Production cost (also called cost of production or factory cost) is the total amount spent to manufacture finished goods. It is calculated using a manufacturing account and includes three main components: raw materials consumed, direct labour, and factory overheads, adjusted for any changes in work in progress.
The formula is:
\[\text{Production Cost} = \text{Prime Cost} + \text{Factory Overheads} + \text{Opening WIP} - \text{Closing WIP}\]
where:
- Prime Cost = Direct Materials Consumed + Direct Wages + Direct Expenses
- Direct Materials Consumed = Opening Stock of Raw Materials + Purchases of Raw Materials - Closing Stock of Raw Materials
- Factory Overheads = all indirect manufacturing costs such as factory rent, power, depreciation of factory equipment, indirect wages, and indirect materials
- Work in Progress (WIP) = goods that are partially completed at the start or end of the period
To solve the question, extract each figure from the data table and apply them in order:
- Calculate raw materials consumed from the opening stock, purchases, and closing stock of raw materials.
- Add direct wages and any direct expenses to get the prime cost.
- Add all factory overheads to the prime cost.
- Add the opening work in progress and subtract the closing work in progress.
Applying this method to the figures provided in the question yields a production cost of #55,800.
Common errors that produce incorrect totals include forgetting to deduct the closing stock of raw materials (which overstates materials consumed), accidentally including administrative or selling expenses (which are not part of production cost), or omitting the work in progress adjustment. Administrative salaries, office rent, and distribution costs belong in the profit and loss account, not the manufacturing account.
When answering production cost questions, always distinguish between factory-level costs (which form production cost) and non-factory costs (which do not). Only costs incurred up to the point where goods leave the factory floor are included.
