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 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

1

Advanced Level

Less: Expenses

Carriage outwards 300

Selling expenses 500

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,

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.

2

Advanced Level

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.

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.

3

Advanced Level

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

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

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

4

Advanced Level

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

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

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

5

Advanced Level

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

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

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)

6

Advanced Level

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.

(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

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

7

Advanced Level

10000 5000 7000 7990 10

(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

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

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

8

Advanced Level

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

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

258,000

21,000

17,000

59,000

4,000

21,000

7,000

9,000

9,000

482,000

9

Advanced Level

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

21,000

14,000

23,000

410,000

80,000

20,000

11,000

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

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

10

Advanced Level

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

Less: ending stock 26,000

Cost of sales 379,000

Gross profit 9,60 0 0

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

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

11

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

12

Advanced Level

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

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

13

Advanced Level

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).

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

14

Advanced Level

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

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

15