Cost of Production

Prime cost overheads

cslirect costs) ( indirect costs)
l
n

• Direct material • indirect material

•
Direct labour • indirect labour
•
Direct other expenses • indirect factory
expenses .

$
Direct material cost xxx

labour ✗ ✗
+ Direct
✗ ✗
+ Direct expenses
✗ ✗ ✗
Prime cost

Factory overheads
✗ ✗
+

✗ ✗ ✗

✗ ✗
+
Opening working progress (xx)
closing working progress
cost of production ✗ ✗ ✗
 Indirect material

Indirect labour

Indirect expenses .

Prime cost section of a Manufacturing account

Cost of raw materials ( How many of the raw material purchases

direct wages were
actually used
during the year)

royalties
other direct costs
any

Question
Max shoemaker makes footwear The
•
.

Following
information relates to the ended
year
31 December 2019 .

leather
-

inventory of at 1/1/2019 $ 5000

-

purchase of leather
during the
year $ 65000

leather at 31/12/2019 $ 4900

inventory of
-

Required ,

Calculate the value of leather used to

make shoes during the year ended 31/12/2019 .
Question
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$250

$30000

as

cost direct costs

* In prime we
only include .

(try ]
Questions
 The overhead
expenses

* The costs incurred the

factory
expenses or in
running
but cannot be
directly identified with the cost
unit .

Example
2-

The manufacturing account

* In manufacturing account Prime cost section

and overhead added
factory section are

together .
Question

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* To calculate total Production cost

,

Total Production =
Prime + total
cost cost overheads .
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 Inventories business
in a
manufacturing

raw materials
adjust in the
manufacturing
work in ale
progress

finished goods adjust in the

trading section of
the in 1st .

* All
in the
the
closing
SFP under
inventories
current
should
assets .
show

Work in
progress inventory

should be
*
Opening work in
progress inventory
added to the cost of production because these
partly finished goods completed
financial year .
are
during the

*
Closing work in
progress inventory should be deducted
because these units will be completed in the
next financial year .
Question
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Manufacturing
2-
profit

Businesses have two options first

* always The .
one is
the l usiness's factory
produce goods
.si#iin a
.

site .

Second option is to purchase the same goods

from an outside
' '
supplier Businesses can compare these
.

what
two options and see is more
profitable .

If business can produce goods by less costs

incurring
than
purchasing cost
,

But
business can
would
marinara
be
E- are
goods
within factory
the .
if it cheaper to
then best
purchase goods externally it
may be the

option .

after
calculating
that
cost of production
,
we
transfer cost to the
trading account .

Then gross profit is found by deducting

the cost of sales from sales revenue .

Business increase
profit in two
can
gross ways .

(so it
a) by manufacturing efficiently reduces
cost of production)
2) by selling the goods at a
price that is

higher than the production cost .

How to choose the best option ?

the most
* Businesses
always choose profitable
option .

-
steps
•
prepare manufacturing account and find
total cost of production .

•
Compare cost of production with purchasing
cost .
If cost of production is less than
then business
purchasing cost can earn

manufacturing profit .
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Provision for unrealised profit

In businesses goods
*
manufacturing ,
after
they theproduce ,

they add a
factory profit to the cost of product ,
it
before
transferring .

* a
problem does arise when
goods are
passed ,

finished a

goods + profit
cost
margin
.

price

why ?
should be valued
• Because always
lowest
inventory sable value
at the of cost or net reali .

• If
a%jÉ%ds are valued at cost
exclude
plus some

factory profits we need

been
to it , because

profit has not yet earned .

 Question

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( Additional Question 05 )
 Provision for unrealised profit account asset decreasing
ak )

Usually manufactures don't sell products

cost it at which
at
price .

They sell a
price
is
higher than the cost of production .

* Therefore in finished goods inventories , profit element

is included .

* IF the value of inventory is increased by the profit element

w
,

A problem will arise in

closing finished inventory
Because still the business didn't sell that particular
inventory .

* that means profit included in the

closing finished
good inventory is not yet been realised .

*
unrealised for the
The profit increases Gross profit and profit
Year .

If the business follows prudence concept ,

business
should not do this .

* In 1st
-
SFP

* So businesses should create ak

a
provision
For unrealised profit .
atleast 2*0080
How to include unrealised profits
in financial statements

Question
☆@☒ Isador
-

3*8000

7B¥
240000
-
Important
* In in 1st we
always adjust the difference between
the
closing and
unrealised
provision opening
unrealised provision balances .

( pro
: balance increased )
If closing high than
"
•

provision balance is

provision balance , the difference of unrealised

opening
profit should be deducted from
q.%fF-rpit.EE#manu-raEis
.

IF balance than
•
opening pro : is
high closing
provision balance ( pro balance reduced
:
) ,
the difference of
unrealised profit should be added to profit
'

gross
earned on
manufacturing .

In SFP under CA have to show finished

* ,
we
closing
inventory less for unrealised profit
provision
.

( minus the
closing balance of provision account .