Manufacturing accounts

Revise Manufacturing accounts for Accounting 7707 (O Level) — revision notes, 60 practice questions and instant AI marking.

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Cambridge O Level Accounting 7707

Manufacturing Accounts

The big idea: A manufacturer makes the goods it sells, so before the income statement it needs one more account: the manufacturing account, which adds up every factory cost to find what it cost to produce the year’s finished goods.

Summary — What This Chapter Covers

Direct costs can be traced to each unit made; indirect costs (factory overheads) cannot.
Prime cost = direct materials + direct labour + direct expenses.
Prime cost + factory overheads, adjusted for opening and closing work in progress, gives the cost of production.
Cost of production replaces purchases in the cost of sales section of the income statement.
Three inventories appear in the statement of financial position: raw materials, work in progress and finished goods.

1. Direct and Indirect Costs

Syllabus 5.5 · Paper 1 & 2

Can the cost be traced to a unit?

A direct cost can be identified with each item produced: the wood in a table (direct material), the wages of the carpenter who makes it (direct labour), a royalty paid per table (direct expense). Together they make the prime cost.

An indirect cost is a cost of running the factory that cannot be traced to a single unit: supervisors’ wages, factory rent, factory power and lighting, depreciation of factory machinery, factory insurance. These are factory overheads. Office and selling costs are not factory costs at all; they go in the income statement.

The cost build-up Direct materials + Direct labour + Direct expenses = Prime cost
Prime cost + Factory overheads ± work in progress adjustment = Cost of production

Practice Question 1

For a furniture maker, state where each cost belongs (direct material, direct labour, factory overhead, or income statement expense): (a) timber; (b) wages of machine operators; (c) factory supervisor’s salary; (d) depreciation of delivery vans; (e) factory electricity; (f) office rent.

2. Work in Progress and Cost of Production

Syllabus 5.5 · Paper 1 & 2

Partly finished goods

Work in progress (WIP) is goods that have been started but not finished at the year end. Opening WIP was started last year and is finished this year, so it is added; closing WIP is not yet finished, so it is subtracted. The result is the factory cost of the goods completed this year: the cost of production.

Cost of production Prime cost + Factory overheads + Opening WIP − Closing WIP

Practice Question 2

Raw materials: opening inventory $3,000, purchases $21,000, closing inventory $2,500. Direct wages $30,000. Factory overheads $14,200. Work in progress: opening $2,100, closing $2,800. Calculate (a) prime cost (b) cost of production.

3. Preparing the Manufacturing Account

Syllabus 5.5 · Paper 1 & 2

From raw materials to cost of production

Kestrel Furniture’s year ended 31 March 2026. Rent of $12,000 is shared ¾ factory, ¼ office. Factory machinery cost $60,000 (accumulated depreciation $18,000 at 1 April 2025) and is depreciated at 10% per annum on cost.

Worked example

Prepare the manufacturing account for the year ended 31 March 2026.

Kestrel Furniture — Manufacturing account for the year ended 31 March 2026
	$	$
Inventory of raw materials at 1 April 2025	6,200
Add Purchases of raw materials	48,500
	56,000
Prime cost

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7707 Jun 2026 · Paper 1 · Variant 2 Cambridge · mark scheme Open → 7707 Jun 2026 · Paper 2 · Variant 2 Cambridge · mark scheme Open → 7707 Nov 2025 · Paper 1 · Variant 2 Cambridge · mark scheme Open → 7707 Nov 2025 · Paper 2 · Variant 2 Cambridge · mark scheme Open → 7707 Jun 2025 · Paper 1 · Variant 2 Cambridge · mark scheme Open → 7707 Nov 2024 · Paper 1 · Variant 2 Cambridge · mark scheme Open →

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Manufacturing accounts