Calculate prime cost and factory cost of production
Classify manufacturing costs and calculate direct materials used, prime cost, factory cost and cost of production.
Section 5.4 · Manufacturing accounts
Cambridge IGCSE Accounting 0452 / (9–1) 0985, 2027–2029 Version 1. These lessons follow the 2027–2029 syllabus only; the separate 2026 syllabus update is not yet mapped. Written practice is self-checked, not an official Cambridge grade. Full timed-paper practice and human subject-teacher review remain pending.
Before you begin
- No previous accounting study is assumed. Keep the business, transaction and accounting period in view, and distinguish a resource, a claim and a performance result.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
A factory's electricity supports the whole production area. How is it normally classified?
What you will learn
- Distinguish direct and indirect costs
- Calculate direct materials used and prime cost
- Adjust factory cost for work in progress to calculate cost of production
Build production cost from direct materials and labour
Direct costs can be traced to making a product. Direct materials and direct labour form prime cost. Indirect costs support production but cannot be traced conveniently to one unit; factory rent, indirect wages, power and factory depreciation are examples.
Direct materials used = opening raw materials + net purchases + carriage inwards − closing raw materials. Add direct labour to find prime cost. Add factory overheads to find factory cost before work-in-progress adjustments.
Adjust for unfinished production
Cost of production = factory cost + opening work in progress − closing work in progress. Opening work in progress represents earlier production costs still unfinished; closing work in progress is removed because that production is not yet complete.
Keep factory costs separate from selling and administrative expenses. Use the given classifications; a cost's amount alone does not determine whether it is direct or indirect.
Pause and explain
Factory cost is $28,000, opening work in progress $3,400 and closing work in progress $2,900. Find cost of production.
Worked example
Opening raw materials are $2,400; purchases $18,500; returns outwards $500; carriage inwards $400; closing raw materials $3,000; direct labour $9,200; factory overheads $7,000; opening work in progress $4,800 and closing work in progress $5,300. Calculate cost of production.
Show the worked solution
- Direct materials used = 2,400 + 18,500 − 500 + 400 − 3,000 = $17,800.
- Prime cost = 17,800 + 9,200 = $27,000; factory cost = 27,000 + 7,000 = $34,000.
- Cost of production = 34,000 + 4,800 − 5,300 = $33,500.
Answer Direct materials $17,800; prime cost $27,000; factory cost $34,000; cost of production $33,500.
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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.
Opening raw materials $3,200; purchases $21,000; returns outwards $700; carriage inwards $500; closing raw materials $4,000; direct labour $12,000. Calculate materials used and prime cost.
Give me a hint
Find net materials available, subtract closing raw materials, then add direct labour.
Compare my reasoning
- Net purchases = 21,000 − 700 = $20,300.
- Materials used = 3,200 + 20,300 + 500 − 4,000 = $20,000.
- Prime cost = 20,000 + 12,000 = $32,000.
Direct materials used $20,000; prime cost $32,000.
Look for these in your work
- Net purchases correct
- Materials used correct
- Prime cost correct
Prime cost is $32,000; factory overheads are rent $4,000, indirect wages $2,500, power $1,100 and depreciation $900. Opening WIP is $5,500 and closing WIP $4,800. Calculate cost of production.
Give me a hint
Add factory overheads to prime cost, then adjust for opening and closing WIP.
Compare my reasoning
- Factory overheads = 4,000 + 2,500 + 1,100 + 900 = $8,500.
- Factory cost = 32,000 + 8,500 = $40,500.
- Cost of production = 40,500 + 5,500 − 4,800 = $41,200.
Factory overheads $8,500; factory cost $40,500; cost of production $41,200.
Look for these in your work
- Overheads total correct
- Factory cost correct
- WIP direction correct
A production worker's wages are $8,000, factory supervisor wages $2,300 and sales commission $900. Classify the costs and explain which enter prime cost or factory overheads.
Give me a hint
Use traceability and the department that incurs the cost.
Compare my reasoning
- Production-worker wages directly make the goods: direct labour in prime cost.
- Factory-supervisor wages support production: indirect factory labour in overheads.
- Sales commission is a selling expense, outside factory cost.
Direct labour $8,000 enters prime cost; factory-supervisor wages $2,300 are factory overhead; sales commission $900 is a selling expense.
Look for these in your work
- Direct labour identified
- Factory overhead identified
- Selling expense excluded
Common mistakes
- Treating indirect factory wages as direct labour
- Including closing raw materials as a production cost
- Adding closing work in progress instead of subtracting it
- Including selling expenses in factory overheads
What can you explain now?
What is included in prime cost?
Compare with the explanation
Direct materials and direct labour
Prime cost collects the direct production costs before factory overheads.
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Make it stick
Why is closing work in progress deducted when calculating cost of production?
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.