Theory question 103
Manufacturing Accounts3. (a) Explain four classifications of cost found in the preparation of manufacturing accounts (b) Explain the following: (i) prime cost; (ii) work-in-progress; (iii) manufacturing profit.
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(a) Direct materials – raw materials that become part of the product; direct labour – wages of workers who make the product; direct expenses – other costs traced to units, e.g. royalties; factory overheads – indirect production costs such as factory rent, supervision and depreciation of machinery. (Administration, selling and distribution, and finance costs are charged in profit and loss.)
(b)(i) Prime cost is the total of direct materials, direct labour and direct expenses.
(ii) Work-in-progress is partly finished goods at the start or end of a period; opening WIP is added and closing WIP deducted to find cost of production.
(iii) Manufacturing profit is the profit added when goods are transferred from the factory to the trading account at more than cost (e.g. market value), to measure factory efficiency; any unrealised profit in stock is removed with a provision.
Separate costs into direct and indirect before defining the terms.