IGC-L24 — Manufacturing Accounts
Understanding how manufacturing costs are calculated and how cost of production is determined.
Learning Objectives
- define a manufacturing business
- distinguish between trading and manufacturing activities
- calculate cost of production
- prepare a Manufacturing Account
- classify direct and indirect costs correctly
Concept Framework
What is a Manufacturing Business?
A manufacturing business produces goods using raw materials, labour and expenses.
Unlike trading businesses, it creates products instead of purchasing finished goods
Purpose of Manufacturing Account
A Manufacturing Account is prepared to calculate the:
This cost is then transferred to the Income Statement (Trading Section).
Structure of Manufacturing Costs
Manufacturing costs are divided into:
Direct Costs
These are costs directly related to production:
• direct materials (raw materials)
• direct labour (wages)
• direct expenses
Indirect Costs (Factory Overheads)
These are costs that support production:
• factory rent
• machinery depreciation
• factory utilities
Diagram 1 —Manufacturing Cost Flow
Raw Materials
↓
Add Purchases
↓
Materials Available
↓
Less Closing Inventory of Raw Materials
↓
Materials Used
↓
Add Direct Labour + Direct Expenses
↓
Prime Cost
↓
Add Factory Overheads
↓
Cost of Production
Diagram 2 —Manufacturing Account Format
Opening Raw Materials
+ Purchases
− Closing Raw Materials
= Materials Used
Materials Used
+ Direct Labour
+ Direct Expenses
= Prime Cost
Prime Cost
+ Factory Overheads
= Cost of Production
Worked Examples
Opening raw materials = £5,000
Purchases = £20,000
Closing raw materials = £4,000
Materials Used:
Direct labour = £10,000
Direct expenses = £2,000
Prime Cost:
Factory overheads = £7,000
Cost of Production:
📌 Additional manufacturing account questions are available in the
🎯 Lesson wise resources, Module wise resources, Guess Question Papers + YouTube Explanation section.
Students should practise cost classification and calculations regularly.
Structured Practice
Level 1 – Concept Check
Define manufacturing business.
What is prime cost?
State one example of factory overhead.
Level 2 – Application Practice
Opening materials = £6,000
Purchases = £18,000
Closing materials = £5,000
Direct labour = £9,000
Factory overheads = £6,000
Calculate cost of production.
Level 3 – Examination Style Question
Explain the difference between direct costs and indirect costs.
(4 marks)
📌 Additional structured questions are available in the 🎯 Lesson wise resources, Module wise resources, Guess Question Papers + YouTube Explanation section.
Enrolled students may submit questions from recognised textbooks, past examination papers or other genuine academic material for expert clarification through the Student Doubt Support facility.
Proficiency Check
Learn → Unlearn → Relearn
Students who believe they understand this topic should attempt:
- Explain why factory overheads are included in cost of production.
- Calculate prime cost if:
Materials used = £25,000
Direct labour = £12,000
Direct expenses = £3,000
- Explain why manufacturing accounts are important.
If unsure, revisit the lesson.
Detailed Activity Solutions
Solution to Level 2 question
Materials Used:
Prime Cost:
Cost of Production:
Solutions to Proficiency Check
Prime Cost:
How This Topic Appears in the Examination
This topic commonly appears through:
• preparation of Manufacturing Accounts
• calculation of cost of production
• classification of costs
Examiners frequently assess:
• correct cost classification
• accurate calculations
• understanding of cost flow
Students should practise regularly and review video explanations for clarity.
Enrolled students may submit questions from recognised textbooks, past examination papers or other genuine academic material for expert clarification through the Student Doubt Support facility.
Self-Assessment Checklist
- I understand manufacturing businesses
- I can calculate materials used
- I can calculate prime cost
- I can calculate cost of production
Continue Your Preparation
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