Theory question 104
Manufacturing Accounts(a) What is a Manufacturing account?
(b) Explain the following terms: (i) prime cost; (ii) factory overheads; (iii) work-in-progress; (iv) cost of goods transferred; (v) finished goods; (vi) profit on manufacturing.
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(a) An account prepared by a firm that makes goods, to find the cost of production of the finished goods made in the period.
(b)(i) Prime cost: total of direct costs - direct materials, direct labour and direct expenses (e.g. royalties).
(ii) Factory overheads: indirect factory costs that cannot be traced to a unit of output, e.g. factory rent, supervisors' wages, factory power, depreciation of machinery.
(iii) Work-in-progress: goods partly made at the end (or start) of the period.
(iv) Cost of goods transferred: the value at which finished goods are passed from the manufacturing account to the trading account (cost of production, or a transfer price).
(v) Finished goods: products that have completed production and are ready for sale.
(vi) Profit on manufacturing: the excess of the transfer (market) value of goods produced over their cost of production.
Prime cost + factory overheads ± work-in-progress = cost of production.