OxfordAQA A-Level Accounting: Manufacturing accounts (9615) – Revision Notes

These notes condense section 3.2.7, Manufacturing accounts, of the OxfordAQA International AS and A-level Accounting (9615) specification, Version 1.2, for International AS exams May/June 2025 onwards and International A-level exams May/June 2026 onwards. It is International A-level only material, examined on Paper 3: Financial Accounting according to the assessment overview. Two long worked examples and fuller explanations are in the study guide.

Then test yourself with the practice questions. Course links: the OxfordAQA A-level Accounting hub, the printable checklist and the diagnostic quizzes. The layouts below sit on top of the AS statements in sole trader financial statements and limited company accounts. All figures are invented and in US dollars.

The checklist from the specification

Section 3.2.7 asks you to prepare and comment on the financial statements of manufacturers:

• the manufacturing account;
• the income statement;
• the statement of financial position.

Preparing them involves calculating and recording:

1. prime costs;
2. overhead cost;
3. factory cost of finished goods;
4. profit on manufacture;
5. provisions for unrealised profit.

Key terms

Term	Meaning
Direct costs	Costs traced to each unit made: direct materials, direct labour, direct expenses
Prime cost	Total of the direct costs
Factory overheads	Indirect production costs: supervision, factory power, factory rent, machine depreciation
Work in progress	Partly finished goods at the year end
Factory cost of finished goods	Prime cost + overheads + opening WIP − closing WIP
Transfer price	Value at which completed goods leave the factory: cost plus a mark-up, or market value
Profit on manufacture	Transfer price − factory cost of finished goods
Provision for unrealised profit (PUP)	Profit on manufacture still held in unsold finished goods

Formulas

What you need	Formula
Direct materials consumed	Opening raw materials + purchases + carriage inwards − returns outwards − closing raw materials
Prime cost	Direct materials consumed + direct labour + direct expenses
Factory cost of finished goods	Prime cost + factory overheads + opening WIP − closing WIP
Profit on manufacture (mark-up m%)	Factory cost of finished goods × m/100
PUP (mark-up m% on cost)	Finished goods at transfer price × m/(100 + m)
PUP (margin p% of transfer price)	Finished goods at transfer price × p/100
Change in PUP to income statement	Closing PUP − opening PUP
Finished goods in statement of financial position	Transfer price − closing PUP

Converting: a mark-up of m% equals a margin of m/(100 + m). A 30% mark-up is a margin of 30/130, about 23.1%. A 20% margin is a mark-up of 20/80 = 25%.

Method in steps: the manufacturing account

1. Direct materials consumed (raw materials only; carriage inwards in, returns outwards out).
2. Add direct labour and direct expenses: prime cost.
3. List factory overheads, using only the factory share of shared costs: overhead cost.
4. Add opening WIP, deduct closing WIP: factory cost of finished goods.
5. Add profit on manufacture to reach the transfer to the income statement.

Skeleton to copy in the exam room:

Manufacturing account for the year ended ...
Inventory of raw materials (opening)                    x
Purchases of raw materials + carriage inwards
  − returns outwards                                    x
Less inventory of raw materials (closing)              (x)
Direct materials consumed                               x
Direct labour + direct expenses                         x
PRIME COST                                              x
Factory overheads (listed)                              x
Add opening work in progress                            x
Less closing work in progress                          (x)
FACTORY COST OF FINISHED GOODS                          x
Profit on manufacture                                   x
Transfer to income statement                            x

Method in steps: the income statement

1. Revenue.
2. Cost of sales: opening finished goods + transfer from manufacturing account + any purchases of finished goods − closing finished goods (both inventories at the values given, usually transfer price).
3. Gross profit.
4. Add profit on manufacture; deduct an increase in PUP, or add a decrease.
5. Deduct office, selling and finance expenses (including the office share of shared costs).
6. Sole trader: profit for the year. Limited company: profit from operations, then profit for the year before and after tax.

Method in steps: the statement of financial position

Under current assets list inventories of raw materials, work in progress, and finished goods less the closing PUP. The provision is never a liability.

Recording the provision

The provision for unrealised profit has its own ledger account, with a credit balance.

• Increase: debit income statement, credit provision.
• Decrease: debit provision, credit income statement.

Small worked reminders

These use Quillby Glassware, which transfers at factory cost plus 30%.

Prime cost. Raw materials: opening 7,250, purchases 63,900, carriage inwards 1,350, returns outwards 900, closing 8,100. Consumed = 7,250 + 63,900 + 1,350 − 900 − 8,100 = 63,500. With direct wages 48,700 and direct expenses 2,300, prime cost = 114,500.

Factory cost. Prime cost and overheads total 171,000; opening WIP 6,400, closing WIP 5,100. Factory cost of finished goods = 171,000 + 6,400 − 5,100 = 172,300.

Profit on manufacture. 30% × 172,300 = 51,690, so the transfer is 223,990.

Apportionment. Rent of 27,200 split 5 : 3 between factory and office puts 17,000 in the manufacturing account and 10,200 in the income statement.

Provision over two years. Closing finished goods at transfer price are 24,700 in year 1 and 21,320 in year 2. The provision is 5,700 then 4,920. In year 2 the provision account is debited with 780 and the income statement credited, so profit on manufacture is shown plus 780.

Must-know distinctions

• Direct v indirect labour. Operators who make the product are direct; supervisors, cleaners and maintenance staff are factory overheads.
• Carriage inwards v carriage outwards. Inwards on raw materials goes in prime cost; outwards is a distribution expense.
• Factory v office share. Only the factory share of a shared cost is a production cost.
• Mark-up v margin. A mark-up is a percentage of cost; a margin is a percentage of the transfer price.
• Provision v change in provision. The full provision reduces finished goods in the statement of financial position; only the change affects profit.
• Profit on manufacture v profit for the year. Profit on manufacture moves profit between factory and selling; it does not create profit on unsold goods, because the PUP removes it.

Commenting: points to reach for

• Factory cost per unit against the price an outside supplier would charge.
• Whether the mark-up flatters the factory compared with market value.
• Which costs would stop if production ended (make-or-buy), and which would continue.
• Non-financial factors: quality control, reliability of supply, staff, flexibility.
• Movements in raw materials, WIP and finished goods inventories and what they suggest about cash and sales.
• Finish with a decision that answers the question set.

Quick self-test

1. Name the three kinds of inventory a manufacturer holds.
2. Is a royalty paid on each unit made a prime cost or an overhead?
3. Raw materials: opening 5,480, purchases 41,250, carriage inwards 870, returns outwards 600, closing 6,000. Find direct materials consumed.
4. Prime cost and overheads total 96,300, opening WIP 3,950, closing WIP 4,250. Find the factory cost of finished goods.
5. Goods costing 96,000 are transferred at cost plus 30%. Find the profit on manufacture.
6. Closing finished goods at transfer price are 18,850 (mark-up 30%). Find the PUP.
7. Show finished goods in the statement of financial position for question 6.
8. A year later finished goods at transfer price are 16,120 (mark-up still 30%). Find the change in PUP and say how it is treated.
9. Goods are transferred at a price giving a margin of one fifth. Closing finished goods at transfer price are 22,800. Find the PUP.
10. Which two accounting concepts require a provision for unrealised profit?
11. Where does depreciation of delivery vans appear?
12. Insurance of 14,400 is shared 7 : 2 between factory and office. How much goes in the manufacturing account?

Answers

1. Raw materials, work in progress and finished goods.
2. Prime cost: it is a direct expense, traced to each unit made.
3. 5,480 + 41,250 + 870 − 600 − 6,000 = 41,000.
4. 96,300 + 3,950 − 4,250 = 96,000.
5. 96,000 × 30% = 28,800.
6. 18,850 × 30/130 = 4,350.
7. 18,850 − 4,350 = 14,500 (cost).
8. 16,120 × 30/130 = 3,720; the provision falls by 630, which is added to profit on manufacture.
9. 22,800 × 1/5 = 4,560.
10. Realisation and prudence.
11. Income statement, as a selling and distribution expense.
12. 14,400 × 7/9 = 11,200.

Where marks are usually lost

• Taking 30% of the transfer price as the PUP when the 30% is a mark-up on cost.
• Charging the full closing provision to profit instead of the movement.
• Adding a decrease in the provision the wrong way, so profit falls.
• Leaving finished goods at transfer price in the statement of financial position.
• Placing the WIP adjustment above prime cost.
• Applying the mark-up to total factory cost before the WIP adjustment.
• Mislabelling totals: write “prime cost” and “factory cost of finished goods” in full.
• Comments that never use a cost per unit or a market price, or never reach a decision.

Official syllabus

OxfordAQA International AS and A-level Accounting (9615) specification, Version 1.2, for International AS exams May/June 2025 onwards and International A-level exams May/June 2026 onwards, published by OxfordAQA: section 3.2.7, Manufacturing accounts.