Prime cost, factory overheads, the cost of production and the manufacturer's income statement.
A manufacturer makes its own goods, so before the income statement it prepares a manufacturing account to find the cost of production (the factory cost of the goods finished in the year).
Prime cost and factory cost
Prime cost = direct materials + direct labour + direct expenses.
- Direct materials = opening raw materials + purchases − closing raw materials.
Cost of production = prime cost + factory (indirect) overheads, adjusted for the change in work-in-progress.
| Cost | Type | Example |
|---|---|---|
| Direct materials | Direct (prime) | raw materials used |
| Direct labour | Direct (prime) | factory wages |
| Factory rent, power | Indirect (overhead) | running the factory |
| Depreciation of machinery | Indirect (overhead) | factory equipment |
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