrative and selling expenses are deducted to find profit for the year.
- Statement of Financial Position → closing inventory of finished goods and WIP shown as current assets; factory machinery at NBV under non-current assets.
Only factory-related costs go in the Manufacturing Account. Administrative and selling/distribution expenses (office rent, delivery van repairs, carriage outwards) go directly to the Income Statement.
Format of the Manufacturing Account
| Details | $ | $ |
|---|---|---|
| Opening Inventory of Raw Materials | XXX | |
| Add: Purchases of Raw Materials | XXX | |
| Add: Carriage Inwards | XXX | |
| Less: Closing Inventory of Raw Materials | (XXX) | |
| Cost of Raw Materials Consumed | XXXX | |
| Add: Direct Labour | XXX | |
| Add: Direct Expenses | XXX | |
| PRIME COST | XXXX | |
| Add: Factory Overheads | XXX | |
| Add: Opening Work in Progress | XXX | |
| Less: Closing Work in Progress | (XXX) | |
| PRODUCTION COST OF GOODS COMPLETED | XXXX |
Worked Example 1: Manufacturing Account with WIP
Nova Manufacturing — year ended 31 December 2025:
| Manufacturing Account | $ | $ |
|---|---|---|
| Opening raw materials | 3,000 | |
| Purchases | 22,000 | |
| Carriage inwards | 800 | |
| Less: Closing raw materials | (2,800) | |
| Cost of materials consumed | 23,000 | |
| Direct labour | 18,000 | |
| Direct expenses (royalties) | 2,000 | |
| Prime cost | 43,000 | |
| Factory overheads (rent, power, depreciation, supervisor) | 12,000 | |
| 55,000 | ||
| Add: Opening WIP | 4,500 | |
| Less: Closing WIP | (6,200) | |
| Production cost of goods completed | 53,300 |
Worked Example 2: Income Statement and SFP Extract
Using Nova Manufacturing: Sales $95,000; Opening finished goods inventory $8,000; Closing finished goods inventory $11,500; Office expenses $9,200; Carriage outwards $1,800.
| Income Statement (extract) | $ | $ |
|---|---|---|
| Revenue | 95,000 | |
| Cost of sales: Opening finished goods | 8,000 | |
| Production cost of goods completed | 53,300 | |
| Less: Closing finished goods | (11,500) | (49,800) |
| Gross profit | 45,200 | |
| Office expenses and carriage outwards | (11,000) | |
| Profit for the year | 34,200 |
SFP (extract) — Current assets: Closing inventory — Raw materials $2,800 + WIP $6,200 + Finished goods $11,500 = $20,500.
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