OxfordAQA A-Level Accounting: Manufacturing accounts (9615)

This study guide teaches 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. You meet this content in the second year only: it is International A-level only. According to the assessment overview, Paper 3: Financial Accounting examines it, and A-level papers assume the AS skills as well.

Start points: the OxfordAQA A-level Accounting hub, the printable checklist and the free diagnostic quizzes. After this guide, use the revision notes for recall and the practice questions to test yourself. This topic builds on sole trader financial statements, limited company accounts and the accounting concepts page. Cost classification also links to absorption and activity based costing.

Tolverne Copperware and every figure below are made up. OxfordAQA question papers express currency in US dollars ($), and this page does the same.

What section 3.2.7 covers

Content (3.2.7, International A-level only)	Your task
Prepare and comment on the financial statements of manufacturers	Prepare a manufacturing account, an income statement and a statement of financial position for a business that makes its own goods, then comment on what they show
Calculation and recording of prime costs	Find direct materials consumed and add the other direct costs
Calculation and recording of overhead cost	Total the indirect factory costs, sharing mixed costs between factory and office
Calculation and recording of factory cost of finished goods	Adjust total factory cost for opening and closing work in progress
Calculation and recording of profit on manufacture	Add a mark-up (or use a market value) to transfer goods out of the factory
Calculation and recording of provisions for unrealised profit	Remove profit not yet earned from finished goods inventory, recording the change

Why manufacturers need an extra statement

A trader buys goods ready to sell, so cost of sales comes straight from purchases. A manufacturer buys raw materials, pays people to work on them and runs a factory. The manufacturing account gathers those factory costs and works out what the goods made in the year cost. That figure then feeds into the income statement in place of (or as well as) purchases of finished goods.

A manufacturer usually holds three kinds of inventory:

• raw materials – bought in, not yet used;
• work in progress – started but not finished at the year end;
• finished goods – complete and ready to sell.

All three appear under current assets in the statement of financial position.

Prime cost

Prime cost is the total of the direct costs: costs that can be traced to each unit made.

• Direct materials consumed = opening inventory of raw materials + purchases of raw materials + carriage inwards − returns outwards − closing inventory of raw materials.
• Direct labour: wages of the people who make the product (machine operators, assemblers).
• Direct expenses: other costs tied to each unit, such as a royalty paid per item made.

Carriage inwards on raw materials belongs here. Carriage outwards is a selling cost and goes in the income statement.

Overhead cost

Factory overheads are indirect production costs. They are needed to make the goods but cannot be traced to a single unit: supervisors’ and maintenance wages, factory power, factory rent, insurance of machinery and depreciation of factory machinery.

Some costs cover the whole site. Share them between factory and office on a fair basis – floor area for rent, meter readings for electricity, values for insurance. Only the factory share enters the manufacturing account; the office share is an expense in the income statement.

Factory cost of finished goods

Prime cost plus overhead cost gives the total cost of production in the year. Some of that production is unfinished. Add opening work in progress (finished this year) and deduct closing work in progress (carried forward). The result is the factory cost of finished goods: the cost of goods completed in the year.

Worked example 1: the manufacturing account

Tolverne Copperware makes copper pans. Year ended 30 April 2026:

Item	$
Raw materials: 1 May 2025 / 30 April 2026	18,400 / 21,300
Work in progress: 1 May 2025 / 30 April 2026	9,600 / 11,800
Purchases of raw materials	186,500
Carriage inwards on raw materials	4,200
Returns outwards of raw materials	2,700
Direct factory wages	142,000
Royalties (paid per pan made)	6,800
Indirect factory wages	38,500
Factory power	17,400
Rent and insurance (factory 3/4, office 1/4)	36,000
Depreciation of factory machinery	22,000
Factory maintenance	5,900

Goods are transferred to the warehouse at factory cost plus 15%.

Tolverne Copperware
Manufacturing account for the year ended 30 April 2026
Inventory of raw materials at 1 May 2025                    18,400
Purchases of raw materials                     186,500
Carriage inwards                                 4,200
                                               190,700
Less returns outwards                            2,700     188,000
                                                           206,400
Less inventory of raw materials at 30 April 2026            21,300
Direct materials consumed                                  185,100
Direct factory wages                                       142,000
Royalties                                                    6,800
PRIME COST                                                 333,900
Factory overheads
  Indirect factory wages                        38,500
  Factory power                                 17,400
  Rent and insurance (3/4 x 36,000)             27,000
  Depreciation of factory machinery             22,000
  Factory maintenance                            5,900     110,800
                                                           444,700
Add work in progress at 1 May 2025                           9,600
                                                           454,300
Less work in progress at 30 April 2026                      11,800
FACTORY COST OF FINISHED GOODS                             442,500
Profit on manufacture (15% x 442,500)                       66,375
Transfer to income statement                               508,875

Profit on manufacture

Many manufacturers transfer goods out of the factory at more than cost: either cost plus a set percentage, or the price an outside supplier would charge for the same goods. The difference is the profit on manufacture. It lets the owner judge the factory as if it were selling to the rest of the business, and it can be used to reward factory managers.

The double entry: the transfer price is debited to the trading section of the income statement and credited to the manufacturing account. The profit on manufacture is then added back below gross profit, so it does not change the business’s total profit for goods that have been sold.

Provisions for unrealised profit

Closing finished goods that came from the factory are valued at transfer price, which includes profit on manufacture. Those goods have not been sold to a customer outside the business, so that profit is not yet earned. The realisation concept says profit is recognised only when goods pass to the customer, and prudence says assets and profit must not be overstated. So you create a provision for unrealised profit (PUP).

With a mark-up of m% on cost:

PUP = finished goods at transfer price × m / (100 + m)

With a margin of p% of the transfer price, PUP = finished goods at transfer price × p / 100.

Each year the income statement takes just the movement in the provision:

• increase – deduct it from profit on manufacture;
• decrease – add it to profit on manufacture.

In the statement of financial position, finished goods are shown at transfer price less the full closing provision, which is cost.

Worked example 2: income statement and inventories

Tolverne’s finished goods at transfer price were 24,150 at 1 May 2025 and 29,900 at 30 April 2026. Revenue was 640,000. Office salaries were 64,000, selling and distribution costs 31,500 and depreciation of office equipment 4,000; the office pays 9,000 of the rent and insurance.

PUP at 1 May 2025 = 24,150 × 15/115 = 3,150. PUP at 30 April 2026 = 29,900 × 15/115 = 3,900. The provision rises by 750.

Tolverne Copperware
Income statement for the year ended 30 April 2026
Revenue                                                    640,000
Inventory of finished goods at 1 May 2025       24,150
Transfer from manufacturing account            508,875
                                               533,025
Less inventory of finished goods at 30 April    29,900
Cost of sales                                              503,125
Gross profit                                               136,875
Add profit on manufacture                       66,375
Less increase in provision for unrealised profit   750      65,625
                                                           202,500
Less expenses
  Office salaries                               64,000
  Selling and distribution                      31,500
  Rent and insurance (1/4)                       9,000
  Depreciation of office equipment               4,000     108,500
Profit for the year                                         94,000

Check: if every transfer were at cost, opening and closing finished goods would be 21,000 and 26,000. Cost of sales would be 21,000 + 442,500 − 26,000 = 437,500 and gross profit 202,500 – the same 202,500 as above. The mark-up and the provision only split profit between factory and selling.

Statement of financial position at 30 April 2026 (extract):

Current assets
Inventories: raw materials                                  21,300
             work in progress                               11,800
             finished goods                     29,900
             less provision for unrealised profit 3,900     26,000
                                                            59,100

The ledger account for the provision:

Provision for unrealised profit
Dr                              | Cr
Balance c/d             3,900   | Balance b/d              3,150
                                | Income statement           750
                        3,900   |                          3,900

If finished goods at transfer price fall to 25,300 a year later, the provision becomes 25,300 × 15/115 = 3,300. The 600 decrease is debited to the provision account and added in the income statement.

For a limited company the layout is the same down to gross profit plus the adjusted profit on manufacture. Expenses then lead to profit from operations, then profit for the year before and after tax, as in 3.1.7.

Commenting on manufacturers’ statements

The specification asks you to comment, not only prepare. Points that earn credit:

• Factory cost per unit. Tolverne made 25,000 pans, so the factory cost was 442,500 ÷ 25,000 = 17.70 each. If an outside supplier quotes 19.80, making saves 2.10 a pan, or 52,500 in total.
• Profit on manufacture is internal. A 15% mark-up produced 66,375 of “profit”, more than the 52,500 real saving against the market. A mark-up chosen by the owner can flatter the factory; a transfer at market value shows its true advantage.
• Make or buy. Closing the factory saves only the costs that would stop. Leases, redundancy costs and lost control of quality and supply all count. Non-financial points (jobs, reliability, know-how) matter too.
• Cost behaviour. Prime costs rise with output; many overheads do not. A drop in output raises the cost per unit.
• Performance measures. A separate factory profit helps reward managers, but a manager who ignores quality or overproduces may still show a profit on manufacture.
• Inventory levels. Rising work in progress or finished goods ties up cash and may signal production bottlenecks or weak sales.

Always link the comment to the figures and finish with a judgement.

Common errors

• Putting carriage outwards, office rent or sales commission in the manufacturing account.
• Treating the factory supervisor’s wages as direct labour.
• Adjusting for work in progress before prime cost instead of after overheads.
• Calculating PUP as m% of transfer price (15% of 29,900) instead of m/(100 + m).
• Deducting the whole closing provision from profit instead of the change.
• Showing finished goods at transfer price in the statement of financial position.
• Commenting in general terms without using the factory cost per unit or the market price.

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.