An enterprise can buy goods from others for resale and or it can manufacture its own goods for resale.
When the enterprise manufactures its own goods, it keeps such records that will disclose his TOTAL COST OF MANUFACTURE/PRODUCTION. At the end of an accounting period, a Manufacturing Account is drawn up to ascertain the total cost of manufacture. Sometimes, it is so prepared as to show whether the factory has made a manufacturing profit or loss.
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For a Manufacturer: Cost of Production = Prime Costs + Factory Overheads |
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Prime Costs are direct costs of a product before any manufacturing overhead is added which consists of:
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Direct raw materials: |
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Normally, direct raw materials form a major portion of the prime costs; Consist of Cost of Purchase and All costs incurred in getting the raw materials to the factory; Formula to get Cost of raw materials used/consumed : = Opening Stock of raw materials Plus: Purchases of raw materials Plus : Carriage Inwards Plus: Duty charges Less: Closing Stock |
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Direct Labor: |
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Cost of labor that can be traced directly to the manufactured goods. Example is the wages for the factory operators |
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Direct Expenses: |
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All expenses that can be directly related to the production process. |
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Illustration To Determine Prime Cost: |
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Details of a manufacturer for year ended 31 st Dec:
Purchases of raw materials $ 4,000 Opening stock of raw materials $200 Closing stock of raw materials $400 Freight charges on raw materials $150 Direct wages $1,500 Direct expense $600
Calculate the prime cost.
Statement Of Prime Cost for the year ended 31 st Dec
Opening stock of raw materials $200
Purchases of raw materials $4,000 Add: Freight $150 $4,150 $4,350
Less: Closing stock of raw materials ($400) Cost of raw materials used/consumed $3,950 Direct wages $1,500 Direct expense $600
Prime Cost $ 6,050
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