Cost of goods manufactured and the manufacturing account
Raw materials consumed + direct labour + direct expenses = prime cost. Add factory overheads and adjust for work in progress to get the cost of goods manufactured.
Data: Saman Coir Products, Kurunegala, year ended 31 March 2026 (Rs.)
| Item | Rs. |
|---|---|
| Raw materials: opening inventory | 180,000 |
| Purchases of raw materials | 1,450,000 |
| Carriage inwards on raw materials | 30,000 |
| Raw materials returned to suppliers | 20,000 |
| Raw materials: closing inventory | 210,000 |
| Direct labour | 820,000 |
| Direct expenses (royalties) | 50,000 |
| Indirect labour | 260,000 |
| Factory rent | 180,000 |
| Factory electricity | 140,000 |
| Depreciation of factory machinery | 120,000 |
| Factory insurance | 40,000 |
| Work in progress: opening / closing | 150,000 / 190,000 |
| Finished goods: opening / closing | 260,000 / 300,000 |
| Sales | 4,500,000 |
| Office salaries | 380,000 |
| Advertising | 150,000 |
| Delivery costs | 90,000 |
| Depreciation of office equipment | 60,000 |
| Units completed in the year | 20,000 |
Worked example: the manufacturing account
Prepare the manufacturing account of Saman Coir Products and find the cost per unit.
- Raw materials consumed: 180,000 + 1,450,000 + 30,000 − 20,000 − 210,000 = 1,430,000.
- Prime cost: 1,430,000 + 820,000 + 50,000 = 2,300,000.
- Factory overheads: 260,000 + 180,000 + 140,000 + 120,000 + 40,000 = 740,000.
- Total manufacturing cost: 2,300,000 + 740,000 = 3,040,000.
- Cost of goods manufactured: 3,040,000 + 150,000 (opening WIP) − 190,000 (closing WIP) = 3,000,000.
- Cost per unit: 3,000,000 ÷ 20,000 = 150.
Cost of goods manufactured Rs. 3,000,000; cost per unit Rs. 150.
Manufacturing account in summary
Worked example: the manufacturer's income statement
Continue with the same data to find the gross profit and the profit for the year.
- Cost of sales: opening finished goods 260,000 + COGM 3,000,000 − closing finished goods 300,000 = 2,960,000.
- Gross profit: 4,500,000 − 2,960,000 = 1,540,000.
- Administration and selling expenses: 380,000 + 150,000 + 90,000 + 60,000 = 680,000.
- Profit for the year: 1,540,000 − 680,000 = 860,000.
- Check by re-adding: 2,960,000 + 680,000 + 860,000 = 4,500,000, the sales figure.
Gross profit Rs. 1,540,000; profit for the year Rs. 860,000.
Common mistakes
- Putting office or selling costs in the manufacturing account.
- Forgetting carriage inwards on raw materials; it belongs in the cost of raw materials.
- Mixing up the three inventories: raw materials adjust materials consumed, WIP adjusts COGM, finished goods adjust cost of sales.
- Splitting a shared cost wrongly: if rent covers both factory and office, divide it in the ratio the question gives.
Sri Lanka is a leading exporter of coir products and tea. A coir mill in Kurunegala or a tea factory in Nuwara Eliya prepares a manufacturing account to know its cost per kilogram before quoting prices to foreign buyers.
Short answer: “What is the cost of goods manufactured?” The total manufacturing cost for the period adjusted for opening and closing work in progress: the cost of the goods completed.
Structured question: “Calculate raw materials consumed, prime cost and the cost of goods manufactured from the given data.” Follow the layout: materials consumed, prime cost, add overheads, adjust WIP; show each sum.
Essay: “Prepare the manufacturing account and the income statement of a manufacturer from the given data.” Manufacturing account to COGM, then cost of sales with finished goods, gross profit, period expenses and profit; give the cost per unit if units are given.
Three inventories, three places: raw materials → materials consumed, WIP → COGM, finished goods → cost of sales.