Advanced Level

Manufacturing Account (With answers)

A) Modified Trading and Profit and Loss Account A company imported transistor radios from Britain, however, the radios must be modified to meet Hong Kong specifications with the help of some equipment. The trial balance at year end 31st December, 1993 is as follows: $ $ Sales 12000 Purchases 4500 Radios 3000 Carriage inwards 200 Carriage outwards 300 Returns inwards 600 Returns outwards 500 Wages for modifications 400 Motor vans 10 000 Equipment 2 000 Selling expenses 500 Capital _ 9 000 21 500 21 500 It is the company's policy to depreciate fixed assets at 10% p.a. and increase the stock held by 10% each year. Prepare the Trading and Profit and Loss Account for the year ended 31st December 1993. Trading and profit and loss account for the year ended 31-12-1993 Sales Less: Returns Inwards Net Sales Less: Cost of goods sold Opening stock Less: Purchases Less: Returns Outwards Net Purchases Add: Carriage inwards Less: Closing stock Add: Wages for modifications Depreciation expense on equipment Gross Profit 400 200 600 4500 6900
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12000 600 11400 3000 4500 500 4000 200 4200 7200 3300 3900

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Less: Expenses Carriage outwards Selling expenses Depreciation expense on motor van Net Profit 300 500 1000 1800 5100

B)

Elements of manufacturing cost In general four elements of manufacturing cost are usually recognised in a manufacturing account. These are: 1. Direct materials / Raw materials 2. Direct labour / Direct wages / Factory wages 3. Other direct expenses Prime cost (total of 1, 2 and 3) 4. Factory overhead expenses Manufacturing or factory cost (total of 1, 2, 3 and 4) The word 'direct' indicates the relationship of the cost element to the actual goods being produced. Direct materials are materials which become a physical part of the goods produced. Direct labour is the cost of labour actually working on the goods produced and excludes costs of supervision and other labour costs which cannot be associated with actual work on the product. There are rarely any other direct expenses which can be related directly to the goods produced, though a royalty calculated per unit of goods produced would be an example of this type of expense. Factory overhead includes all factory costs which are not direct. These include indirect labour costs such as the wages of foremen, cleaners, maintenance men, indirect materials such as factory cleaning materials, lubricants, and general factory overheads such as depreciation, rent, rates, electricity, etc. In a manufacturing account, the direct costs are largely variable while the factory overhead expenses will tend to be either fixed or semi-variable.

Advanced Level

C. Special points to be noted 1) Work in progress If the 'work in progress' is valued at 'prime cost', the adjustment for the different value of the work in progress at the beginning and at the end of the accounting period should be shown after all the direct expenses have been totalled, and before factory overhead expenses are added. Manufacturing Accounts (Extract) Prime Cost 100 Add: work in progress at 50 begin (valued at prime cost) 150 Less: work in progress at end 20 (valued at prime cost) 130 2) Manufacturing profit In order to assess the efficiency and performance of the production process in the factory, a manufacturing profit is calculated either by: i) Market value of goods produced - Manufacturing cost of goods produced OR ii) applying a fixed mark-up on manufacturing cost of goods produced Example one The information extracted from the books of the company is: Raw materials consumed $1000 Direct labour 1000 Factory overhead 700 Work in progress, at prime cost: At the beginning 500 At the end 200 Selling expenses 300 Show the Manufacturing and Trading and Profit and Loss Account under different assumptions. Assumption One All the goods manufactured are transferred at cost to the selling office. i.e. no manufacturing profit, and all of them are sold at $3 200.
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Manufacturing and trading and profit and loss account $ Raw material consumed Direct labour Prime cost Add: work-in-progress at beg Less: work-in-progress at end Factory overhead Cost of finished goods manufactured Production cost Gross profit c/d 1000 Cost of goods manufactured 1000 transferred to trading 2000 500 2500 200 2300 700 3000 3000 Sales 200 3200 Selling expenses 300 Gross Profit b/d Net Loss 300 3200 200 100 300 3000 3200 3000 $

Assumption Two All the goods manufactured are transferred at market price of $3 300 to the selling office and all of them are sold at $3 200. Manufacturing and trading and profit and loss account $ Raw material consumed Direct labour Prime cost 1000 Goods transferred at market value 1000 2000
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$ 3300

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Add: work-in-progress at beg Less: work-in-progress at end Factory overhead Cost of finished goods manufactured Manufacturing profit

500 2500 200 2300 700 3000 300 3300 3300

Goods manufactured at market value

3300 Sales Gross loss 3300

3200 100 3300 300 100 400

Gross loss Selling expenses

100 Manufacturing profit 300 Net Loss 400

Double entry Dr. Manufacturing a/c- Manufacturing profit Cr. Profit and Loss Manufacturing profit 300 300

Assumption Three All the goods manufactured are transferred at market price of $3 300 but none or them are sold at year end. No selling expenses incurred. Manufacturing and trading and profit and loss account $ Raw material consumed Direct labour Prime cost Add: work-in-progress at beg 1000 Goods transferred at market value 1000 2000 500 2500
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$ 3300

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Less: work-in-progress at end Factory overhead Cost of finished goods manufactured Manufacturing profit

200 2300 700 3000 300 3300 3300

Goods manufactured at market value Less: closing stock Cost of goods sold Gross profit

3300 3300 0 0 0 0 0 300

Provision for unrealised profit Stock (Year One) Trading- closing 3000

300 Manufacturing profit Stock (Year One) Trading- Closing 3300

Provision for unrealised profits (Year One) Trading (Year Two) Stock Gross profit 3000 Sales 200 Stock 3200 Trading (Year Two) 3300 Sales Gross Loss Gross Loss Selling expenses Example Two Cost of production for the year $10 000 Finished goods, at cost: At the beginning of year 6 000 At the end of year 2 000 The goods are transferred from factory to sales office at 10% mark up. Show the balance sheet (extract) at the beginning and the end of the year and also the provision for unrealized profit on stock account. Balance Sheet (Extract) Beginning Finished goods Less: Provision for unrealised profit 6600 600 Ending 2200 200
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P&L

300

3200 100 300 100

100 Dec in prov 300 Net Loss

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6000

2000

Provision for unrealised profit Profit and Loss Balance c/d 400 Balance b/d 200 600

3) Abnormal and normal stock loss Example One Beginning stock $10 000 Purchases 5 000 Ending stock (after stock loss) 7 000 Sales 12 000 Prepare the trading account if: i) There was a normal loss of damaged stock of $10, and ii) There was a fire during the year and the loss amounted to $2 000. (i) Beginning stock Add: Purchases Less: Ending stock Cost of goods sold Gross profit Trading 10000 Sales 5000 15000 7000 8000 4000 12000 Beginning stock + Purchases = Ending Stock + Cost of goods sold + Stock Loss 10000 (ii) 5000 7000 Trading
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12000

12000

7990

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Beginning stock Add: Purchases Less: Ending stock Stock loss Cost of goods sold Gross profit

10000 Sales 5000 15000 7000 2000 6000 6000 12000

12000

12000 6000

Stock loss due to fire

2000 Gross profit

Beginning stock + Purchases = Ending Stock + Cost of goods sold + Stock Loss 10000 5000 7000 6000 2000 2000

Dr. Profit and Loss: stock loss due to fire Cr. Trading account: Stock loss

2000

Example Two Beginning raw material $ 10 000 Purchases of raw material 10 000 Ending raw material 5 000 Raw materials stolen 6 000 Prepare the extract of the manufacturing account and the journal entry for the stock stolen. Manufacturing account Beginning raw material Add: Purchases Less: Ending raw material Raw materials stolen Cost of raw material consumed Dr. Profit and Loss ~ Loss due to theft Cr. Manufacturing ~ Loss due to theft 10000 Transferred to trading 10000 20000 5000 6000 9000 6000 6000 9000 9000

Advanced Level

Manufacturing account Beginning raw material Add: Purchases Less: Ending raw material Cost of raw material consumed 10000 Transferred to trading 10000 20000 5000 15000 15000 15000

Not true and fair view

Exercise One From the following information prepare the manufacturing, trading and profit and loss accounts for the year ending 31 December 19X6 and the balance sheet as at 31 December 19X6 for the firm of J. Jones. Purchase of raw materials Fuel and light Administration salaries Factory wages Carriage outwards Rent and rates Sales Returns inward General office expenses Repairs to plant and machinery Stock at 1 January 19X6 Raw materials Work in progress Finished goods Sundry creditors 258,000 21,000 17,000 59,000 4,000 21,000 7,000 9,000 9,000 21,000 14,000 23,000 37,000 457,000
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482,000

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Capital account Freehold premises Plant and machinery Debtors Provision for depreciation on plant and Machinery at 1 January 19X6 Cash in hand

410,000 80,000 20,000 8,000 11,000 984,000 984,000

Make provision for the following: (a) Stock in hand at 31 December 19X6 Raw materials 25,000 Work in progress 11,000 Finished goods 26,000 (b) Depreciation of 10% on plant and machinery straight line method (c) 80% of fuel and light and 75% of rent and rates to be charged to manufacturing (d) Doubtful debts provision 5% of sundry debtors (e) 4,000 outstanding for fuel and light (f) Rent and rates paid in advance - 5,000 (g) Market value of finished goods - 382,000 Manufacturing A/C for the yr. Ended 31-12-19-6 $ Beginning stock Add: Purchases Less: ending stock Cost of materials consumed Factory Overhead Prime cost Fuel & light Rent & Rates Repairs to plant Depreciation Add: Work-in-progress Less: Work-in-progress Manufacturing profit Market value of goods 20,000 12,000 9,000 8,000 49000 362,000 14,000 376,000 11,000 365,000 17,000 382,000 382,000
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$ 382,000

21,000 Goods transferred at market value 258,000 279,000 25,000 254,000 59,000 313,000

Advanced Level

manufactured Trading & Profit & Loss A/C for the year Ended 31-12-19-6 Beginning stock Add: Production cost Less: ending stock Cost of sales Gross profit Fuel and light Rent & Rates Administration salaries Carriage outwards General office expenses Provision for Bad Debts Net Profit 23,000 Sales 382,000 Less: Sales Returns 405,000 Net Sales 26,000 379,000 9,6000 475,000 5,000 Gross profit 4,000 Manufacturing profit 17,000 4,000 9,000 1,000 73,000 113,000 Balance Sheet as at 31-12-19-6 Fixed Assets Freehold premises Plant & Machinery Less: Depreciation Current Assets Stock- raw materials - Work-in-progress - Finished goods Debtors Less:Provision for B.D. Prepayment Cash in hand 20,000 1,000 19000 5,000 11,000 97,000 571,000 571,000 25,000 11,000 26,000 80,000 16,000 64,000 474,000 Current liabilities Creditors Accruals 37,000 4,000 41,000 410,000 Capital Add: Net Profit 457,000 73,000 530,000 113000 475,000 96,000 17,000 482,000 7,000 475,000

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Advanced Level

M-anufacturing Profit a) The double entry for the factory profit is Dr. Manufacturing Accounts Cr. Profit and Loss Accounts b) Provision for unrealised profit on stock is calculated: Cost of production $10000 Finished good, at cost At the beginning of the year 6000 At the end of the year 2000 Sales 27000 The goods are transferred from factory to sales department at 10% mark-up. i) Extract of Balance Sheet at the beginning of the year Finished goods at make-up price 6600 Less: Provision for unrealised profit on stock 600 Finished goods at cost 6000 ii) Extract of Balance Sheet at the end of the year Finished goods at make-up price 2200 Less: Provision for unrealised profit on stock 200 Finished goods at cost 2000
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Advanced Level

iii) Provision for unrealised profit on stock Profit and Loss a/c Balance c/d 400 200 600 Provision for unrealised profit on stock Opening stock Add: Manufactured at transfer price Less: Closing stock Cost of goods sold Gross profit 6600 11000 17600 2200 15400 11600 27000 Gross profit Manufacturing profit Decrease in provision 27000 11600 1000 400 Sales 27000 600 Balance b/d 600

Exercise Five John Cormack started in business on 1 st January 1980 as a manufacturer of gaming machines. The following figures are extracted from his records on 31st December 1980. Sales (30,000 machines at 30 each) Plant and machinery (bought 1st January 1980) Motor vans (bought 1st January 1980) Administrative wages Loose tools bought Light and power Building repairs Raw materials bought Salesmens salaries Drivers wages Motor van expenses Direct wages General administration expenses Indirect wages Repairs to machinery Rates and insurance 900,000 80,000 10,000 18,000 6,400 40,000 20,000 273,400 29,000 24,000 5,000 302,000 6,000 54,000 11,000 10,000
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Advanced Level

The following information is also made available to you: (a) The work in progress on 31st December 1980, valued at production cost was 55,000. (b) The closing stocks on 31st December 1980 were: Raw materials 13,400, Loose tools 2,400. (c) Depreciate motor vans 20%, plant and machinery 10%. (d) Allocate expenses as follows: Factory Administration Light and power 9/10 1/10 Building repairs 3/5 2/5 Rates and insurance 4/5 1/5 (e) A manufacturing profit of 25% on production cost was added for the purpose of transferring finished goods to the trading account. (f) During the year 40,000 machines were completed. Value the 10,000 machines in stock at the average cost of production (subject to provision for unrealized profit). You are required to draw up the manufacturing, trading and profit and loss account for the year ended 31st December 1980. Show clearly the figures of prime cost and production cost of goods completed. Manufacturing & Trading & Profit & Loss account for the year ended 31-12-80 Purchases Less: ending stock Cost of materials consumed Direct wages Prime cost Factory Overhead Depreciation Loose tools (6400-2400) Light & power Building repairs Rates & Insurance Indirect wages Repairs to machinery 8,000 4,000 36,000 12,000 8,000 54,000 11,000 133,00 0 695,00
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273,40 Goods transferred at market value 0 13,400 260,00 0 302,00 0 562,00 0

800,000

Advanced Level

0 Less: work-in-progress 55,000 640,00 0 Manufacturing profit Market value of goods manufactured 160,00 0 800,00 0 800,00 Sales 0 200,00 0 600,00 0 300,00 0 900,00 0 Depreciation Administrative wages Light & power Building repairs Rates & Insurance Salaries Drivers wages Motor van expenses General expenses Provision for unrealized profit Net profit 2,000 Gross profit 18,000 Manufacturing profit 4,000 8,000 2,000 29,000 24,000 5,000 6,000 40,000 322,00 0 460,00 0 460,000 900,000 300,000 160,000 800,000

Market value of goods manufactured Less: closing stock Cost of sales Gross profit

900,000

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