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Manufacturing Account Worked Example Question 16

This manufacturing account summarizes the costs of production for a manufacturing business for the year ended December 31, 2015. It shows the opening and closing inventory amounts for raw materials and work-in-progress. It calculates direct costs of raw materials, direct wages, and factory overheads. It then determines the cost of production and adds a 20% factory profit to calculate the transfer price to the income statement. The income statement shows revenue, cost of goods sold using opening and closing inventory at transfer price, and expenses to determine net profit.

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Roshan Ramkhalawon
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571 views

Manufacturing Account Worked Example Question 16

This manufacturing account summarizes the costs of production for a manufacturing business for the year ended December 31, 2015. It shows the opening and closing inventory amounts for raw materials and work-in-progress. It calculates direct costs of raw materials, direct wages, and factory overheads. It then determines the cost of production and adds a 20% factory profit to calculate the transfer price to the income statement. The income statement shows revenue, cost of goods sold using opening and closing inventory at transfer price, and expenses to determine net profit.

Uploaded by

Roshan Ramkhalawon
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Manufacturing Account Worked Example

Question 16

End of year

Opening

Opening
Closing

Factory profit

Depreciation on plant and machinery = 10% X 200 000 = $20 000 – MA


Depreciation on Motor Vehicles = 25% X 25 000 = $6 250 – IS
Depreciation on office equipment = 15% X (15 000 – 4 600) = $1 560 - IS
Manufacturing account for the year ended 31 December 2015
Cost of Raw Materials Consumed
Opening inventory of Raw Materials 10400
Add Purchases of Raw Materials 146200
Add carriage on raw materials 3160
159760
Less closing inventory of Raw Materials (11750)
Cost of Raw Materials Consumed 148010
Add Direct Costs
Direct wages 249400
Prime Cost 397410
Add Factory overheads
Indirect wages 54650
Rent [4/5 X (49 000 – 4 000)] 36000
Heat, light and power [4/5 X (28 600 + 3 500)] 25680
General expenses (3/4 X 12 600) 9450
Depreciation on plant and machinery 20000 145780
543190
Work-in-Progress
Opening inventory work-in-progress 12600
Less closing inventory work-in-progress (14670)
Increase in work-in-progress (2070)
Cost of production at cost price 541120
Add factory (manufacturing) profit (20% X 541120) 108224
Cost of production at transfer price 649344
Income Statement for the year ended 31 December 2015
Revenue 742490
Less cost of sales
Opening inventory finished goods (transfer price) 14904
Add cost of production (transfer price) 649344
664248
Less closing inventory finished (transfer price) (15750) (648498)
Gross Profit 93992
Less Expenses
Carriage outwards 2790
Rent [1/5 X (49 000 – 4 000)] 9000
Heat, light and power [1/5 X (28 600 + 3 500)] 6420
General expenses (1/4 X 12 600) 3150
Office salaries 24780
Depreciation on motor vehicles 6250
Depreciation on Office equipment 1560 (53950)
Profit from trading 40042
Add Manufacturing Profit 108224
Provision for unrealized profit
Opening provision for unrealized profit 2484
Less closing provision for unrealized profit (W1) 2625
Increase in provision for unrealized profit (141)
Realised manufacturing profit 108083
Profit for the year 148125

Working 1 (W1):
Closing provision for unrealized profit
= (Factory profit / cost of production at transfer price) X Closing inventory transfer price
= (108224 / 649344) X 15750 = $2 625

Closing provision for unrealized profit


= Closing inventory transfer price – closing inventory cost price
= 15 750 – 13 125 = $2 625

Closing inventory cost price = Closing inventory transfer price / (1 + Mark-up)


= 15750 / (1 + 0.2)
= 15750 / 1.2
= $13125
Provision for unrealized Profit Account
Balance b/d 2 484
Balance c/d 2 625 Income Statement (Increase) 141
2 625 2 625
Balance b/d 2 625

Transfer price is the price of the goods calculated in the manufacturing account and
transferred to the income statement. The transfer price includes an additional
percentage for factory profit and this is included in the inventory of finished goods
as unrealized profit.

Cost of production per unit at cost price = 541 120 / 10 000 = $54.11
Cost of production per unit at transfer price = 649 344 / 10 000 = $64.93
The cost of production at transfer price includes an element of factory profit. The
offer price by the supplier of $60 is greater than the cost of production at cost price
of $54.11. The business is able to produce the goods at a lower price compared to
buying it from another supplier. The business should not buy from the supplier but
instead should produce the goods. If there is an additional demand the business is
not able to produce the additional goods, then only it can by from the supplier. In
addition buying from the supplier might result in inferior quality goods being
obtained and delay in delivery of goods by the supplier.

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