Manufacturing Accounts

This section explains the components of manufacturing costs, including direct materials, direct labour, prime cost, and factory overheads. Understanding these elements is crucial for calculating the cost of goods manufactured and determining profitability.

Direct Materials

Direct materials are the raw materials that are directly used in the production of a product. These materials can be easily identified and traced to the finished goods. Examples include wood for a table, fabric for a garment, or steel for a car.

• Materials that are an integral part of the finished product.
• Can be directly traced to the product.
• Examples: Wood, metal, plastic, fabric, chemicals.

Direct Labour

Direct labour refers to the wages and benefits paid to workers who are directly involved in the manufacturing process. This includes the labour of those who physically assemble, operate, or create the product.

• Wages paid to workers directly involved in production.
• Includes employer's National Insurance contributions and pension contributions.
• Examples: Assembly line workers, machinists, factory assistants.

Prime Cost

Prime cost is the sum of direct materials and direct labour. It represents the basic cost of producing a product before factory overheads are added.

$$ \text{Prime Cost} = \text{Direct Materials} + \text{Direct Labour} $$

Factory Overheads

Factory overheads are all the indirect costs incurred in the manufacturing process. These costs cannot be easily traced to individual products but are necessary for running the factory. Examples include factory rent, utilities, depreciation of machinery, and wages of factory supervisors.

• Indirect costs incurred in the factory.
• Cannot be easily traced to individual products.
• Examples: Factory rent, utilities, depreciation, supervisor salaries, factory insurance.

Calculating Total Manufacturing Cost

The total manufacturing cost is the sum of the prime cost and the factory overheads.

$$ \text{Total Manufacturing Cost} = \text{Prime Cost} + \text{Factory Overheads} $$

Manufacturing Accounts

A manufacturing account is a summary of all the costs incurred in the manufacturing process. It is used to determine the cost of goods manufactured.

Account	Amount (£)
Direct Materials	$$ \text{Amount} $$
Direct Labour	$$ \text{Amount} $$
Factory Overheads	$$ \text{Amount} $$
Prime Cost	$$ \text{Amount} $$
Cost of Goods Manufactured	$$ \text{Amount} $$

Note: The Cost of Goods Manufactured is calculated as: Prime Cost + Factory Overheads.

Understanding these accounts and their calculations is fundamental to analysing the profitability of a manufacturing business.