Manufacturing Account



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 |

|Gross Profit | | |6900 |

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|Less: Expenses | | | |

| Carriage outwards | |300 | |

| Selling expenses | |500 | |

| Depreciation expense on motor van | |1000 |1800 |

|Net Profit | | |5100 |

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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, 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 | 50 | | | |

|prime cost) | | | | |

| | |150 | | | |

|Less: work in progress at end (valued at | 20 | | | |

|prime cost) | | | | |

| |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.

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 | | | |

|Factory overhead | | 700 | | | |

|Cost of finished goods manufactured | |3000 | | |3000 |

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|Production cost | |3000 |Sales | |3200 |

|Gross profit c/d | | 200 | | | |

| | |3200 | | |3200 |

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|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.

|Manufacturing and trading and profit and loss account |

| | |$ | | |$ |

|Raw material consumed | |1000 |Goods transferred at market value |3300 |

|Direct labour | |1000 | | | |

|Prime cost | |2000 | | | |

|Add: work-in-progress at beg | | 500 | | | |

| | |2500 | | | |

|Less: work-in-progress at end | | 200 | | | |

| | |2300 | | | |

|Factory overhead | | 700 | | | |

|Cost of finished goods manufactured | |3000 | | | |

|Manufacturing profit | | 300 | | | |

| | |3300 | | |3300 |

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|Goods manufactured at market value | |3300 |Sales | |3200 |

| | | |Gross loss | | 100 |

| | |3300 | | |3300 |

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|Gross loss | |100 |Manufacturing profit | |300 |

|Selling expenses | |300 |Net Loss | |100 |

| | |400 | | |400 |

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|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.

|Manufacturing and trading and profit and loss account |

| | |$ | | |$ |

|Raw material consumed | |1000 |Goods transferred at market value |3300 |

|Direct labour | |1000 | | | |

|Prime cost | |2000 | | | |

|Add: work-in-progress at beg | | 500 | | | |

| | |2500 | | | |

|Less: work-in-progress at end | | 200 | | | |

| | |2300 | | | |

|Factory overhead | | 700 | | | |

|Cost of finished goods manufactured | |3000 | | | |

|Manufacturing profit | | 300 | | | |

| | |3300 | | |3300 |

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|Goods manufactured at market value | |3300 | | | |

|Less: closing stock | |3300 | | | |

|Cost of goods sold | |0 | | | |

|Gross profit | |0 | | |0 |

| | |0 | | |0 |

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|Provision for unrealised profit | |300 |Manufacturing profit | |300 |

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|Stock (Year One) |Stock (Year One) |

|Trading- closing |3000 | | |Trading- Closing |3300 | | |

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| | | | |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 |

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| | | | |Gross Loss |100 |Dec in prov |300 |

| | | | |Selling expenses |300 |Net Loss |100 |

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 |

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|Provision for unrealised profit |

|Profit and Loss | |400 |Balance b/d | |600 |

|Balance c/d | |200 | | | |

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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) Trading |

|Beginning stock | |10000 |Sales | |12000 |

|Add: Purchases | | 5000 | | | |

| | |15000 | | | |

|Less: Ending stock | | 7000 | | | |

|Cost of goods sold | |8000 | | | |

|Gross profit | | 4000 | | | |

| | |12000 | | |12000 |

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|Beginning stock + Purchases = Ending Stock + Cost of goods sold + Stock Loss |

|10000 5000 7000 7990 10 |

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|(ii) Trading |

|Beginning stock | |10000 |Sales | |12000 |

|Add: Purchases | | 5000 | | | |

| | |15000 | | | |

|Less: Ending stock | | 7000 | | | |

| Stock loss | |2000 | | | |

|Cost of goods sold | |6000 | | | |

|Gross profit | | 6000 | | | |

| | |12000 | | |12000 |

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|Stock loss due to fire | |2000 |Gross profit | |6000 |

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|Beginning stock + Purchases = Ending Stock + Cost of goods sold + Stock Loss |

|10000 5000 7000 6000 2000 |

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|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 |

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|Dr. Profit and Loss ~ Loss due to theft 6000 |

| Cr. Manufacturing ~ Loss due to theft 6000 |

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|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 |

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|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 |258,000 | |

|Fuel and light |21,000 | |

|Administration salaries |17,000 | |

|Factory wages |59,000 | |

|Carriage outwards |4,000 | |

|Rent and rates |21,000 | |

|Sales | |482,000 |

|Returns inward |7,000 | |

|General office expenses |9,000 | |

|Repairs to plant and machinery |9,000 | |

|Stock at 1 January 19X6 | | |

|Raw materials |21,000 | |

|Work in progress |14,000 | |

|Finished goods |23,000 | |

|Sundry creditors | |37,000 |

|Capital account | |457,000 |

|Freehold premises |410,000 | |

|Plant and machinery |80,000 | |

|Debtors |20,000 | |

|Provision for depreciation on plant and | | |

|Machinery at 1 January 19X6 | |8,000 |

|Cash in hand |11,000 | |

| |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

|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 |

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|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 |

|Less: ending stock | |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 |

|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 | | | | |

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|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 | | | |

| |Cost of goods sold |15400 | | | |

| |Gross profit |11600 | | | |

| | |27000 | | |27000 |

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| | | | |Gross profit |11600 |

| | | | |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) |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 |9/10 |1/10 |

|Building repairs |3/5 |2/5 |

|Rates and insurance |4/5 |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.

|Manufacturing & Trading & Profit & Loss account for the year ended 31-12-80 |

|Purchases | |273,400 |Goods transferred at market value |800,000 |

|Less: ending stock | |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 |

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|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 | | | |

|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 | |40,000 | | | |

|Net profit | |322,000 | | | |

| | |460,000 | | |460,000 |

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