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
Carriage outwards
Returns inwards
Returns outwards
Wages for modifications
Motor vans
Equipment
Selling expenses
Capital
200
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
1
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,
2
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
Direct labour
Factory overhead
Work in progress, at prime cost:
At the beginning
At the end
Selling expenses
$1000
1000
700
500
200
300
Show the Manufacturing and Trading and Profit and Loss Account under different
assumptions.
3
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
4
Advanced Level
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
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
5
Advanced Level
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
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
Manufacturing profit
3000
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
6
Advanced Level
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
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
3) Abnormal and normal stock loss
Example One
Beginning stock
Purchases
Ending stock (after stock loss)
Sales
600
$10 000
5 000
7 000
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.
7
Advanced Level
(i)
Trading
Beginning stock
10000 Sales
Add: Purchases
12000
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
10
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
8
Advanced Level
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
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
9
Advanced Level
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
258,000
21,000
17,000
59,000
4,000
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
21,000
482,000
7,000
9,000
9,000
21,000
14,000
23,000
Sundry creditors
Capital account
Freehold premises
Plant and machinery
Debtors
Provision for depreciation on plant and
Machinery at 1 January 19X6
Cash in hand
37,000
457,000
410,000
80,000
20,000
8,000
11,000
984,000
Make provision for the following:
(a) Stock in hand at 31 December 19X6
Raw materials
(b)
(c)
(d)
(e)
984,000
￡25,000
Work in progress
11,000
Finished goods
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
(f) Rent and rates paid in advance - ￡5,000
(g) Market value of finished goods - ￡382,000
10
Advanced Level
Manufacturing A/C for the yr. Ended 31-12-19-6
$
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
11
Advanced Level
Balance Sheet as at 31-12-19-6
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
12
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
Sales
2000
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
Less: Provision for unrealised profit on stock
Finished goods at cost
2200
200
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
13
Advanced Level
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)
Plant and machinery (bought 1 January 1980)
Motor vans (bought 1st January 1980)
Administrative wages
900,000
80,000
10,000
18,000
Loose tools bought
Light and power
Building repairs
Raw materials bought
Salesmen’s salaries
Driver’s wages
Motor van expenses
Direct wages
General administration expenses
6,400
40,000
20,000
273,400
29,000
24,000
5,000
302,000
6,000
st
Indirect wages
Repairs to machinery
Rates and insurance
54,000
11,000
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:
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).
14
Advanced Level
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
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
900,000
300,000
160,000
15
Advanced Level
Provision for unrealized profit
Net profit
40,000
322,000
460,000
460,000
16
Advanced Level
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.
17
Advanced Level
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
18
Advanced Level
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:
19
Advanced Level
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.
20
Advanced Level
21