Manufacturing Account (With Answers)

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 / 12000
Less: Returns Inwards / 600
Net Sales / 11400
Less: Cost of goods sold
Opening stock / 3000
Less: Purchases / 4500
Less: Returns Outwards / 500
Net Purchases / 4000
Add: Carriage inwards / 200 / 4200
7200
Less: Closing stock / 3300
3900
Add: Wages for modifications / 400
Depreciation expense on equipment / 200 / 600 / 4500
Gross Profit / 6900
Less: Expenses
Carriage outwards / 300
Selling expenses / 500
Depreciation expense on motor van / 1000 / 1800
Net Profit / 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 semivariable.

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 begin (valued at prime cost) / 50
150
Less: work in progress at end (valued at prime cost) / 20
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.

Manufacturing and trading and profit and loss account
$ / $
Raw material consumed / 1000 / Cost of goods manufactured
Direct labour / 1000 / transferred to trading / 3000
Prime cost / 2000
Add: work-in-progress at beg / 500
2500
Less: work-in-progress at end / 200
2300
Factory overhead / 700
Cost of finished goods manufactured / 3000 / 3000
Production cost / 3000 / Sales / 3200
Gross profit c/d / 200
3200 / 3200
Selling expenses / 300 / Gross Profit b/d / 200
Net Loss / 100
300 / 300

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 / 1000 / Goods transferred at market value / 3300
Direct labour / 1000
Prime cost / 2000
Add: work-in-progress at beg / 500
2500
Less: work-in-progress at end / 200
2300
Factory overhead / 700
Cost of finished goods manufactured / 3000
Manufacturing profit / 300
3300 / 3300
Goods manufactured at market value / 3300 / Sales / 3200
Gross loss / 100
3300 / 3300
Gross loss / 100 / Manufacturing profit / 300
Selling expenses / 300 / Net Loss / 100
400 / 400
Double entry
Dr. Manufacturing a/c- Manufacturing profit 300
Cr. Profit and Loss – Manufacturing profit 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 / 1000 / Goods transferred at market value / 3300
Direct labour / 1000
Prime cost / 2000
Add: work-in-progress at beg / 500
2500
Less: work-in-progress at end / 200
2300
Factory overhead / 700
Cost of finished goods manufactured / 3000
Manufacturing profit / 300
3300 / 3300
Goods manufactured at market value / 3300
Less: closing stock / 3300
Cost of goods sold / 0
Gross profit / 0 / 0
0 / 0
Provision for unrealised profit / 300 / Manufacturing profit / 300
Stock (Year One) / Stock (Year One)
Trading- closing / 3000 / Trading- Closing / 3300
Provision for unrealised profits (Year One)
Trading (Year Two) / P & L / 300
Stock / 3000 / Sales / 3200
Gross profit / 200 / Trading (Year Two)
Stock / 3300 / Sales / 3200
Gross Loss / 100
Gross Loss / 100 / Dec in prov / 300
Selling expenses / 300 / Net Loss / 100

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 /

Ending

Finished goods / 6600 / 2200
Less: Provision for unrealised profit / 600 / 200
6000 / 2000
Provision for unrealised profit
Profit and Loss / 400 / Balance b/d / 600
Balance c/d / 200

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) Trading
Beginning stock / 10000 / Sales / 12000
Add: Purchases / 5000
15000
Less: Ending stock / 7000
Cost of goods sold / 8000
Gross profit / 4000
12000 / 12000
Beginning stock + Purchases = Ending Stock + Cost of goods sold + Stock Loss
10000 5000 7000 7990 10
(ii) Trading
Beginning stock / 10000 / Sales / 12000
Add: Purchases / 5000
15000
Less: Ending stock / 7000
Stock loss / 2000
Cost of goods sold / 6000
Gross profit / 6000
12000 / 12000
Stock loss due to fire / 2000 / Gross profit / 6000
Beginning stock + Purchases = Ending Stock + Cost of goods sold + Stock Loss
10000 5000 7000 6000 2000
Dr. Profit and Loss: stock loss due to fire 2000
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 / 10000 / Transferred to trading / 9000
Add: Purchases / 10000
20000
Less: Ending raw material / 5000
Raw materials stolen / 6000
Cost of raw material consumed / 9000 / 9000
Dr. Profit and Loss ~ Loss due to theft 6000
Cr. Manufacturing ~ Loss due to theft 6000
Manufacturing account
Beginning raw material / 10000 / Transferred to trading / 15000
Add: Purchases / 10000
20000
Less: Ending raw material / 5000
Cost of raw material consumed / 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
Capital account
Freehold premises
Plant and machinery
Debtors
Provision for depreciation on plant and
Machinery at 1 January 19X6
Cash in hand / 258,000
21,000
17,000
59,000
4,000
21,000
7,000
9,000
9,000
21,000
14,000
23,000
410,000
80,000
20,000
11,000 / 482,000
37,000
457,000
8,000
984,000 / 984,000

Make provision for the following:

(a)Stock in hand at 31 December 19X6

Raw materials￡25,000

Work in progress11,000

Finished goods26,000

(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 / 21,000 / Goods transferred at market value / 382,000
Add: Purchases / 258,000
279,000
Less: ending stock / 25,000
Cost of materials consumed / 254,000
Factory Overhead / 59,000
Prime cost / 313,000
Fuel & light / 20,000
Rent & Rates / 12,000
Repairs to plant / 9,000
Depreciation / 8,000 / 49000
362,000
Add: Work-in-progress / 14,000
376,000
Less: Work-in-progress / 11,000
365,000
Manufacturing profit / 17,000
Market value of goods manufactured / 382,000 / 382,000
Trading & Profit & Loss A/C for the year Ended 31-12-19-6
Beginning stock / 23,000 / Sales / 482,000
Add: Production cost / 382,000 / Less: Sales Returns / 7,000
405,000 / Net Sales / 475,000
Less: ending stock / 26,000
Cost of sales / 379,000
Gross profit / 9,6000
475,000 / 475,000
Fuel and light / 5,000 / Gross profit / 96,000
Rent & Rates / 4,000 / Manufacturing profit / 17,000
Administration salaries / 17,000
Carriage outwards / 4,000
General office expenses / 9,000
Provision for Bad Debts / 1,000
Net Profit / 73,000
113,000 / 113000
Balance Sheet as at 31-12-19-6

Fixed Assets

/ Capital / 457,000
Freehold premises / 410,000 / Add: Net Profit / 73,000
Plant & Machinery / 80,000 / 530,000
Less: Depreciation / 16,000 / 64,000 / 474,000

Current Assets

/

Current liabilities

Stock-raw materials / 25,000 / Creditors / 37,000
- Work-in-progress / 11,000 / Accruals / 4,000 / 41,000
- Finished goods / 26,000
Debtors / 20,000
Less:Provision for B.D. / 1,000 / 19000
Prepayment / 5,000
Cash in hand / 11,000 / 97,000
571,000 / 571,000

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

iii)

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

Exercise Five

John Cormack started in business on 1st 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) / 900,000
Plant and machinery (bought 1st January 1980) / 80,000
Motor vans (bought 1st January 1980) / 10,000
Administrative wages / 18,000
Loose tools bought / 6,400
Light and power / 40,000
Building repairs / 20,000
Raw materials bought / 273,400
Salesmen’s salaries / 29,000
Driver’s wages / 24,000
Motor van expenses / 5,000
Direct wages / 302,000
General administration expenses / 6,000
Indirect wages / 54,000
Repairs to machinery / 11,000
Rates and insurance / 10,000

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
Building repairs
Rates and insurance / 9/10
3/5
4/5 / 1/10
2/5
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 / 273,400 / Goods transferred at market value / 800,000
Less: ending stock / 13,400
Cost of materials consumed / 260,000
Direct wages / 302,000
Prime cost / 562,000
Factory Overhead
Depreciation / 8,000
Loose tools (6400-2400) / 4,000
Light & power / 36,000
Building repairs / 12,000
Rates & Insurance / 8,000
Indirect wages / 54,000
Repairs to machinery / 11,000 / 133,000
695,000
Less: work-in-progress / 55,000
640,000
Manufacturing profit / 160,000
Market value of goods manufactured / 800,000 / 800,000
Market value of goods manufactured / 800,000 / Sales / 900,000
Less: closing stock / 200,000
Cost of sales / 600,000
Gross profit / 300,000
900,000 / 900,000
Depreciation / 2,000 /

Gross profit

/ 300,000
Administrative wages / 18,000 / Manufacturing profit / 160,000
Light & power / 4,000
Building repairs / 8,000
Rates & Insurance / 2,000
Salaries / 29,000
Drivers’ wages / 24,000
Motor van expenses / 5,000
General expenses / 6,000
Provision for unrealized profit / 40,000
Net profit / 322,000
460,000 / 460,000

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