Manufacturing Accounts - Calculating Factory Cost of Production

This section explains how to calculate the factory cost of production, a crucial component of manufacturing accounts. Understanding this process is essential for determining the profitability of a manufacturing business.

Understanding the Components of Factory Cost

Factory cost of production encompasses all the direct costs incurred in turning raw materials into finished goods. These costs can be broadly categorized as follows:

• Direct Materials: The cost of raw materials that can be directly traced to the finished product.
• Direct Labour: The wages and salaries paid to workers directly involved in the manufacturing process.
• Factory Overheads: Indirect costs incurred in the factory, such as factory rent, utilities, depreciation of factory equipment, and factory manager's salary.

Calculating Factory Cost of Production

The formula for calculating the factory cost of production is:

Factory Cost of Production = Direct Materials + Direct Labour + Factory Overheads

Example Calculation

Consider the following information for a manufacturing business during a specific period:

• Direct Materials: $15,000
• Direct Labour: $8,000
• Factory Overheads: $4,000

Using the formula:

Factory Cost of Production = $15,000 + $8,000 + $4,000 = $27,000

Manufacturing Account Format

A manufacturing account is a summary of the costs incurred in the factory during a period. It typically has the following format:

Account Name	Debit (£)	Credit (£)
Direct Materials	$15,000
Direct Labour	$8,000
Factory Overheads	$4,000
Cost of Production	$$27,000$$

Important Considerations

It's important to accurately classify costs to ensure the correct calculation of factory cost of production. For instance, administrative expenses are not included as factory overheads.

Further Learning

Understanding manufacturing accounts is a fundamental skill in accounting. Further study will cover how to calculate the cost of goods sold and the profit or loss from manufacturing.