Edexcel IGCSE Accounting: Financial statements of a manufacturer (4AC1) – Revision Notes

These notes condense Topic 4, section 4.5, Financial statements of a manufacturer, from the Pearson Edexcel International GCSE in Accounting (4AC1) specification, Issue 1, October 2016. The section has two points: (a) the difference between the inventories of raw materials, work-in-progress and finished goods, and (b) preparing manufacturing accounts to show prime cost, production cost and total cost. It belongs to Paper 2, Financial Statements. For full explanations and the worked Odlington example, use the study guide.

Links: Edexcel IGCSE Accounting hub, printable checklist, free 10-minute diagnostics, and the practice questions. All amounts are in dollars and all businesses are invented.

4.5 (a) The three inventories

Inventory	Meaning	Adjusted in
Raw materials	Bought, not yet used in production	Manufacturing account
Work-in-progress	Started, not finished at the year end	Manufacturing account
Finished goods	Complete and ready to sell	Income statement

• Each has an opening and a closing figure.
• Work-in-progress is valued at the materials, labour and factory overheads put in so far.
• All three closing figures are current assets in the statement of financial position.

4.5 (b) The cost groups

Group	Contains	Feeds
Direct costs	Raw materials consumed, direct (manufacturing) wages, direct expenses	Prime cost
Factory overheads	Indirect wages, factory rent and rates, power, insurance, repairs, depreciation of factory assets	Total cost
Not factory costs	Office salaries, selling and distribution costs, office depreciation	Income statement expenses

If a cost is shared between factory and office, apportion it as the question states. Only the factory share enters the manufacturing account.

Formulas

Figure	Calculation
Raw materials consumed	Opening raw materials + purchases + carriage inwards - returns outwards - closing raw materials
Prime cost	Raw materials consumed + direct wages + direct expenses
Total cost	Prime cost + factory overheads
Production cost	Total cost + opening work-in-progress - closing work-in-progress
Cost of sales	Opening finished goods + production cost - closing finished goods
Gross profit	Revenue - cost of sales

Label each total on the page with its name. A clear label lets the marker see which figure you mean, even if a number elsewhere is wrong.

Method in steps

1. Sort every cost in the question into direct, factory overhead or not a factory cost.
2. Work out raw materials consumed first. Ignore carriage outwards.
3. Add direct wages and direct expenses to reach prime cost. Write the total on its own line.
4. List each factory overhead, total them, and add to prime cost for total cost.
5. Add opening work-in-progress and deduct closing work-in-progress to reach production cost.
6. Carry production cost to the income statement. Adjust finished goods there to find cost of sales and gross profit.
7. Put all three closing inventories in current assets.

Worked reminder: Murnwick Candles

Year ended 30 April 2027. Opening raw materials 3,100, purchases 18,600, carriage inwards 400, returns outwards 250, closing raw materials 3,500. Direct wages 9,200, hire of a wax-moulding machine 700. Factory overheads: indirect wages 2,800, power 1,900, factory rent 1,300, depreciation of factory equipment 900. Work-in-progress: opening 1,100, closing 900. Finished goods: opening 2,200, closing 1,800.

Raw materials consumed: 3,100 + 18,600 + 400 - 250 - 3,500 = 18,350
Prime cost:             18,350 + 9,200 + 700                 = 28,250
Factory overheads:      2,800 + 1,900 + 1,300 + 900          =  6,900
Total cost:             28,250 + 6,900                       = 35,150
Production cost:        35,150 + 1,100 - 900                 = 35,350
Cost of sales:          2,200 + 35,350 - 1,800               = 35,750

The layout to learn

Manufacturing account for the year ended ...
Opening raw materials + purchases + carriage inwards
   - returns outwards - closing raw materials   = Raw materials consumed
+ Direct wages + direct expenses                 = PRIME COST
+ Factory overheads (list each, then total)      = TOTAL COST
+ Opening WIP - closing WIP                      = PRODUCTION COST

Production cost moves to the income statement, where it replaces purchases:

Revenue
Opening finished goods + PRODUCTION COST - closing finished goods
   = Cost of sales
Revenue - cost of sales                          = Gross profit

If the question gives a printed layout, copy its headings and order. Some books call a total by a different name, so match the page you are given.

Working backwards from a total

Examiners can give a total and ask for a missing item. Rearrange the formula and check by running the calculation forwards.

• Missing closing work-in-progress: total cost + opening work-in-progress - production cost.
• Missing closing raw materials: opening + purchases + carriage inwards - returns outwards - raw materials consumed.
• Missing factory overheads: total cost - prime cost.
• Missing closing finished goods: opening finished goods + production cost - cost of sales.

Murnwick check: if production cost is 35,350, total cost is 35,150 and opening work-in-progress is 1,100, then closing work-in-progress is 35,150 + 1,100 - 35,350 = 900.

Exam wording

If the question says	Do this
Prepare a manufacturing account	Build the whole layout down to production cost
Calculate prime cost	Stop after direct costs. Do not add overheads
Calculate the total cost	Prime cost plus factory overheads only
State the production cost	Total cost after the work-in-progress adjustment
Explain the difference between work-in-progress and finished goods	Unfinished at the year end versus complete and ready to sell

Must-know distinctions

• Prime cost versus total cost. Prime cost has direct costs only. Total cost adds factory overheads.
• Total cost versus production cost. Production cost is total cost after the work-in-progress adjustment.
• Work-in-progress versus finished goods. Work-in-progress is unfinished and adjusted in the manufacturing account. Finished goods are complete and adjusted in the income statement.
• Purchases versus raw materials consumed. Purchases are bought. Consumed is what was used, after inventory changes.
• Direct wages versus indirect wages. Workers who make the goods are direct. Supervisors, cleaners and maintenance staff are indirect.
• Factory versus office costs. Only factory costs go in the manufacturing account.

Why the three figures matter

• Prime cost shows what the goods cost in materials and the labour and expenses traced to them. The owner can see whether direct costs are rising faster than output.
• Total cost adds the running costs of the factory, so the owner can see how much the factory itself costs to keep open.
• Production cost is the cost of the goods actually completed in the year. Using it, rather than the cash spent on materials, matches the cost of making the goods with the revenue from selling them.

A short explanation question usually needs a definition plus a use. For example: “Prime cost is the total of direct materials, direct labour and direct expenses, and it shows the cost that can be traced to the goods made.”

Quick self-test

1. Name the three inventories held by a manufacturer.
2. Which of the three are adjusted in the manufacturing account?
3. Opening raw materials 5,000, purchases 12,000, closing raw materials 4,000. What are the raw materials consumed?
4. Raw materials consumed 13,000, direct wages 22,000 and a royalty per unit of 1,500. What is the prime cost?
5. Is the salary of the factory supervisor a prime cost item or a factory overhead?
6. Rent of 15,000 is shared with 40% relating to the factory. How much goes in the manufacturing account?
7. Prime cost 50,000, factory overheads 20,000. What is the total cost?
8. Using question 7, with opening work-in-progress 3,000 and closing 4,500, what is the production cost?
9. Production cost is 68,500, opening finished goods 6,000 and closing finished goods 8,500. What is the cost of sales?
10. Raw materials consumed were 31,000. Opening raw materials 4,000, purchases 29,500, carriage inwards 600, returns outwards 900. What was the closing raw materials?
11. In which section of the statement of financial position do the three closing inventories appear?

Answers

1. Raw materials, work-in-progress and finished goods.
2. Raw materials and work-in-progress.
3. 5,000 + 12,000 - 4,000 = 13,000.
4. 13,000 + 22,000 + 1,500 = 36,500.
5. A factory overhead (indirect wages).
6. 15,000 x 40% = 6,000.
7. 50,000 + 20,000 = 70,000.
8. 70,000 + 3,000 - 4,500 = 68,500.
9. 6,000 + 68,500 - 8,500 = 66,000.
10. 4,000 + 29,500 + 600 - 900 - closing = 31,000, so closing = 33,200 - 31,000 = 2,200.
11. Current assets (inventories).

Where marks are usually lost

• Using purchases in place of raw materials consumed.
• Treating indirect factory wages as direct labour, which inflates prime cost.
• Including carriage outwards or office expenses in the manufacturing account.
• Reversing the work-in-progress adjustment (deducting opening, adding closing).
• Not showing prime cost, total cost and production cost as separate labelled lines, so a slip cannot be traced.
• Forgetting the finished goods adjustment when finding cost of sales.
• Applying a fraction to the wrong cost, or putting the office share in the manufacturing account.
• Leaving depreciation of factory machinery out of the overheads.
• Showing only one or two of the three inventories in current assets.

Frequently asked questions

How is work-in-progress valued? Work-in-progress is valued at the cost put in so far: the materials used, the wages of workers who handled it and a share of factory overheads. A half-made item is therefore worth more than its materials alone.

Does carriage outwards go in the manufacturing account? No. Carriage outwards is the cost of delivering to customers, so it is an expense in the income statement. Carriage inwards adds to the cost of raw materials in the manufacturing account.

Is depreciation of factory machinery a factory overhead? Yes. Depreciation of factory machinery and buildings is a factory overhead in the manufacturing account. Depreciation of office equipment goes in the income statement instead.

How should the manufacturing account totals be shown? Show prime cost, total cost and production cost as separate, clearly labelled lines. If a question prints its own layout, follow its labels and order exactly.

Official syllabus

Pearson Edexcel International GCSE in Accounting (4AC1) specification, Issue 1, October 2016, published by Pearson Education Limited – Topic 4: The preparation of financial statements, section 4.5 Financial statements of a manufacturer, points (a) and (b).