Factory cost of production

The factory cost of production (also called the cost of goods manufactured) represents the total cost incurred in converting raw materials into finished goods within the factory. It is computed by combining all direct and indirect manufacturing costs and adjusting for any changes in work-in-progress.

The standard computation follows this structure:

1. Raw materials consumed = Opening stock of raw materials + Purchases of raw materials - Closing stock of raw materials
2. Prime cost = Raw materials consumed + Direct wages (direct labour)
3. Total factory cost = Prime cost + Factory overheads (indirect materials, indirect wages, factory rent, depreciation of factory machinery, etc.)
4. Factory cost of production = Total factory cost + Opening work-in-progress - Closing work-in-progress

Each step builds on the previous one. Raw materials consumed captures only the materials actually used in production, not the full amount purchased. Prime cost isolates the direct costs. Factory overheads add the indirect costs that support production but cannot be traced to a single product. Finally, the work-in-progress adjustment accounts for partially completed goods: opening WIP adds costs brought forward from the previous period, while closing WIP removes costs that relate to goods not yet finished.

Applying these steps to the figures in the manufacturing account provided, the factory cost of production is #56,300.

Common errors on this type of question include forgetting to adjust for work-in-progress (which would give an incorrect total factory cost figure), or subtracting opening WIP instead of adding it. Remember: opening WIP is added because those partially completed goods from last period are now being finished, adding to this period's output. Closing WIP is subtracted because those goods are not yet complete and their cost should not be included in the cost of finished production.