IGCSE Accounting — Manufacturing Accounts: Notes, Practice Questions & Worked Solutions

IGCSE Accounting 0452 · Section 5.4: Manufacturing Accounts

Manufacturing Accounts

A manufacturer makes its own products, so instead of “purchases,” its trading account needs a “factory cost of production” figure — built up in stages from the direct and indirect costs of production.

1. Direct vs Indirect Costs

Type	Meaning	Examples
Direct costs	Directly traceable to a specific unit of production	Direct materials, direct labour, direct expenses (e.g. royalties)
Indirect costs (factory overheads)	Support production but aren’t traceable to one unit	Factory rent, factory supervisor’s wages, machinery depreciation

Prime cost = Direct materials + Direct labour + Direct expenses

Factory cost of production = Prime cost + Factory overheads ± change in work in progress

Worked example — prime cost Direct materials $8,000, direct labour $5,000, direct expenses $500. Calculate the prime cost.
8,000 + 5,000 + 500 = $13,500

Worked example — factory cost of production Prime cost $13,500, factory overheads $3,000, opening work in progress $1,000, closing work in progress $1,500. Calculate the factory cost of production.
13,500 + 3,000 + 1,000 − 1,500 = $16,000

The factory cost of production then replaces “purchases” in the trading account, to calculate cost of sales for the finished goods sold.

Common mistakes to watch for

Classifying an indirect cost (like factory rent) as a direct cost — direct costs must be traceable to a specific unit made.
Getting the work in progress adjustment backwards — ADD opening WIP (work started last period, finished this period) and SUBTRACT closing WIP (work started this period, not yet finished).
Forgetting factory overheads are added AFTER prime cost, not included within it.

Key Vocabulary Recap

Prime cost — the total of all direct costs of production

Work in progress — partly completed units at a point in time

Syllabus Reference

This note covers IGCSE Accounting 0452 Section 5.4, Manufacturing Accounts: direct vs indirect costs, direct materials, direct labour, prime cost, factory overheads, work in progress, factory cost of production, and manufacturing financial statements.

Practice questions

IGCSE Accounting 0452 · Section 5.4: Manufacturing Accounts — Practice Question Bank (no answers)

Manufacturing Accounts — Practice

Covers: direct/indirect costs, prime cost, and factory cost of production. 10 questions.

Explain the difference between a direct cost and an indirect cost, giving one example of each.

State the formula for prime cost.

Direct materials $8,000, direct labour $5,000, direct expenses $500. Calculate the prime cost.

Direct materials $12,000, direct labour $9,000, no direct expenses. Calculate the prime cost.

Explain what factory overheads are, giving two examples.

Prime cost $13,500, factory overheads $3,000, opening work in progress $1,000, closing work in progress $1,500. Calculate the factory cost of production.

Explain what “work in progress” means.

Explain why opening work in progress is added, but closing work in progress is subtracted, when calculating factory cost of production.

Explain what replaces “purchases” in the trading section of a manufacturing business’s financial statements.

Q10

Classify each as a direct or indirect cost: (a) wages of machine operators, (b) factory supervisor’s salary.

Worked solutions

Show worked solutions

IGCSE Accounting 0452 · Section 5.4: Manufacturing Accounts — Solutions

Manufacturing Accounts — Practice: Solutions

Direct vs indirect cost, with examples.

✓A direct cost can be traced directly to a specific unit of production (e.g. the raw materials used to make it). An indirect cost supports production generally but cannot be traced to one specific unit (e.g. factory rent).

Formula for prime cost.

✓Prime cost = Direct materials + Direct labour + Direct expenses

Materials $8,000, labour $5,000, expenses $500.

Sum all three

8,000+5,000+500

✓$13,500

Materials $12,000, labour $9,000, no expenses.

Sum

12,000+9,000

✓$21,000

Factory overheads, two examples.

✓Factory overheads are indirect costs of running the factory. Examples: factory rent, factory supervisor’s salary, depreciation of factory machinery, factory power/electricity.

Prime cost $13,500, overheads $3,000, WIP open $1,000, close $1,500.

Add prime cost, overheads, opening WIP; subtract closing WIP

13,500+3,000+1,000−1,500

✓$16,000

What is work in progress?

✓Work in progress is the value of partly completed units of production at a given point in time (started, but not yet finished).

Why add opening WIP but subtract closing WIP?

✓Opening work in progress represents units that were started in the PREVIOUS period but completed and cost this period, so their cost is added in. Closing work in progress represents units started THIS period but not yet finished, so their cost must be excluded (subtracted) since they are not yet part of the finished goods.

What replaces “purchases” for a manufacturer?

✓The factory cost of production replaces “purchases” in the trading section, since the manufacturer makes its own goods rather than buying finished goods to resell.

Q10

Classify: machine operators’ wages, supervisor’s salary.

✓(a) Wages of machine operators — direct cost (traceable to units produced) (b) Factory supervisor’s salary — indirect cost (factory overhead)

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