IGCSE Accounting: Manufacturing accounts (Cambridge 0452)

Syllabus edition note. This resource follows the Cambridge IGCSE Accounting 0452 syllabus (and Cambridge O Level Accounting 7707, which has the same subject content for the same series) for exams in 2027, 2028 and 2029 (version 1), first examined in the March 2027 series in India and the June 2027 series elsewhere. If you sit 0452 in November 2026, you sit the 2026 syllabus (version 2), which differs: Paper 1 has 35 multiple-choice marks in 1 hour 15 minutes, not 40 marks in 1 hour 30 minutes; Topic 7 is “Accounting principles and policies”, without 7.2 Ethical considerations or 7.3 Technology and sustainability; 4.4 is “Irrecoverable debts and provision for doubtful debts”; income statements are named instead of statements of profit or loss; three-column running balance accounts are not required; Clubs and societies is 5.4 and Manufacturing accounts 5.5; and 6.3 is “Inter-firm comparison”. For this topic, the 2026 syllabus covers only trading and service businesses in 5.1 and limits drawings adjustments to goods taken by the owner for own use; for limited companies it excludes cumulative and non-cumulative preference shares, rights issues, share premium and capital redemption reserve but requires the difference between redeemable and non-redeemable preference shares (the 2027-2029 syllabus lists none of these); and for incomplete records it does not ask why businesses keep them or what their advantages are. If you sit in November 2026, work from the 2026 syllabus on the Cambridge International website.

This guide covers section 5.4 Manufacturing accounts of the Cambridge IGCSE Accounting 0452 syllabus for exams in 2027, 2028 and 2029 (version 1). You learn how a business that makes its own goods finds the cost of what it made, and how that figure flows into the statement of profit or loss and the statement of financial position. The topic overview is in Preparation of financial statements, which shows a different worked example. Use this guide with the revision notes and the practice questions. Find your level on the Cambridge IGCSE Accounting hub, tick off topics on the checklist and test yourself with the free diagnostics.

What the syllabus asks for

Syllabus point in 5.4	Where it is taught here
Direct and indirect costs	Section 1
Direct material, direct labour, prime cost and factory overheads	Section 2
Adjustments for work in progress	Section 3
Factory cost of production	Section 3
Preparing manufacturing accounts, statements of profit or loss and statements of financial position	Sections 4 and 5
Adjustments to financial statements as detailed in 5.1	Section 6 and the worked example

1. Direct and indirect costs

A direct cost can be traced to the goods being made. An indirect cost is needed to run the factory but cannot be traced to one unit of output. Costs of the office and of selling are not factory costs at all.

Tarnley Canoes makes plastic canoes. Here is how its costs are classified.

Cost	Class	Why
Polyethylene sheet	Direct (material)	Becomes part of every canoe
Wages of the moulding team	Direct (labour)	Paid to the people who make the canoes
Wages of the factory supervisor	Indirect (factory overhead)	Helps all production, traced to no single canoe
Factory power	Indirect (factory overhead)	Runs the machines for all output
Depreciation of moulding machine	Indirect (factory overhead)	A cost of owning the factory equipment
Salary of the sales manager	Not a factory cost	Goes in the statement of profit or loss

2. Direct material, direct labour, prime cost and factory overheads

Direct material is shown as the cost of raw materials consumed, not as purchases, because some materials are in inventory at each end of the year.

Cost of raw materials consumed = opening inventory of raw materials + purchases + carriage inwards - returns outwards - closing inventory of raw materials

Direct labour is the wages of the production workers.

Prime cost = direct material + direct labour

Factory overheads are all the indirect factory costs: indirect wages, factory rent, power, insurance and depreciation of factory machinery. Add them to prime cost.

3. Work in progress and factory cost of production

Work in progress (WIP) is part-finished goods still in the factory. The opening WIP was paid for last year but is finished this year, so you add it. The closing WIP has been paid for this year but is not finished, so you deduct it.

Factory cost of production = prime cost + factory overheads + opening WIP - closing WIP

Effect of a change: if closing WIP is 1,000 higher, factory cost of production is 1,000 lower, cost of sales is 1,000 lower and gross profit is 1,000 higher. An understated closing WIP does the reverse.

4. How the statements link

• The manufacturing account ends with factory cost of production.
• In the statement of profit or loss, a manufacturer’s cost of sales is opening inventory of finished goods + factory cost of production - closing inventory of finished goods. A trader would use purchases here.
• A business that both makes goods and buys finished goods to resell adds purchases of finished goods to that cost of sales.
• Office, selling and distribution expenses stay in the statement of profit or loss, below gross profit.
• The statement of financial position shows three inventories under current assets: raw materials, work in progress and finished goods.

5. Worked example

Tarnley Canoes is a sole trader. Year ended 31 March 2028. Balances and information:

Item	$
Raw materials inventory, 1 April 2027	14,200
Raw materials inventory, 31 March 2028	16,500
Purchases of raw materials	118,400
Returns outwards (raw materials)	2,100
Carriage inwards on raw materials	3,300
Direct factory wages	86,500
Indirect factory wages	21,400
Factory power paid	9,600
Factory rent paid	19,500
Factory machinery at cost	120,000
Accumulated depreciation on machinery, 1 April 2027	36,000
WIP, 1 April 2027 / 31 March 2028	4,800 / 6,300
Finished goods, 1 April 2027 / 31 March 2028	21,000 / 24,600
Revenue / returns inwards	392,000 / 2,000
Office salaries	38,000
Office expenses	14,500
Carriage outwards	6,200
Irrecoverable debts written off	1,350
Trade receivables / allowance for irrecoverable debts	25,000 / 1,000
Rent received from letting a shed	3,600
Office equipment at cost / accumulated depreciation	18,000 / 5,400
Trade payables / bank	17,200 / 9,800
Drawings (cash)	24,000

Adjustments: power owing 800; factory rent prepaid 1,500; machinery depreciated at 20% on reducing balance; office equipment depreciated 10% on cost straight line; allowance to be 5% of trade receivables; 900 of the rent received relates to next year; the owner took finished goods costing 1,200 for own use; 700 of the office expenses is the owner’s private expense.

Tarnley Canoes
Manufacturing account for the year ended 31 March 2028
                                      (amounts in $; subtotals left)
Inventory of raw materials 1 April 2027      14,200
Purchases                                   118,400
Less Returns outwards                         2,100
                                            116,300
Carriage inwards                              3,300
                                            133,800
Less Inventory of raw materials 31 March 2028 16,500
Cost of raw materials consumed                         117,300
Direct labour                                           86,500
Prime cost                                             203,800
Factory overheads
  Indirect wages                             21,400
  Power (9,600 + 800)                        10,400
  Rent (19,500 - 1,500)                      18,000
  Depreciation: machinery (20% x 84,000)     16,800
                                                        66,600
                                                       270,400
Add Work in progress 1 April 2027                        4,800
                                                       275,200
Less Work in progress 31 March 2028                      6,300
Factory cost of production                             268,900

Statement of profit or loss for the year ended 31 March 2028
                                      (amounts in $; subtotals left)
Revenue                                                392,000
Less Returns inwards                                     2,000
                                                       390,000
Less Cost of sales
  Inventory of finished goods 1 April 2027   21,000
  Factory cost of production                268,900
                                            289,900
  Less Inventory of finished goods 31 March 2028 24,600
                                            265,300
  Less Goods taken by owner                   1,200
                                                       264,100
Gross profit                                           125,900
Add Rent received (3,600 - 900)                          2,700
                                                       128,600
Less Expenses
  Office salaries                            38,000
  Office expenses (14,500 - 700)             13,800
  Carriage outwards                           6,200
  Irrecoverable debts                         1,350
  Increase in allowance (1,250 - 1,000)         250
  Depreciation: office equipment              1,800
                                                        61,400
Profit for the year                                     67,200

Statement of financial position at 31 March 2028
                                          Cost   Acc dep      NBV
Non-current assets (amounts in $)
Factory machinery                      120,000    52,800   67,200
Office equipment                        18,000     7,200   10,800
                                       138,000    60,000   78,000
Current assets
  Inventory: raw materials 16,500
             work in progress 6,300
             finished goods 24,600       47,400
  Trade receivables 25,000
  Less Allowance 1,250                   23,750
  Prepayment                              1,500
  Bank                                    9,800   82,450
Current liabilities
  Trade payables                         17,200
  Accrued power                             800
  Rent received in advance                  900   18,900
Working capital                                   63,550
                                                 141,550
Capital 1 April 2027                             100,250
Add Profit for the year                           67,200
                                                 167,450
Less Drawings (24,000 + 1,200 + 700)              25,900
                                                 141,550

Check the balance: net assets 141,550 = closing capital 141,550. Factory machinery’s accumulated depreciation is 36,000 + 16,800 = 52,800.

6. Adjustments from section 5.1 in a manufacturing business

Adjustment	Where it goes
Depreciation, straight line (cost - residual value) / years, reducing balance (a % of net book value), revaluation (opening value + additions - closing value)	Factory assets: manufacturing account, as a factory overhead. Office assets: statement of profit or loss
Accrued and prepaid factory expenses	Adjust the expense in the manufacturing account; accrual is a current liability, prepayment a current asset
Accrued and prepaid office expenses	Adjust the expense in the statement of profit or loss
Accrued and prepaid income	Adjust the income added after gross profit; accrued income is a current asset, income received in advance a current liability
Irrecoverable debts and allowance for irrecoverable debts	Statement of profit or loss; receivables shown net of the allowance
Goods taken by the owner	Deducted in cost of sales at the cost given; added to drawings
Owner’s private expenses paid by the business	Removed from the expense; added to drawings

If a question tells you to split one expense, such as rent, between the factory and the office, apply the given fraction and put each part in its own statement.

Common errors

• Putting purchases of raw materials, not the cost of raw materials consumed, into prime cost.
• Adding closing WIP and deducting opening WIP.
• Treating the factory supervisor’s wages as direct labour.
• Putting office salaries or carriage outwards into factory overheads.
• Forgetting that the factory machinery depreciation goes in the manufacturing account, not the statement of profit or loss.
• Using factory cost of production where prime cost is asked for, or the reverse.
• Showing one lump of inventory in the statement of financial position instead of raw materials, WIP and finished goods.
• Leaving the owner’s goods or private expenses out of drawings.

Frequently asked questions

What is the difference between a direct cost and an indirect cost in a manufacturing account? A direct cost can be traced to the goods being made, such as raw materials and production workers’ wages. An indirect cost, or factory overhead, is needed to run the factory but cannot be traced to one unit, such as factory rent, power and a supervisor’s wages.

How is factory cost of production calculated in Cambridge IGCSE Accounting 0452? Factory cost of production is prime cost plus factory overheads plus opening work in progress minus closing work in progress. Prime cost is direct material (raw materials consumed) plus direct labour.

What happens to gross profit if closing work in progress is higher? A higher closing work in progress lowers factory cost of production and cost of sales by the same amount, so gross profit rises. An understated closing work in progress has the reverse effect.

How is cost of sales calculated for a manufacturer? Cost of sales is opening inventory of finished goods plus factory cost of production minus closing inventory of finished goods. If the business also buys finished goods to resell, those purchases are added too.

Where does depreciation of factory machinery go? Depreciation of factory machinery is a factory overhead in the manufacturing account. Depreciation of office equipment and other office, selling and distribution expenses stay in the statement of profit or loss.

Official syllabus

Cambridge IGCSE Accounting 0452 syllabus for exams in 2027, 2028 and 2029 (version 1), Cambridge International, section 5.4 Manufacturing accounts.