Production Cost Statement (Grade 12 NSC Matric Accounting): Revision Notes

Production Cost Statement

What is a production cost statement?

A production cost statement is a financial document that shows the total cost of manufacturing goods during a specific period. This statement helps manufacturing businesses understand exactly how much it costs to produce their products by breaking down all the different types of costs involved in the production process.

Components of a production cost statement

Understanding the different components is crucial for preparing an accurate production cost statement. Each component represents a different type of cost involved in the manufacturing process.

Direct materials cost

Direct materials cost represents the value of raw materials that are actually used in the production process during the accounting period. This is not simply the amount purchased, but the amount consumed in manufacturing.

How to calculate direct materials cost:

• Start with the opening balance of raw materials stock
• Add purchases of raw materials during the period
• Add carriage costs on raw material purchases
• Add any transport costs for raw materials
• Subtract the closing balance of raw materials stock
• The result equals raw materials issued to the factory (direct materials cost)

Direct labour cost

Direct labour cost includes all wages paid to workers who are directly involved in the manufacturing process. This typically includes production workers and their associated employment costs.

Components of direct labour cost:

• Production wages for factory workers
• UIF (Unemployment Insurance Fund) contributions for factory employees
• Any overtime payments for production staff

Prime cost (direct cost)

Prime cost is the total of direct materials cost and direct labour cost. It represents all the costs that can be directly traced to the production of goods.

Formula: $\text{Prime cost} = \text{Direct materials cost} + \text{Direct labour cost}$

Using our example: Prime cost = R950 600 + R737 300 = R1 687 900

Factory overhead cost

Factory overhead cost includes all the indirect costs associated with running the factory. These are costs that support the production process but cannot be directly traced to individual products.

Common factory overhead costs include:

• Salary of factory foreman and supervisors
• Consumable stores used in the factory
• Depreciation on factory plant and equipment
• Water and electricity used in the factory
• Sundry factory expenses
• Factory insurance and maintenance

Total cost of production

Total cost of production represents all costs incurred to manufacture goods during the period, before considering work-in-process adjustments.

Formula: $\text{Total cost of production} = \text{Prime cost} + \text{Factory overhead cost}$

Using our example: Total cost of production = R1 687 900 + R677 000 = R2 364 900

Work-in-process adjustments

To determine the cost of completed goods, you need to adjust for work-in-process at the beginning and end of the period.

Worked example: Fatima Manufacturers

Let's examine a complete production cost statement using the information from Fatima Manufacturers for the year ended 28 February 2010:

Component	Amount (R)
Direct materials cost	950 600
Direct labour cost	737 300
Prime/direct cost	1 687 900
Factory overhead cost	677 000
Total cost of production	2 364 900
Work-in-process at beginning	158 000
Subtotal	2 522 900
Work-in-process at end	(122 900)
Total cost of production of finished goods	2 400 000

Cost per unit calculations

Once you have completed the production cost statement, you can calculate important per-unit costs for management decision-making and pricing strategies.

Raw materials cost per unit

Using our example where 20 000 units were produced:

$\text{Raw materials cost per unit} = \frac{\text{Direct materials costs}}{\text{Number of units manufactured}}$

Raw materials cost per unit = R950 600 ÷ 20 000 units = R47,53 per unit

Total cost per unit

$\text{Total cost per unit} = \frac{\text{Total cost of production of finished goods}}{\text{Number of units manufactured}}$

Total cost per unit = R2 400 000 ÷ 20 000 units = R120 per unit

Break-even point analysis

The break-even point tells you how many units you must manufacture and sell before you start making a profit. This is a crucial metric for business planning and pricing decisions.

Interpreting break-even results

When evaluating break-even performance:

• Compare actual units produced to the break-even point
• If actual production exceeds break-even point, the business should be profitable
• If actual production is below break-even point, the business will make a loss
• Monitor trends by comparing break-even points across different periods

Important adjustments to remember

When preparing production cost statements, always consider these adjustments:

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