Topic ● Manufacturing accounts
37.13
Full set of financial statements
A complete worked example is now given. Note that in the profit and loss account part the
expenses have been separated so as to show whether they are administration expenses, selling and
distribution expenses, or financial charges.
The trial balance in Exhibit 37.5 has been extracted from the books of J. Jarvis, Toy Manufacturer, as at 31 December 2014.
Exhibit 37.5
J. Jarvis
Trial Balance as at 31 December 2014
Dr
Inventory of raw materials 1.1.2014
Inventory of finished goods 1.1.2014
Work-in-progress 1.1.2014
Wages (direct £180,000; factory indirect £145,000)
Royalties
Carriage inwards (on raw materials)
Purchases of raw materials
Productive machinery (cost £280,000)
Administration computers (cost £20,000)
General factory expenses
Lighting
Factory power
Administration salaries
Sales reps’ salaries
Commission on sales
Rent
Insurance
General administration expenses
Bank charges
Discounts allowed
Carriage outwards
Sales
Accounts receivable and accounts payable
Bank
Cash
Drawings
Capital as at 1.1.2014
506
£
21,000
38,900
13,500
325,000
7,000
3,500
370,000
230,000
12,000
31,000
7,500
13,700
44,000
30,000
11,500
12,000
4,200
13,400
2,300
4,800
5,900
142,300
16,800
1,500
60,000
_________
1,421,800
Cr
£
1,000,000
64,000
357,800
1,421,800
Chapter 37 ● Manufacturing accounts
Notes at 31.12.2014:
1 Inventory of raw materials £24,000; inventory of finished goods £40,000; work-in-progress £15,000.
2 Lighting, rent and insurance are to be apportioned: factory 5/6, administration 1/6.
3 Depreciation on productive machinery and administration computers at 10 per cent per annum
on cost.
J. Jarvis
Manufacturing Account and Statement of Profit or Loss for the year ending 31 December 2014
£
£
Inventory of raw materials 1.1.2014
Add Purchases
Carriage inwards
Less Inventory raw materials 31.12.2014
Cost of raw materials consumed
Direct labour
Royalties
Prime cost
Indirect manufacturing costs:
General factory expenses
Lighting 5/6
Power
Rent 5/6
Insurance 5/6
Depreciation of productive machinery
Indirect labour
31,000
6,250
13,700
10,000
3,500
28,000
145,000
237,450
794,950
13,500
808,450
(15,000)
793,450
Add Work-in-progress 1.1.2014
Less Work-in-progress 31.12.2014
Production cost of goods completed c/d
Sales
Less Cost of goods sold:
Inventory of finished goods 1.1.2014
Add Production cost of goods completed b/d
1,000,000
38,900
793,450
832,350
(40,000)
Less Inventory of finished goods 31.12.2014
Gross profit
Administration expenses
Administration salaries
Rent 1/6
Insurance 1/6
General expenses
Lighting 1/6
Depreciation of administration computers
£
21,000
370,000
3,500
394,500
(24,000)
370,500
180,000
7,000
557,500
(792,350)
207,650
44,000
2,000
700
13,400
1,250
2,000
63,350
Selling and distribution expenses
Sales reps’ salaries
Commission on sales
Carriage outwards
30,000
11,500
5,900
47,400
Financial charges
Bank charges
Discounts allowed
2,300
4,800
7,100
Net profit
(117,850)
89,800
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J. Jarvis
Statement of Financial Position as at 31 December 2014
Non-current assets
Productive machinery at cost
Less Depreciation to date
£
280,000
(78,000)
Administration computers at cost
Less Depreciation to date
20,000
(10,000)
£
202,000
10,000
212,000
Current assets
Inventory
Raw materials
Finished goods
Work-in-progress
Accounts receivable
Bank
Cash
24,000
40,000
15,000
142,300
16,800
1,500
239,600
451,600
Less Current liabilities
Accounts payable
Financed by
Capital
Balance as at 1.1.2014
Add Net profit
Less Drawings
37.14
(64,000)
387,600
357,800
89,800
447,600
(60,000)
387,600
Market value of goods manufactured
The financial statements of Jarvis, just illustrated, are subject to the limitation that the respective
amounts of the gross profit which are attributable to the manufacturing side or to the selling side
of the business are not known. A technique is sometimes used to bring out this additional information. This method uses the cost which would have been involved if the goods had been bought
in their finished state instead of being manufactured by the business. This figure is credited to the
manufacturing account and debited to the trading account so as to throw up two figures of gross
profit instead of one. It should be pointed out that the net profit will remain unaffected. All that
will have happened will be that the figure of £207,650 gross profit will be shown as two figures
instead of one. When added together, they will total £207,650.
Assume that the cost of buying the goods instead of manufacturing them had been £950,000.
The relevant parts of the Manufacturing Account and Statement of Profit or Loss will then be:
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Chapter 37 ● Manufacturing accounts
Manufacturing Account and Statement of Profit or Loss extract for the year ending
31 December 2014
£
Market value of goods completed
Less Production cost of goods completed (as before)
Gross profit on manufacture c/d
Sales
Inventory of finished goods 1.1.2014
Add Market value of goods completed b/d
£
950,000
(793,450)
156,550
1,000,000
38,900
950,000
988,900
(40,000)
Less Inventory of finished goods 31.12.2014
(948,900)
51,100
Gross profit on trading c/d
Gross profit
On manufacturing
On trading
156,550
51,100
207,650
Learning outcomes
You should now have learnt:
1 Why manufacturing accounts are used.
2 How to prepare a manufacturing account and statement of profit or loss.
3 That the trading account section of the statement of profit or loss is used for calculating the
gross profit made by selling the goods manufactured.
4 That the profit and loss account section of the statement of profit or loss shows as net profit
what is left of gross profit after all administration, selling and distribution and finance costs
incurred have been deducted.
5 That work-in-progress, both at the start and the close of a period, must be adjusted so as to
identify the production costs of goods completed in the period.
Answers to activities
37.1 You may have included some of the following:
(1)
(2)
(3)
(4)
(5)
Direct costs
raw materials
machine operator’s wages
packer’s wages
machine set-up costs
crane hire for building contract
Indirect costs
canteen wages
business rates
rent
insurance
storage of finished goods costs
However, you can only really do a split like this if you have a specific job or product in mind.
You must first identify the ‘cost object’, that is, the item you are making or providing. Taking
the example of a construction company building a hotel (it is engaged in other similar projects
at the same time). The direct and indirect costs may include:
(1)
(2)
(3)
(4)
(5)
Direct costs
concrete
forklift truck operator’s wages
bricklayer’s wages
steel girders
windows
Indirect costs
site canteen wages
company lawyer’s salary
company architect’s salary
company headquarters insurance
company warehousing costs
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Part 6 ● Special accounting procedures
Now you should see that the indirect costs are not solely incurred in order to build the hotel. This is
the key. Direct costs are those costs you can specifically link to a specific job. All the other costs of
a job are indirect.
37.2 Direct materials (a) ( g) (i)
Direct labour (b)
Direct expenses (h)
Indirect manufacturing costs (c) (d ) (f) (k) (o)
Administration expenses ( j)
Selling and distribution expenses (e) (m)
Financial charges (l) (n)
37.3 Because only administration expenses, selling and distribution expenses, and financial charges appear
in the profit and loss account part when a manufacturing account is being used. The rest all arose
because manufacturing was taking place and can be directly or indirectly attributed to the products
being produced, so they appear in the manufacturing account.
Review questions
37.1
A business both buys loose tools and also makes some itself. The following data is available
concerning the years ended 31 December 2014, 2015 and 2016.
2014
Jan 1
Dec 31
2015
Dec 31
2016
Dec 31
Inventory of loose tools
During the year:
Bought loose tools from suppliers
Made own loose tools: the cost of wages of employees being £1,300
and the materials cost £900
Loose tools valued at
During the year:
Loose tools bought from suppliers
Made own loose tools: the cost of wages of employees being £1,600
and the materials cost £1,200
Loose tools valued at
During the year:
Loose tools bought from suppliers
Made own loose tools: the cost of wages of employees being £1,000
and the materials cost £1,340. Received refund from a supplier for
faulty tools returned to him
Loose tools valued at
£
6,000
8,000
12,000
4,000
12,800
7,200
320
14,600
You are to draw up the Loose Tools Account for the three years, showing the amount transferred as
an expense in each year to the Manufacturing Account.
37.2 Using whichever of the following figures are required, prepare a manufacturing account and
trading account for 2017. The manufacturing account should show clearly the prime cost of manufacture and the production cost of finished goods produced.
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Chapter 37 ● Manufacturing accounts
£
Inventory, 1 January 2017:
Raw materials
Partly finished goods
Finished goods
Inventory, 31 December 2017:
Raw materials
Partly finished goods
Finished goods
Purchases of raw materials
Carriage on raw materials
Salaries and wages: factory (including £44,500 for management and supervision)
Salaries and wages: general office
Rent and business rates (three-quarters works, one-quarter office)
Lighting and heating (seven-eighths works, one-eighth office)
Repairs to machinery
Depreciation of machinery
Factory direct expenses
Insurance of plant and machinery
Sales
24,600
20,200
18,600
31,300
23,400
29,200
165,400
9,100
151,400
28,400
3,000
5,600
3,400
5,600
730
860
406,120
Note:RCTVN[ƂPKUJGFIQQFUCTGXCNWGFCVVJGKTRTQFWEVKQPEQUV
37.3A From the following information, prepare a manufacturing account and statement of profit
or loss for the year ending 31 December 2016 and a statement of financial position as at 31 December
2016 for J. Jones Limited.
Purchase of raw materials
Fuel and light
Administration salaries
Factory wages
Carriage outwards
Rent and business rates
Sales
Returns inward
General office expenses
Repairs to plant and machinery
Inventory at 1 January 2016:
Raw materials
Work-in-progress
Finished goods
Sundry accounts payable
Capital account
Freehold premises
Plant and machinery
Accounts receivable
Accumulated provision for depreciation on plant and machinery
Cost in hand
£
258,000
21,000
17,000
59,000
4,000
21,000
£
482,000
7,000
9,000
9,000
21,000
14,000
23,000
37,000
457,000
410,000
80,000
20,000
11,000
984,000
8,000
________
984,000
Make provision for the following:
(i) Inventory in hand at 31 December 2016:
Raw materials £25,000
Work-in-progress £11,000
Finished goods £26,000.
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(ii) Depreciation of 10% on plant and machinery using the straight line method.
(iii) 80% of fuel and light and 75% of rent and rates to be charged to manufacturing.
(iv) Allowance for doubtful debts: 5% of sundry accounts receivable.
(v) £4,000 outstanding for fuel and light.
(vi) Rent and business rates paid in advance: £5,000.
(vii) Market value of finished goods: £382,000.
37.4
Prepare a manufacturing account and statement of profit or loss from the following balances
of Z. Varga for the year ending 31 December 2017.
£
Inventory at 1 January 2017:
Raw materials
50,800
Work-in-progress
62,200
Finished goods
46,520
Purchases: Raw materials
183,070
Carriage on raw materials
3,920
Direct labour
168,416
Office salaries
66,838
Rent
10,400
Office lighting and heating
8,840
Depreciation: Works machinery
20,400
Office equipment
4,600
Sales
637,244
Factory fuel and power
16,240
Rent is to be apportioned: Factory 3/4; Office 1/4. Inventory at 31 December 2017 was: Raw materials
£57,800; Work-in-progress £49,200; Finished goods £57,692.
37.5 From the following information, draw up a manufacturing account and the trading account section
of the statement of profit or loss for the six months ending 30 September 2017. You should show clearly:
(a)
(b)
(c)
(d)
Cost of raw materials consumed.
Prime cost of production.
Production cost of finished goods.
Gross profit on sales.
Inventory, 1 April 2017:
Raw materials
Work-in-progress
Finished goods
Inventory, 30 September 2017:
Raw materials
Work-in-progress
Finished goods
Purchases of raw materials
Carriage on raw materials
Direct wages
Factory general expenses
Office salaries
Depreciation of office furniture
Carriage outwards
Advertising
Bad debts
Sales less returns
Sales of scrap
Discounts received
Depreciation of factory equipment
Rent and business rates (factory three-quarters, office one-quarter)
512
£
2,990
3,900
15,300
4,200
3,600
17,700
15,630
126
48,648
7,048
22,200
420
191
1,472
200
112,410
1,317
188
4,200
2,800
Chapter 37 ● Manufacturing accounts
37.6A
From the following figures prepare a manufacturing account and the trading account section
of the statement of profit or loss so as to show:
(a)
(b)
(c)
(d)
(e)
Cost of raw materials used in production.
Prime cost.
Production cost of finished goods produced.
Cost of goods sold.
Gross profit.
£
Inventory at 1 January 2017:
Raw materials
Goods in course of manufacture (at factory cost)
Finished goods
Inventory at 31 March 2017:
Raw materials
Goods in course of manufacture (at factory cost)
Finished goods
Expenditure during the quarter:
Purchases of raw materials
Factory wages: direct
indirect
Carriage on purchases of raw materials
Rent and business rates of the factory
Power
Depreciation of machinery
Repairs to factory buildings
Sundry factory expenses
Sales during the quarter
37.7
10,500
2,400
14,300
10,200
2,900
13,200
27,200
72,600
13,900
700
1,200
2,000
3,900
1,300
900
160,400
E. Wilson is a manufacturer. His trial balance at 31 December 2017 is as follows:
Delivery van expenses
Lighting and heating: Factory
Office
Manufacturing wages
General expenses: Factory
Office
Sales reps: commission
Purchase of raw materials
Rent: Factory
Office
Machinery (cost £40,000)
Office equipment (cost £9,000)
Office salaries
Accounts receivable
Accounts payable
Bank
Sales
Van (cost £6,800)
Inventory at 31 December 2016:
Raw materials
Finished goods
Drawings
Capital
£
1,760
7,220
1,490
72,100
8,100
1,940
11,688
57,210
6,100
2,700
28,600
8,200
17,740
34,200
£
9,400
16,142
194,800
6,200
13,260
41,300
24,200
________
360,150
155,950
360,150
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Prepare the manufacturing account and statement of profit or loss for the year ending 31 December
2017 and a statement of financial position as at that date. Give effect to the following adjustments:
1 Inventory at 31 December 2017: raw materials £14,510; finished goods £44,490. There is no
work-in-progress.
2 Depreciate machinery £3,000; office equipment £600; van £1,200.
3 Manufacturing wages due but unpaid at 31 December 2017 £550; office rent prepaid £140.
37.8
The financial year end of Mendip Limited is 30 June. At 30 June 2017, the following balances
are available:
Freehold land and buildings at cost
Plant and machinery at cost
Accumulated depreciation on plant and machinery
Purchase of raw materials
Sales
Factory rates
Factory heat and light
Accounts receivable
Accounts payable
Wages (including £15,700 for supervision)
Direct factory expenses
Selling expenses
Office salaries and general expenses
Bank
General reserve
Retained profits
Inventory 1 July 2016: Raw materials
Finished goods
Dividends paid: Preference shares
Ordinary shares
£
143,000
105,000
23,000
130,100
317,500
3,000
6,500
37,200
30,900
63,000
9,100
11,000
43,000
24,500
30,000
18,000
20,000
38,000
840
20,000
(i) The inventory at 30 June 2017 was: raw materials £22,000; finished goods £35,600.
(ii) Salaries include £6,700 for directors’ fees.
(iii) Depreciation is to be charged at 10% on cost of plant and machinery.
Required:
Prepare a manufacturing account and statement of profit or loss for the year ending 30 June 2017.
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Chapter 37 ● Manufacturing accounts
37.9A
Jean Marsh owns a small business making and selling children’s toys. The following trial
balance was extracted from her books on 31 December 2017.
Dr
£
Capital
Drawings
Sales
Inventory at 1 January 2017:
Raw materials
Finished goods
Purchases of raw materials
Carriage inwards
Factory wages
Office salaries
J. Marsh: salary and expenses
General expenses:
Factory
Office
Lighting
Rent
Insurance
Advertising
Bad debts
Discount received
Carriage outwards
Plant and machinery, at cost less depreciation
Car, at cost less depreciation
Bank
Cash in hand
Accounts receivable and accounts payable
Cr
£
15,000
2,000
90,000
3,400
6,100
18,000
800
18,500
16,900
10,400
1,200
750
2,500
3,750
950
1,400
650
1,600
375
9,100
4,200
3,600
325
7,700
112,600
6,000
112,600
You are given the following additional information.
1
Inventory at 31 December 2017
Raw materials
Finished goods
2
There was no work-in-progress.
Depreciation for the year is to be charged as follows:
Plant and machinery
Car
3
4
5
£2,900
£8,200
£1,500
£500
At 31 December 2017 insurance paid in advance was £150 and office general expenses unpaid
were £75.
Lighting and rent are to be apportioned: 4/5 Factory, 1/5 Office.
Insurance is to be apportioned: 3/4 Factory, 1/4 Office.
Jean is the business’s salesperson and her salary and expenses are to be treated as a selling
expense. She has sole use of the business’s car.
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Questions:
For the year ended 31 December 2017 prepare
(a) the manufacturing account showing prime cost and factory cost of production.
(b) the trading account section of the statement of profit or loss.
(c) the profit and loss account section of the statement of profit or loss, distinguishing between
administrative and selling costs.
(d) a statement of financial position as at 31 December 2017.Author’s Note
(Midland Examining Group: GCSE)
Author’s Note: Part (d) of the question was not in the original examination question. It has been
added to give you further practice.
37.10 The following list of balances as at 31 July 2016 has been extracted from the books of Jane
Seymour who commenced business on 1 August 2015 as a designer and manufacturer of kitchen
furniture:
£
60,000
30,000
9,000
170,000
43,000
39,000
5,000
8,000
1,600
12,000
11,600
31,000
9,000
13,000
122,000
16,500
11,200
8,500
6,000
Plant and machinery, at cost on 1 August 2015
Motor vehicles, at cost on 1 August 2015
Loose tools, at cost
Sales
Raw materials purchased
Direct factory wages
Light and power
Indirect factory wages
Machinery repairs
Motor vehicle running expenses
Rent and insurances
Administrative staff salaries
Administrative expenses
Sales and distribution staff salaries
Capital at 1 August 2015
Sundry accounts receivable
Sundry accounts payable
Balance at bank
Drawings
Additional information for the year ended 31 July 2016:
(i)
It is estimated that the plant and machinery will be used in the business for ten years and the
motor vehicles used for four years: in both cases it is estimated that the residual value will be
nil. The straight line method of providing for depreciation is to be used.
(ii) Light and power charges accrued due at 31 July 2016 amounted to £1,000 and insurances prepaid
at 31 July 2016 totalled £800.
(iii) Inventory was valued at cost at 31 July 2016 as follows:
Raw materials
Finished goods
£7,000
£10,000
(iv) The valuation of work-in-progress at 31 July 2016 included variable and fixed factory overheads
and amounted to £12,300.
(v) Two-thirds of the light and power and rent and insurances costs are to be allocated to the factory
costs and one-third to general administration costs.
(vi) Motor vehicle costs are to be allocated equally to factory costs and general administration costs.
(vii) Goods manufactured during the year are to be transferred to the trading account at £95,000.
(viii) Loose tools in hand on 31 July 2016 were valued at £5,000.
516