MANUFACTURING ACCOUNTS of a final product. The cost of production is transferred to the trading account to calculate the cost of goods sold. The manufacturing account comprises two main sections: 1. Prime Cost all the direct costs associated with the products, for example, raw materials, direct labour and royalties, 2. Factory Overheads : all other costs associated with the manufacturing process. The two sections are added together to calculate the total production cost. Non-Production Overheads comprise of Administration expenses and selling and distribution expenses. The non Production Overheads are added with Production Cost to obtain the total cost A manufacturer may hold three types of inventory. Raw materials © Work-in-progress © Finished goods Valuing Raw Materials A comparison is made between the cost of the raw materials (applying either FIFO or AVCO) and their realisable value, Valuing Work in Progress and Finished Goods TAS 2 requires that the valuation of these two items include not only their direct material content, but also includes an element for direct labour, direct expenses and production overheads Example The Top Furniture Company manufactures tables. For the Year 2009, it has manufactured and sold 12 000 tables. On 31 December 2009, there were 1 500 completed tables ready for sale and 400 tables which were 75% completed as regards direct materials, direct labour and production overheads. The total costs were as follows 8 Direct Materials 20 500 Direct Labour 6 000 Production Overheads 8.000 Non Production Overheads 10 000 Total Costs 44500 ACCOUNTING for A LevelFinancial Accounting Calculation of closing Inventories of Work in Progress and Finished goods. Units Sales (units) 12.000 Inventories ~ Finished goods (units) 1500 = Work in progress 400x073) 300 Production (2009) 13 800 Attributable Costs $ 34.500 (exclating Non-Pro . 34 500 Cost per unit =$25 ‘ 13 800 Closing Inventories Work in Progress [40007525] = $ 750 Finished Goods {1 50025] = $3 750 2.1 Factory Profit It is cheaper for a firm to produce a commodity than to buy it from outside. The difference between the cost of production and the ‘bought-in’ price is the factory profit. The manufacturing profit helps to recognise the contribution made by the factory personnel on the overall profit ofthe business. However ifthe bought in price is less than the cost of production, the difference is known as factory lass. The format of a manufacturing account is given below. The company transfers manufactured goods from the factory to the trading account at cost plus 20%. Manufacturing Account for the Year ended 31 December 2010 $ $ Raw Materials Opening Inventory 500 Add Purchases 10.000 Carriage inwards 200 10 200 10700 Less Closing Inventory 300 Cost of raw materials consumed 10-400 Factory wages 5 600 Royalties 900 6.500 Prime Cost 16 900 Factory Overheads Indirect Materials 1100 Indirect Labour 1200 Factory rent and rates 1 600 Power 1.050 Factory heat and light 1350 Depreciation of Plant and Machinery a) 7 300 ACCOUNTING for A Level2 Manufacturin; Work-in-Progres Opening Inventory Less Closing Inventory Cost of Production Factory Profit (20400 x 24 300) Transfer to trading account (market value) 2.2 Unrealised Profit IAS 2 requires Inventories to be shown in the balance sheet at cost price, However, if a manufacturer uses a system of production cost plus a percentage mark up, the Inventories of finished goods in the trading account include an element of profit. This method of valuing the inventories of finished goods contravenes two accounting concepts, © The Concept of prudence which states that inventories should be valued at the lower of cost and net realisable value. © The realisation concept which states that profit cannot be recognised until the goods is passed on to the customer. The profit element included in the inventories of finished goods which is at transfer value should be eliminated. This process is done by preparing a ‘provision for unrealised profit account. Factory Profit Unrealised profit = x Closing inventory (transfer value) Cost of Production at Market Value Example The following information relates to Tang Knitwear Lid for the Year ended 31 March 2006 s Sales revenue 000 Factory cost of finished goods 5.000 Opening inventory of finished goods (transfer value) 20.000 Closing inventory of finished goods (transfer value) 15 000 Selling and distribution costs 12.000 Administration costs 8 000 Completed production is transferred to the warehouse at a mark-up on factory cost of 25%. REQUIRED (a) the provision for unrealised profit account (2) Income Statment for the Year ended 31 March 2006. ACCOUNTING for A Level __ 44Financial Accounting Answer Provision for unrealised Profit on Inventory Account $ $ Profit and Loss Account 1.000 Balance (1/5 x 20000) b/d 4.000 Balance cd 3.000 4000 4000 Balance (1/5x 15.000) b/d 3.000 Factory Cost of goods produced Factory Profit (1/4 x 75 000) Transferred to Trading Account Income Statement for the Year ended 31 March 2006 $ ‘i Sales revenue 120 000, Less cost of sales: Opening inventory of finished goods 20.000 Add. Factory cost from manufacturing account 93.750 113 750, Less closing inventory of finished goods 15 000 98 750 Gross Profit 21 250 Selling and distribution costs 12.000 Administration costs 8.000 Net Profit on trading Factory Profit 18 750 Add. Decrease in provision for unrealised profit 1000 Net Profit 21000 Balance Sheet (Extract) Current Assets Closing Inventory Raw Materials wx Work in Progress xx Finished goods 15 000 Less unrealised Profit 3000 12.000 Trade receivables ~ Bank ~ Note : Inventories of finished goods are at Transfer Value in the Trading Accou Cost Price in the Balance Sheet. ACCOUNTING for A Level2 Manufacturing Ac 2.3 Additional Exercises The following balances were extracted from Aurora's accounts at 31 March 2007. $000 Sales 3.200 Purchases of raw materials 430 Purchases returns 18 Carriage inwards 10 Direct labour 400 Direct overheads 60 Rent 40 Electricity 30 Insurance 55 Factory supervision salaries 65 Office salaries 70 Indirect factory wages 13 Factory cleaning 50 Office cleaning 50 Stocks at 1 April 2006: Raw materials 110 Work in progress 55 Finished goods 80 Factory machinery at cost 640 Provision for depreciation on factory machinery 280 Additional information at 31 March 2007 $000 Rent prepaid 5 Electricity accrued 15 Insurance prepaid 10 Stocks — Raw materials 140 Work in progress be Finished goods 170 Depreciation on factory machinery is to be provided at 25% per annum reducing balance, Rent, electricity and insurance are apportioned on the basis of 80% to factory and 20% to office. Finished goods are transfered to the trading account at total factory cost plus one third. REQUIRED (a) Prepare Aurora's Manufacturing Account for the year ended 31 March 2007. (0) Prepare Aurora's Trading Account for the year ended 31 March 2007, Jo7P2Q1 , ACCOUNTINGFinancial Accounting 2 Jane carties on business as a clothing manufacturer, Finished goods manu the year are transferred from the factory to the finished goods ware ‘manufacturing cost of production plus 10% Details of cost of the year ended 31 December 2005 5 s Raw Materials: 1 January 2005 1000 General factory expenses 31 December 2005 1.250 _ Insurance of factory building Work in Progress General expenses 1 January 2005 550 Finished goods: 31 December 2005 620 1 January 2005 Wages - Direct 4160 31 December 2005 = Indirect 2750 Sales Purchases of raw materials 8900 Administration expenses 800 Fuel and Power 1.690 _ Salesmen salaries Direct expenses 340 Carriage outwards 35 Carriage inwards of raw materials 400 _ Internal transport expense 38 Rent of factory 920 Depreciation of Plant and Machinery 62 REQUIRED Prepare a Manufacturing Trading and Profit and Loss Account for the period ended 31 December 2005. The following list of balances as at 31 December 2008 has been extracted from the books of Joy Ltd. s Sales 190.000 Stock at 1 January 2008 Finished goods (Transfer Value) 24.000 Production cost 151 200 Rent 800 Administration expenses 11 000 Provision for unrealised profit at 1 January 2008 4.000 Factory overheads 2450 Additional information: (a) Stock at 31 December 2008 Finished goods (Transfer Value) $ 38 880 (®) Output is transferred from factory to the warehouse at manufacturing cost plus 20%. A provision is maintained against unrealised profit on the stock of finished goods. (6) Rent accrued and administration expenses prepaid were $ 200 and $ 440 respectively REQUIRED (a) A Trading and Profit and Loss Account for the year ended 31 December 2008. (©) A provision for unrealised Profit Account for the year ended 31 December 2008 ACCOUNTING for A-Level2. Manufacturing Accounts Mayksit Limited is a manufacturing company and the following balances are taken from its accounts at 30 June 1982, 5 Freehold factory at cost 200 000 Plant and equipment at cost 350 000 Delivery vehicle at cost 90.000 Provision for depreciation at 1 July 1981 Freehold factory 52.000 Plant and equipment 105 000 Delivery vehicles, 17 000 Stocks at 1 July 1981 Raw materials 16500 Work in progress 46 000 Finished goods at transfer value 23.000 Provision for unrealised profit on stock at 1 July 198 1 600 Purchase of raw materials 148 800 Manufacturing wages 103 900 Sales 425 000 Power 9.600 Factory salaries 23.400 Office salaries 19 700 Rates and insurances 5.000 Selling and distribution expenses 31 700 You are also given the following information: (@ Stocks at 30 June 1982 Raw materials 17 200 Work in progress 57 000 Finished goods at transfer value 29 900 Accrued expenses at 30 June 1982 Manufacturing wages Selling & distribution expenses Depreciation is charged on cost at the following rates Freehold property Plant and Equipment 10% Delivery vehicles 15% Rates and insurances are to be divided 70% to the factory and 30% to the office. !) Manufactured goods are transferred on completion into finished stock at a transfer price of $115 per unit. During the year 3 000 units were completed and transferred into finished goods stock. ACCOUNTING for A LeveFinancial Accounting REQUIRED (@) Manufacturing trading and profit and loss accounts for the year ended 30 June 1982 to show manufacturing gross and net profits. (®) The ‘Provision for unrealised profit on stock account’ for the year showing th of your calculation, Amended N82! The following list of balances as at 31 March 1995 has been extracted from the books Kitchen Tables Limited, a small manufacturing company Stocks at 31 March 1994: s Raw materials 3 500 Finished goods (as transferred from the manufacturi punt 4520 ‘Work in progress at 31 March 1994 3 940 Raw materials purchased 50 Direct factory wages 9 5 Indirect factory wages 4 Indirect factory materials Faciory maintenance and repairs Factory heat, light and power 14130, Sales 225 920 Head office administrative expenditure 23-290 Sales and distribution expenditure 891 Freehold buildings: al cost 45.000 provision for depreciation 6750 Plant and machinery at cost 164.000 provision for depreciation 90 200, Provision for unrealised profit at 31 March 1994 1.320 Additional information: (i) Raw material stocks at cost at 31 Match 1995 are $2 910. (ii) Finished goods stocks at 31 March 1995, as transferred from the manufacturing account, amounted to $18 502. Git) Work in progress, at cost, at 31 March 1995 has been valued at $16 500, (iv) All goods manufactured are transferred from the manufacturing account to the tt account at cost plus 10%. (2) tis company policy to provide for depreciation at the following annual percentages on the cost of fixed assets: Freehold property 25 Plant and machinery 10 Freehold property depreciation is apportioned 2/5 to the factory and 3/5 administrative and related overheads, REQUIRED A Manufacturing, Trading and Profit and Loss Account for the year ended 31 Mar Amen ACCOUNTING for A Level2 Manufacturing Accounts The Veneer Joinery Company Limited is concerned solely with the manufacture and sale of the Silverglide Mark 1! kitchen unit During the year ended 31 March 1990, the company manufactured 105 units at a wholesale value of $1 000 per unit The following list of balances as at 31 March 1990 have been extracted from the books of the company $ Raw materials: stock at 1 April 1989 2.000 purchases 29.000 Direct labour 21000 Factory overheads: fixed 14.000 + variable 19.075 Balance at bank 7 300 Sales (93 units) 210 000 Finished goods stock at 1 April 1989 (17 units @ $1 000 each) 17 000 Provision for unrealised profit on goods manufactured 2550 Showroom rent, heating lighting and cleaning 14 700 Marketing expenses P 43 600 Freehold buildings: at cost 30 000 provision for depreciation at 1 April 1989 8 250 Plant and machinery: _ at cost 96.000 provision for depreciation at 1 April 1989 28 800 Showroom fixtures and fittings: at cost 57 600 provision for depreciation at 1 April 1989 11520 Additional information: (i) Units manufactured are transferred from the manufacturing account to the trading account at wholesale value; there was no work in progress at either 1 April 1989 or 31 March 1990, (ii) Iis company policy for depreciation to be provided on the cost of fixed assets held at each accounting year end at the following percentages Freehold buildings 2.5% Plant and machinery 10% Showroom fixtures and fittings 5% The freehold buildings depreciation is apportioned two thirds to the factory and one third to the showroom. (iii) Raw material stocks at 31 March 1990 have been valued at $3 300. REQUIRED ‘A manufacturing, trading and profit and loss account for the year ended 31 March 1990. Amended J90P1Q1 ACCOUNTING for A LevelFinancial Accounting 7. Helen Tong is a manufacturer of one type of high quality office desk Helen provides the following information from her trial balance at 31 De Sale: 1750 000 Purchases of raw materials 230 400 Factory overheads 215 000 Manufacturing royalties 17500 Direct wages 358 210 Additional information: (i) 4000 desks were manufactured during the year ended 31 December 2007 (i) Helen wansferréd the value of these desks during the year from her manufacturing account to her trading account at a total price of $ 1 126 140. This represents a mark Lup over cost, equivalent to the price Helen would have had to pay if she had purchased the desks from an outside supplier. (iii) Helen maintains stocks of raw materials at a constant value of $ 10 000 and stocks of work in progress at a constant value $ 12 500, (iv) At 31 December 2006 completed goods had been transferred from the manufacturing account to the trading account at cost plus 29%. Stocks of finished goods were valued at wansfer price of § 18 769 at 31 December 2007, (0) An extract from Helen's balance sheet at 31 December 2006 shows Stocks at cost = Raw materials 10.000 Work in progress 12 500 Finished goods 12.300 (vi) At31 December 2007 Manufacturing royalties paid in advance amounted to $ 400, Direct wages remaining unpaid amounted to $ 1 290. (vii) 80% of factory overheads are fixed costs; the remainder are variable costs, REQUIRED (a) _ Prepare a Manufacturing Account for the year ended 31 December 2007. (b) Prepare a Trading Account for the year ended 31 December 2007, (©) Prepare a provision for unrealised profit account for the year ended 31 December 2007. (4) Calculate in units the margin of safety achieved by the factory in 2007. (e) Calculate the value of the goods transferred from the factory at the break-even level of output (Explain one reason why a manufacturing business might continue to manufacture goods despite the fact that it may be cheaper to purchase the goods from an outside supplier J08P4Q2 ACCOUNTING for A Level2 Manufacturing Acc The following trial balance has been prepared from the books of the Ace Manufacturing Co. Lid, as at 30 June 1993. DR cR s 5 Debtors and Creditors 75 500 62.200 Purchase of Raw Materials, ; 310 400 Provision for unrealised profit 4900 10% Debentures (1999) 120 000, Debenture Interest 6.000 Share Capital (2.000 000 ordinary shares of $0.1 each) 200 000 Retained Profit 95 700 Stocks at 1 July 1992; Raw Materials 35 900 Work in Progress 12 600 Finished Goods 49.000 Rent Factory 35 000 Office 25.000 Maintenance Factory 12.100 Office 9 700 Heat, Power ete Factory 21300 Office 8 800 Insurance Factory 2100 Office 700 Sales 1.152.000 Direct Wages 237 600 Indirect Wages 104 500, Carriage Inwards 12.200 Carriage Outwards 7 800 Administration 77 300 Selling and Distribution 49.000 Plant and Machinery (Cost $470 000) 342 000 Motor Vehicles (Cost $96 000) 48 000 Office Equipment (Cost $81 000) 72.000 Bank 80 300 1634 800 1634 800 Notes: (i) Stocks at 30 June 1993 $ Raw Materials 29 500 Work in Progress 15 700 Finished Goods 45 000 (ii) Prepaid expenditure at 30 June 1993 FACTORY OFFICE 5 s Rent 3.000 2.000 Insurance 200 100 ACCOUNTING for A LevFinancial Accounting (iii) Accrued expenditure at 30 June 1993 s Direct Wages 2 900 Indirect Wages 1700 Administration 3 400 (iv) Depreciation is to be provided for the financial year as follows: Plant and Machinery ~ 20% on written down value Motor Vehicles - 25% on cost (used only in factory) Office Equipment - 25% on written down value (v) Finished goods are transferred from the factory at cost plus 10% (vi) Provide for unrealised profit on stock of finished goods at 30 June 1993 ~ 20% dividend for ordinary shareholders. ~ possible bad debts ~ estimated at 2% of book debts. REQUIRED (a) A Manufacturing Account for the year ended 30 June 1993 showing clearly prime cost and cost of goods manufactured. () _A‘Trading and Profit and Loss and Appropriation Account for the yea 1993. (6) A Balance Sheet as at 30 June 1993 ended 30 June N93PIQI 9. Beldoy Ltd is a manufacturing company, Its financial year ends on 31 March, ‘The accountant has extracted a trial balance at 31 March 2001 from the company’s books and this is shown below In preparing the annual accounts from the trial balance the accountant has to take into account the further information which is shown in additional notes. $000 $000 Stocks at 31 March 2000: Raw materials 300 Work in progress 250 Finished goods 260 Factory wages: direct 600 indirect 60 Purchases direct materials 1500 indirect materials 30 Carriage inwards 108 Factory overheads 162 Sales 4.050 Oifice salaries 262 Other administration expenses 450 Debenture interest paid 15 Dividends paid: ordinary shares 10 8% preference shares 16 Provision for Unrealised Profit 52 Freehold Premises any Cost 1300 Provision for Depreciation of Freehold Premises 180 Manufacturing Plant and Machinery at Cost 800 28 ACCOUNTING for A Level2. Manufacturi Provision for Depreciation of Manufacturing Plant and Machinery Office Equipment at cost Provision for Depreciation of Office Equipment 100 Trade debtors Trade creditors : 184 Balance at bank Issued share capital ordinary shares of $10 each 1.000 8% redeemable preference shares of $5 each 400 10% Debenture Stock 2008 ~ 2010 300 Share Premium 250 General Reserve 100 Retained profit brought forward 186 7 202 7202 Additional notes, Stocks at 31 March 2001 valued at lower of cost and net realisable value: Raw materials $294 000; work in progtess $375 000; finished goods $396 000. Carriage inwards relates wholly to the purchase of direct materials. Finished goods are transferred from the factory to the warehouse at a mark-up of 20% The factory occupies '/: of the freehold premises; the administrative offices occupy the remainder. Depreciation policies: Frechold premises 4% per annum on cost Plant and machinery 30% per annum on net book value Office equipment 15% per annum on net book value The Freehold premises have been professionally revalued at 31 March 2001 at $1 500 000. This revaluation is to be incorporated in the accounts, $100 000 to be transferred to General Reserve. The directors propose a final dividend of $0.30 per share on the ordinary shares together with a further 6 months' preference dividend, both dividends to be paid on Tune 2001 REQUIRED (a) _ Prepare a Manufacturing, Trading and Profit and Loss Account for the year ended 31 March 2001 for Beldoy Ltd. (8) Prepare a Balance Sheet as at 31 March 2001 for the company. 72001P3Q1 ACCOUNTING oeFinancial Accounting 2.4 Multiple Choice Questions 1. A manufacturing company has the following balances at its year end. 5 Closing stock of raw materials 24 500 direct manufacturing wages 162 800 purchases of raw materials 85 200 supervisors! wages 44.000 opening stack of raw materials 27 800 What is the prime cost for the year? A $244 700 B $248 000 © $251 300 D_ $295 300 2. What is the definition of prime cost? A. direct materials + direct labour B direct materials + direct labour + direct expenses C direct materials + direct labour + factory overheads D direct materials + direct labour + direct expenses + factory overheads 3. What is a Variable Production cost for a manufacturer? A bought in raw materials B depreciation of equipn factory business rates D__ storekeepers' wages 4. A manufacturing company charges out goods from the factory to the warehouse at production cost plus a markup of 259%. At I September 1999 the balance on the Provision for Unrealised Profit account is $26 000. At 31 August 2000 the closing stock of finished goods is $102 600, What is the effect of the entry in the Provision for Untealised Profit account on 31 August 20002 A Decrease in profit of $350 B Decrease in profit of $5 480 C Increase in profit of $350 D__ Increase in profit of $5 480 5. A company transfers its products from its Manufacturing account to its trading account at factory cost plus a 25% mark-up. The table shows closing stocks of manufactured goods at transfer price Year1 | $50,000 Year2 | $50.00 Year3 | $60.00 ‘What is the provision for unrealised profit charged against year 3 profits? A $2000 B $2500 © $10 000 D_$12000 ACCOUNTING for A Level2 Manufacturing Accounts What should be included when valuing work in progress? A Direct materials + direct labour + direct expenses B Prime Cost + all ovetheads not absorbed by completed production. C Prime Cost + production overheads based on actual level of activity D__ Prime Cost + production overheads based on normal level of activity Which item will be included as part of prime'cost in a manufacturing account? A Carriage inwards B Carriage outwards C Factory rent and rates D__ Wages of factory store keeper. What is a direct expense fora prifting business? A depreciation of printing machinery B__ paper used in the printing process C tent and rates of the factory premises D the capital cost of printing machinery. ‘The following items appear in the accounts of a manufacturing business. Purchase of raw materials Purchase of finished goods Carriage inwards Carriage outwards items will be included in the manufacturing account? Land 2 B Land3 C 1,2and3 D 1,3and4 A manufacturing company transfers its products from factory to warehouse at cost of Production plus 20%, The following information is available Provision for unrealised profit brought forward at $ 1 October 2001 9.000 Closing stock of finished goods at 30 September 2002 48 000 What is shown in the Profit and Loss Account for the year ended 30 September 2002 for the provision for unrealised profit? A $600 credit B_ $600 debit $1000 credit. D_ $1 000 debit Information about a business is given. s production overheads 23.000 ‘opening stock of raw materials 3.000 purchases of raw materials 35.000 Closing stock of raw materials. §— | 2.000 production wages 33000 production supervisor's salary 2.000 What is the prime cost? A $69 000 B $71. 000 $92 000 D_ $94 000 ACCOUNTING for A LevelFinancial Accounting 12, A manufacturing company calculates factory profit at 20% of cost of production. The following information is available Balance Sheet | Manufacturing account | Trading Account as at for the year ended | for the year ended | 31 December 2001 | 31 December 2002 | 31 December 200. s $ $ stock of finished goods 4000 cost of goods produced - 240 000 7 closing stack of finished : goods : 7 [54000 How much will be credited in the Profit and Loss Account for the year ended 31 December 2002 as factory profit? A $39 000 B_ $40 000 C $47 000 D_ $48 000 13. A company transfers manufactured items from factory to warehouse at cost plus 10%. This year the transfer value was $93 500 and at the end of the year the closing stock was 20% of the year’s production. How will the stock of finished goods be shown? Trading Account | Balance sheet $ s A| 17.000 17.000 B | 18700 16 830 | 18700 17 000 B | 18 700 18 700 32 ACCOUNTING for A Level