Izzara enterprise manufactures jeans. It is the financial year-end for the business, and you have been contacted to prepare Izzara’s year-end accounts. The bookkeeper provides you with the following extraction of Izzara’s accounts.
| Items | RM |
|---|---|
| Depreciation – plant and machinery | 60,000 |
| Depreciation – office building | 25,000 |
| Opening inventories : | |
| Raw materials | 42,000 |
| Work-in-progress | 28,000 |
| Finished goods | 46,000 |
| Purchase of raw materials | 516,000 |
| Electricity and power | 42,000 |
| Bookkeepers’ salaries | 34,000 |
| Production wages | 118,000 |
| Indirect labour | 26,000 |
| Rent and rates | 42,000 |
| Repairs to plant | 18,000 |
Additional information: Closing inventories at 31 December 2023.
| RM | |
|---|---|
| Raw materials | 50,000 |
| Work-in-progress | 22,000 |
| Finished goods | 52,000 |
75% of rent and rates and 80% of electricity and power relate to the factory.
Required:
- Compute total prime cost.
- Calculate total manufacturing cost.
The correct answer and explanation is:
Computation of Total Prime Cost & Total Manufacturing Cost
1. Prime Cost Calculation:
Prime cost includes direct costs of production, which are:
- Direct Raw Material Costs
- Direct Labor Costs
Prime Cost=(Opening Raw Materials+Raw Material Purchases−Closing Raw Materials)+Production Wages\text{Prime Cost} = (\text{Opening Raw Materials} + \text{Raw Material Purchases} – \text{Closing Raw Materials}) + \text{Production Wages} =(42,000+516,000−50,000)+118,000= (42,000 + 516,000 – 50,000) + 118,000 =508,000+118,000= 508,000 + 118,000 =626,000= 626,000
Total Prime Cost = RM 626,000
2. Total Manufacturing Cost Calculation:
Total manufacturing cost includes prime cost plus indirect factory costs: Total Manufacturing Cost=Prime Cost+Factory Overheads+Opening WIP−Closing WIP\text{Total Manufacturing Cost} = \text{Prime Cost} + \text{Factory Overheads} + \text{Opening WIP} – \text{Closing WIP}
Factory Overheads:
- Indirect Labor = RM 26,000
- Depreciation on Plant & Machinery = RM 60,000
- Rent & Rates (75% of RM 42,000) = RM 31,500
- Electricity & Power (80% of RM 42,000) = RM 33,600
- Repairs to Plant = RM 18,000
Total Overheads = RM 169,100 Total Manufacturing Cost=626,000+169,100+28,000−22,000\text{Total Manufacturing Cost} = 626,000 + 169,100 + 28,000 – 22,000 =626,000+169,100+6,000= 626,000 + 169,100 + 6,000 =801,100= 801,100
Total Manufacturing Cost = RM 801,100
Explanation
The prime cost represents the core direct costs of manufacturing, including raw materials and wages paid to production workers. It is a crucial component of cost accounting as it directly influences the cost of goods produced.
To calculate the total manufacturing cost, factory overheads are added to the prime cost. These include indirect costs such as indirect labor, plant depreciation, and utility expenses attributed to factory operations. Furthermore, adjustments for work-in-progress inventories ensure that only costs related to completed work are included.
The significance of these calculations lies in determining the accurate cost of production, which helps businesses set appropriate selling prices and maintain profitability.