Cambridge Syllabus Notes

5.5 Manufacturing Accounts

Direct Materials

Think of direct materials as the ingredients you need to bake a cake. They are the raw items that become part of the finished product.

Only the materials that can be traced directly to the product are counted.
Examples: steel for a car chassis, cotton for a shirt, or flour for bread.
They are recorded at cost (price paid + freight + handling).

📊 Example: A factory buys 100 kg of steel at £5 per kg and pays £200 for freight.

Item	Quantity	Unit Cost	Total
Steel	100 kg	£5	£500
Freight	-	-	£200
Total Direct Materials			£700

Exam Tip: Remember that direct materials must be traceable to the product. If you’re unsure, ask whether the item can be identified on the finished goods.

Direct Labour

Direct labour is like the chef who mixes the ingredients. It’s the cost of workers who physically transform the raw materials into the product.

Only wages that can be directly linked to the product count.
Includes time spent on cutting, assembling, or finishing.
Excludes supervisory or indirect staff.

💰 Example: 10 workers each earn £15 per hour, working 8 hours on a batch.

Workers	Hours	Rate	Total
10	8	£15	£1,200
Total Direct Labour			£1,200

Exam Tip: When calculating direct labour, exclude wages for managers, cleaners, or maintenance staff. Only those who work directly on the product count.

Prime Cost

Prime cost is the sum of the two ingredients that make up the product: direct materials and direct labour.

Formula: $C_{\text{prime}} = C_{\text{direct material}} + C_{\text{direct labour}}$

Calculate total direct materials.
Calculate total direct labour.
Add the two amounts.

📈 Example: Using the figures above:

Prime Cost: £700 + £1,200 = £1,900

Exam Tip: Prime cost is a key figure in the production cost calculation. Always double‑check that you’ve included both direct materials and direct labour.

Factory Overheads

Factory overheads are like the kitchen’s utilities – electricity, rent, and maintenance. They support production but cannot be traced to a single product.

Includes indirect materials, indirect labour, depreciation, utilities, and factory rent.
Allocated to products using a chosen cost driver (e.g., machine hours, labour hours).

⚙️ Example of allocation: Suppose total factory overheads are £3,000 and the cost driver is machine hours. If the batch uses 200 machine hours out of 1,000 total hours:

Allocated overheads: $\displaystyle \frac{200}{1000} \times 3000 = £600$

Exam Tip: When allocating overheads, state the cost driver and show the calculation. If the question asks for “overheads per unit,” remember to divide the allocated amount by the number of units produced.

Quick Review Checklist

?? Identify direct materials and direct labour.
?? Sum them to get prime cost.
?? List all factory overheads and allocate them correctly.
?? Use the correct cost driver for allocation.
?? Show all calculations clearly in the answer.

Exam Question Practice

🔍 Question: A factory produced 500 units in a month. Total direct materials cost £4,000, direct labour £6,000, and factory overheads £8,000. Calculate the cost per unit.

Prime cost = £4,000 + £6,000 = £10,000.
Allocated overheads per unit = £8,000 ÷ 500 = £16.
Total cost per unit = £10,000 ÷ 500 + £16 = £20 + £16 = £36.

?? Answer: £36 per unit.

Exam Tip: Show each step and the formula used. This demonstrates clear reasoning and earns full marks.

understand direct material, direct labour, prime cost and factory overheads