Prepare a manufacturing account and calculate production cost
Separate direct production costs from factory overhead and calculate cost of goods completed after work-in-progress adjustments.
Section 3.1 · Preparation of financial statements
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. These original lessons map all five Topic 3.1 objectives: financial-statement purpose; partnership changes; clubs and societies; manufacturing accounts; and limited-company financial statements and notes. Practice is self-checked, not an official Cambridge grade. Full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use the Topic 1.5 adjustment and statement skills: apply accruals, distinguish capital from revenue, reconcile balances, and keep each entity's owners' funds separate from income and cash.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Factory rent is usually classified as what type of production cost?
What you will learn
- Classify direct and indirect factory costs
- Prepare a manufacturing account from raw-material, labour and overhead data
- Calculate production cost after opening and closing work in progress
Build prime cost from direct production costs
Direct material consumed = opening raw-material inventory + net purchases and carriage inwards − closing raw-material inventory. Add direct labour and other direct expenses to get prime cost. Trace a direct cost to the product; factory rent and supervisor salaries are examples of indirect production overheads.
A manufacturing account collects production costs for the period. Add factory overheads to prime cost, then add opening work in progress and deduct closing work in progress to calculate cost of goods completed. Keep non-factory selling and administration costs out of manufacturing cost unless the question specifies a different allocation.
Factory profit is a separate step when required
Where the required format includes factory profit, calculate it only after production cost and apply the stated basis. A markup on cost and a percentage of transfer price are different calculations. Record the factory profit separately so it is not mistaken for direct production cost.
The manufacturing account's result feeds into the statement of profit or loss and the inventories in the statement of financial position. Incomplete production costs should not be forced into finished goods; use work-in-progress balances to match cost to goods completed.
Pause and explain
If closing work in progress is greater than opening work in progress, how does that difference affect cost of goods completed?
Worked example
Opening raw materials $15,000; purchases $62,000; returns $2,000; closing raw materials $11,000; direct labour $28,000; direct expenses $4,000; factory overhead $20,000; opening WIP $6,000; closing WIP $10,000. Calculate cost of production.
Show the worked solution
- Net raw purchases = $62,000 − $2,000 = $60,000; materials consumed = $15,000 + $60,000 − $11,000 = $64,000.
- Prime cost = materials $64,000 + labour $28,000 + direct expenses $4,000 = $96,000.
- Cost of production = $96,000 + factory overhead $20,000 + opening WIP $6,000 − closing WIP $10,000 = $112,000.
Answer Cost of production is $112,000.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A factory has opening raw materials $8,000, purchases $40,000, carriage in $1,000, closing raw materials $7,000, direct wages $18,000, factory overhead $12,000, opening WIP $3,000 and closing WIP $4,000. Find prime cost and cost of production.
Give me a hint
Calculate materials consumed first, then add direct labour and overhead and adjust WIP.
Compare my reasoning
- Materials consumed = $8,000 + $40,000 + $1,000 − $7,000 = $42,000.
- Prime cost = $42,000 + $18,000 = $60,000.
- Cost of production = $60,000 + $12,000 + $3,000 − $4,000 = $71,000.
Prime cost is $60,000 and cost of production is $71,000.
Look for these in your work
- Materials formula correct
- Prime cost correct
- WIP adjustment correct
Direct materials consumed are $54,000, direct labour is $31,000, direct expenses are $5,000, indirect factory costs are $24,000, opening WIP is $7,000 and closing WIP is $9,500. Calculate cost of production.
Give me a hint
Group direct costs as prime cost, then add indirect costs and adjust WIP.
Compare my reasoning
- Prime cost = $54,000 + $31,000 + $5,000 = $90,000.
- Add factory overhead: $90,000 + $24,000 = $114,000.
- Cost of production = $114,000 + $7,000 − $9,500 = $111,500.
Cost of production is $111,500.
Look for these in your work
- Direct costs grouped
- Overhead added
- WIP balances applied
A manufacturer wants to add the chief executive's salary and national advertising to the manufacturing account because they support the business. Explain how to classify them and why.
Give me a hint
Classify by the function that incurs the cost, not by whether the business needs it.
Compare my reasoning
- The chief executive's salary is normally administration overhead, not a factory production cost.
- National advertising is normally a selling/distribution expense, not factory overhead.
- Both may be relevant to total profit but should be reported in the appropriate period expense section.
These costs support the business overall but are not normally incurred to manufacture the goods. Include them as administration or selling expenses in the statement of profit or loss, not as factory production cost.
Look for these in your work
- Administration separated
- Selling separated
- Total-profit relevance retained
Common mistakes
- Including selling expenses as factory overhead
- Adding closing work in progress instead of deducting it
What can you explain now?
What is prime cost?
Compare with the explanation
Direct materials consumed plus direct labour and other direct expenses
Prime cost contains direct production costs before factory overhead.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
Write the formula for cost of goods completed from prime cost, factory overhead and opening/closing work in progress.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.