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
Returns inwards
Returns outwards
Wages for modifications
Motor vans
Equipment
Selling expenses
Capital
300
600
500
400
10 000
2 000
500
_
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
Less: Purchases
Less: Returns Outwards
Net Purchases
Add: Carriage inwards
3000
4500
500
4000
200
4200
7200
Less: Closing stock
3300
3900
Add: Wages for modifications
Depreciation expense on equipment
400
200
600
4500
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Advanced Level
Gross Profit
6900
Less: Expenses
Carriage outwards
300
Selling expenses
500
Depreciation expense on motor van
Net Profit
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,
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Advanced Level
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
Selling expenses
300
Show the Manufacturing and Trading and Profit and Loss Account under different
assumptions.
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Advanced Level
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
Prime cost
2000
Add: work-in-progress at beg
3000
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
Selling expenses
3200
300 Gross Profit b/d
Net Loss
300
200
100
300
Assumption Two
All the goods manufactured are transferred at market price of $3 300 to the selling office and all of
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Advanced Level
them are sold at $3 200.
Manufacturing and trading and profit and loss account
$
$
Raw material consumed
1000 Goods transferred at market value
Direct labour
1000
Prime cost
2000
Add: work-in-progress at beg
3300
500
2500
Less: work-in-progress at end
200
2300
Factory overhead
Cost of finished goods manufactured
Manufacturing profit
Goods manufactured at market value
700
3000
300
3300
3300
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
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
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Advanced Level
year end. No selling expenses incurred.
Manufacturing and trading and profit and loss account
$
$
Raw material consumed
1000 Goods transferred at market value
Direct labour
1000
Prime cost
2000
Add: work-in-progress at beg
3300
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
Stock (Year One)
Trading- closing
300
Stock (Year One)
3000
Trading- Closing
3300
Provision for unrealised profits (Year One)
Trading (Year Two)
Stock
Gross profit
3000 Sales
P&L
300
3200
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
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Advanced Level
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
6600
2200
600
200
6000
2000
Finished goods
Less: Provision for unrealised profit
Provision for unrealised profit
Profit and Loss
400 Balance b/d
Balance c/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
Trading
10000 Sales
12000
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Advanced Level
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
(ii)
7990
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Trading
Beginning stock
10000 Sales
Add: Purchases
12000
5000
15000
Less: Ending stock
7000
Stock loss
2000
Cost of goods sold
6000
Gross profit
6000
12000
Stock loss due to fire
12000
2000 Gross profit
6000
Beginning stock + Purchases = Ending Stock + Cost of goods sold + Stock Loss
10000
5000
7000
Dr. Profit and Loss: stock loss due to fire
Cr. Trading account: Stock loss
6000
2000
2000
2000
Example Two
Beginning raw material
$ 10 000
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Advanced Level
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
Add: Purchases
10000
9000
20000
Less: Ending raw material
5000
Raw materials stolen
6000
Cost of raw material consumed
9000
Dr. Profit and Loss ~ Loss due to theft
9000
6000
Cr. Manufacturing ~ Loss due to theft
6000
Manufacturing account
Beginning raw material
10000 Transferred to trading
Add: Purchases
10000
15000
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
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Advanced Level
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
258,000
21,000
17,000
59,000
4,000
21,000
482,000
7,000
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
9,000
9,000
21,000
14,000
23,000
37,000
457,000
410,000
80,000
Debtors
Provision for depreciation on plant and
Machinery at 1 January 19X6
Cash in hand
20,000
8,000
11,000
984,000
Make provision for the following:
(a) Stock in hand at 31 December 19X6
Raw materials
984,000
￡25,000
Work in progress
Finished goods
(b)
(c)
(d)
(e)
(f)
(g)
￡
11,000
26,000
Depreciation of 10% on plant and machinery – straight line method
80% of fuel and light and 75% of rent and rates to be charged to manufacturing
Doubtful debts provision – 5% of sundry debtors
￡4,000 outstanding for fuel and light
Rent and rates paid in advance - ￡5,000
Market value of finished goods - ￡382,000
Manufacturing A/C for the yr. Ended 31-12-19-6
$
$
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Advanced Level
Beginning stock
21,000 Goods transferred at market value
Add: Purchases
382,000
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
Market value of goods
manufactured
17,000
382,000
382,000
Trading & Profit & Loss A/C for the year Ended 31-12-19-6
Beginning stock
Add: Production cost
23,000 Sales
382,000 Less: Sales Returns
405,000 Net Sales
Less: ending stock
482,000
7,000
475,000
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
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Advanced Level
Fixed Assets
Capital
Freehold premises
410,000
Add: Net Profit
Plant & Machinery
80,000
Less: Depreciation
16,000 64,000 474,000
457,000
73,000
530,000
Current Assets
Current liabilities
Stock- raw materials
25,000
Creditors
37,000
- Work-in-progress
11,000
Accruals
4,000
- Finished goods
26,000
Debtors
Less:Provision for B.D.
Prepayment
Cash in hand
41,000
20,000
1,000
19000
5,000
11,000 97,000
571,000
571,000
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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
iii)
Provision for unrealised profit on stock
Profit and Loss a/c
400
Balance c/d
200
Balance b/d
600
600
600
Provision for unrealised profit on stock
Opening stock
Add: Manufactured at
transfer price
6600
Sales
27000
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
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Advanced Level
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)
Plant and machinery (bought 1 January 1980)
Motor vans (bought 1st January 1980)
Administrative wages
Loose tools bought
Light and power
Building repairs
900,000
80,000
10,000
18,000
6,400
40,000
20,000
Raw materials bought
Salesmen’s salaries
Driver’s wages
Motor van expenses
Direct wages
General administration expenses
Indirect wages
Repairs to machinery
Rates and insurance
273,400
29,000
24,000
5,000
302,000
6,000
54,000
11,000
10,000
st
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:
Light and power
Building repairs
Rates and insurance
Factory
9/10
3/5
4/5
Administration
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.
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Advanced Level
Manufacturing & Trading & Profit & Loss account for the year ended 31-12-80
Purchases
273,400 Goods transferred at market value
Less: ending stock
800,000
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
Depreciation
Administrative wages
2,000 Gross profit
18,000 Manufacturing profit
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
Net profit
900,000
300,000
160,000
40,000
322,000
460,000
460,000
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