Scribd
Upload
397 views

Manufacturing Account Worked Example Question 8

This document provides a worked example of a manufacturing account for the year ended December 31, 2011. It includes a calculation of opening and closing provisions for unrealized profit to adjust inventory valuations from transfer price to cost. The income statement and statement of financial position are corrected to remove unrealized profit from inventory valuations in accordance with accounting principles.

Uploaded by

Roshan Ramkhalawon
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
397 views

Manufacturing Account Worked Example Question 8

This document provides a worked example of a manufacturing account for the year ended December 31, 2011. It includes a calculation of opening and closing provisions for unrealized profit to adjust inventory valuations from transfer price to cost. The income statement and statement of financial position are corrected to remove unrealized profit from inventory valuations in accordance with accounting principles.

Uploaded by

Roshan Ramkhalawon
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 7

Manufacturing Account Worked Example

Question 8
Manufacturing Account for the year ended 31 December 2011
Cost of Raw Materials Consumed
Opening inventory of Raw Materials 31000
Add Purchases of Raw Materials 261000
Add Carriage inwards of Raw Materials 2500
294500
Less closing inventory of Raw Materials (46400)
Cost of Raw Materials Consumed 248100
Add Direct Cost
Manufacturing wages 166000
Direct expenses 9200 175200
Prime Cost 423300
Add Factory Overheads
Supervisory wages 42800
Factory rent 36000
Depreciation of factory machinery 13800 92600
Cost of production at cost price 515900
Add Factory Profit (40% X 515900) 206360
Cost of production at transfer price 722260

Provision for unrealized profit account


Provision for unrealized profit account
1 Jan 2011 Balance b/d 16800
31 Dec 2011 Balance c/d 24800 31 Dec 2011 Income Statement??
(Increase) 8 000
24800 24800
1 Jan 2012 Balance b/d 24800

Opening provision for unrealized profit


= (Factory profit / cost of production transfer price) X Opening inventory transfer price
= (206360 / 722260) X 58 800 = $16 800

Or
Opening inventory transfer price – Opening inventory at cost
= 58 800 – [58 800 / (1+0.4)]
= 58 800 – 42 000 = $16 800
Closing inventory at cost price
Cost per unit at cost = Cost of production cost price / Number of units produced
= 515900 / 10318
= $50

Closing inventory at cost = 1 240 X 50 = $62 000


Closing provision for unrealized profit
= Factory profit % X Closing inventory at cost
= 40% X 62 000 = $24 800

Or
Closing inventory at transfer price
Cost per unit at transfer price
= Cost of production transfer price / number of units produced
= 722260 / 10318
= $70

Closing inventory transfer price = 1 240 X 70 = $86800

Closing provision for unrealized profit


= Closing inventory at transfer price – closing inventory at cost
= 86800 – [86800 / (1 + 0.4)] = 24800
Corrected income statement for the year ended 31 December 2011
Revenue 880000
Less cost of sales
Opening inventory finished goods (transfer price) 58800
Add Cost of production (transfer price) 722260
781060
Less closing inventory finished goods (transfer price) (86800) (694260)
Gross Profit 185740
Less Expenses
Office rent 21000
Depreciation of office equipment 2900
Administrative and selling expenses 201000 (224900)
Loss on trading (39160)
Add Factory profit 206360
Less increase in provision for unrealized profit (8000)
Realised factory profit 198360
Profit for the year 159200
Corrected statement of financial position as at 31 December 2011
Non-Current Assets 570000
Current Assets
Closing Inventories
- Raw Materials 46400
- Finished goods (at cost) 62000 108400
Trade receivables 96200
Cash and cash equivalent: Bank 11000 215600
TOTAL ASSETS 785600
Capital and Liabilities
Capital
Capital at start 622300
Add profit for the year 159200
781500
Less drawings (80000)
Capital at end 701500
Current Liabilities
Trade payables 84100
TOTAL CAPITAL AND LIABILITIES 785600

Factory profits need to be removed from items of inventory because it has not yet
been realized. It is against the realization concept to included unrealized profit in
the valuation of inventory. With unrealized profit in the value of inventory,
profits and assets would be overstated. Hence, the unrealized profit should be
removed to value inventory at lower of cost and net realizable value to comply
with the prudence concept and IAS2

You might also like