ZIMSEC A Level · Accounting · Form 5
Manufacturing account
- Prime cost = direct materials consumed + direct labour + direct expenses.
- Direct materials consumed = opening raw materials + purchases (+ carriage inwards) − closing raw materials.
- Production cost = prime cost + factory overheads ± change in work in progress.
- The cost of goods manufactured is transferred to the income statement (sometimes at a transfer price including a manufacturing profit).
Worked example: Opening raw materials 4 000; purchases 30 000; closing raw materials 6 000; direct labour 20 000; factory overheads 15 000; opening WIP 3 000; closing WIP 5 000. Find prime cost and production cost.
Materials consumed = 4 000 + 30 000 − 6 000 = 28 000
Prime cost = 28 000 + 20 000 = 48 000
Production cost = 48 000 + 15 000 + 3 000 − 5 000 = 61 000
Inventory valuation (IAS 2)
Inventory is valued at the lower of cost and net realisable value.
- FIFO (first in, first out): issues use the oldest prices; closing inventory at the latest prices.
- AVCO (weighted average cost): a new average is calculated after each receipt.
(LIFO is not permitted under IAS 2.)
Worked example: Bought 100 units at US$5, then 100 at US$6. Sold 150 units. Find closing inventory under FIFO.
Issues: 100 at 5 + 50 at 6. Closing: 50 units at US$6 = US$300
In rising prices, FIFO gives a higher closing inventory and higher profit than AVCO.
Check yourself
- What is prime cost?
- What is the rule for valuing inventory under IAS 2?
- Using AVCO for the example above, what is the average cost per unit before the sale?
Show answers
- Direct materials + direct labour + direct expenses.
- The lower of cost and net realisable value.
- (500 + 600) ÷ 200 = US$5.50
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