manufacturing account (with...

Advanced Level

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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

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Gross Profit 6900

Less: Expenses

Carriage outwards 300


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,

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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.

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


Show the Manufacturing and Trading and Profit and Loss Account under different

assumptions.

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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


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

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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.


$ $

Raw material consumed 1000 Goods transferred at market value 3300

Direct labour 1000

Prime cost 2000


2500


2300


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

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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.


$ $

Raw material consumed 1000 Goods transferred at market value 3300

Direct labour 1000

Prime cost 2000


2500


2300


Cost of finished goods manufactured 3000


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

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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.

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(i) Trading

Beginning stock 10000 Sales 12000

Add: Purchases 5000

15000

Less: Ending stock 7000


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


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

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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

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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 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

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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


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

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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

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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


Gross profit 11600

27000 27000

Gross profit 11600

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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).

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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


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


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


Rates & Insurance 2,000

Salaries 29,000

Drivers’ wages 24,000

Motor van expenses 5,000

General expenses 6,000

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Provision for unrealized profit 40,000

Net profit 322,000

460,000 460,000

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Manufacturing Account At the end of every accounting period, trading firms which buy ready-made goods and resell them at a

profit, prepare the Trading and Profit and Loss Accounts. However, for those firms which manufacture the

goods they sell, a Manufacturing Account is prepared in addition to these two final accounts.

The Manufacturing Account is prepared to determine the total manufacturing or production cost of goods

completed during the accounting period. The production cost includes all costs incurred in converting raw

materials into finished goods, i.e. cost of raw materials, direct labour and direct expenses, and factory

overhead expenses.

Manufacturing or Production Cost

Production cost can be divided into two categories, i.e. prime cost and factory overhead expenses. Both

these costs are charged to the Manufacturing Account for the calculation of production cost. The

following is a description of the different components which make up prime cost and factory overhead

expenses.

Prime Cost

Prime cost includes all costs which relate directly to the manufacturing process. They include raw

materials, labour and expenses which are traceable to the particular unit of goods manufactured.. These

prime costs will vary with the units of output produced. Increasing output means using mere raw

materials, direct labour and direct expenses, e.g. if production is increased by 50%, the cost of raw

materials, manufacturing wages and direct expenses will rise by approximately the same extent.

Cost of Raw Materials

The cost of raw materials used to make the finished good represents one of the major prime costs. The

opening and closing stock of raw materials, together with the purchase of raw materials must be taken into

account when calculating the cost of raw materials.

Any other costs incurred in the purchases of raw materials, like duty, freight or carriage, should be added to

the net purchases of the raw materials.

Direct Labour Cost

These refer to the wages paid to labour which is directly involved in the manufacture of goods. These

wages paid to workers who are employed on the actual production line are called direct wages.

Direct Expenses

Besides raw materials and labour cost, other expenses directly related to manufacturing may be

incurred. These include expenses for water and electricity that can be traced by the units of goods

produced, e.g. the amount of water used in the production of bottled drinks and the amount of electricity

consumed in the baking of bread can be computed by each unit of goods produced.

Direct expenses may include royalties which are payments made to the patentee for the right to use the

patent for each unit of goods produced.

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A patent confers upon its holder, the right to be the only producer of a certain product for a particular

period of time.

Factory Overhead Expenses

These costs are not directly related to the actual manufacturing of goods but more so to the general

operations of running of the factory where production is carried on.

Overhead expenses do not vary with output. Even if output is increased or decreased, the overhead

expenses remain relatively fixed.

Factory overhead costs include:

rent and rates of factory

insurance of factory

factory power and lighting

repairs and maintenance of plant and machinery

depreciation of tools, plant and machinery

indirect labour cost - wages and salaries paid to those employed in the general operations of the factory

and who are indirectly associated with actual production, e.g. factory engineer, supervisor, manager,

forklift and crane drivers, cleaners and security personnel.

Production Cost

Production cost measures the total cost of goods produced during the period and is made up of prime

cost and factory overhead expenses used in production.

Work in Progress

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In the above example, it is assumed that all the work that started in the factory was finished by the end of

the year and that there was no partly finished goods. It is possible for a manufacturing firm to

have work-in-progress which is partly completed goods at the end of the accounting period.

Where there is work-in-progress, production cost incurred during the accounting period will cover both the

finished and unfinished goods.

If we wish to know the cost of manufacturing only the finished goods during the year, we must deduct the

work-in-progress at the end of the year from the production cost. The work-in-progress is valued

according to the cost of materials, labour, factory overhead expenses and other expenses that have gone

into it.

Where there is work-in-progress at the beginning of the accounting period, this must be added to the

production cost before deducting the work-in-progress at the end of the year to give the cost value of

finished goods for the year.

Cost Flows in the Manufacturing Account and the Determination of the Manufacturing Profit

Summary

The following steps are taken by the manufacturer to arrive at his net profit figure:

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Calculation of production cost by setting up a Manufacturing Account: Production Cost = Prime Costs (raw

materials cost + direct labour and direct expenses) + Factory Overhead Expenses

Calculation of gross manufacturing profit by comparing the market price of goods manufactured with the

production cost in the Manufacturing Account: Gross Manufacturing Profit = Market Price of Goods

Manufactured - Production Cost

Calculation of gross trading profit by setting up a Trading Account: Gross Trading Profit = Net Sales - Cost

of Sales

Calculation of net profit by setting up a Profit and Loss Account: Net Profit = Gross Manufacturing Profit +

Gross Trading Profit + Any Gains - Expenses

To the Manufacturing Account, charge all manufacturing expenses incurred in the production of finished

goods.

To the Trading Account, charge all buying expenses incurred in the purchase of goods for resale.

To the Profit and Loss Account, charge all selling expenses incurred in the sale and distribution of goods

including all administrative expenses.

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manufacturing account (with...

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