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Difficulty: MediumPurpose and Key Terminologies in Manufacturing Accounts

A bespoke furniture manufacturing firm in Lagos provided the following extract from its financial records for the year ended 31st December 2025:

Accounting ItemAmount (₦₦)
Opening stock of raw timber60,000
Purchases of raw timber450,000
Carriage inwards on raw timber30,000
Direct wages paid to craftsmen280,000
Royalty on furniture designs40,000
Salary of factory supervisor120,000
Factory rent and rates90,000
Closing stock of raw timber50,000

Based on the information above, calculate the Prime Cost of production for the year in Naira.

Answer: 810000 ₦

Answer

The Prime Cost of production for the year is ₦810,000₦810,000.
The correct answer of ₦810,000₦810,000 is obtained by adding the Cost of Raw Materials Consumed (₦490,000₦490,000), Direct Labour (₦280,000₦280,000), and Direct Expenses (₦40,000₦40,000). Indirect factory costs such as supervisor salary (₦120,000₦120,000) and factory rent (₦90,000₦90,000) are excluded because Prime Cost consists exclusively of direct costs.

Step-by-Step Solution

1
Calculate Cost of Raw Materials Consumed
₦490,000₦490,000
Cost of Raw Materials Consumed is determined by adding carriage inwards to purchases of raw timber and opening stock, then deducting closing stock of raw timber: ₦60,000+₦450,000+₦30,000−₦50,000=₦490,000₦60,000 + ₦450,000 + ₦30,000 - ₦50,000 = ₦490,000.
2
Identify Direct Labour and Direct Expenses
Direct Labour = ₦280,000₦280,000; Direct Expenses = ₦40,000₦40,000
Direct wages paid to craftsmen directly contribute to product creation (Direct Labour), and royalties paid on production designs represent direct expenses directly traceable to units produced.
3
Calculate Prime Cost
₦810,000₦810,000
Prime Cost is the sum total of all direct costs: Prime Cost=Direct Materials Consumed+Direct Labour+Direct Expenses=₦490,000+₦280,000+₦40,000=₦810,000\text{Prime Cost} = \text{Direct Materials Consumed} + \text{Direct Labour} + \text{Direct Expenses} = ₦490,000 + ₦280,000 + ₦40,000 = ₦810,000.

Key Concept

Components and Computation of Prime Cost in Manufacturing Accounts
Estimated Time:1m 30s
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Topics

Purpose and Key Terminologies in Manufacturing Accounts

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