Manufacturing business

A business that produces or manufactures goods i.e. car/cloth manufacturer

Manufacturing account

Manufacturing businesses prepare manufacturing account as part of their internal financial statements. A
manufacturing account shows the costs of running and maintaining the factory in which a final product is
made.
A manufacturing business will also trade by selling its finished goods to wholesalers or retailers, so it will
prepare a trading account in its income statement as well as manufacturing account

Name of the manufacturing business Manufacturing Account for the year ended 31st ……, 20X
£ £
Raw material consumed

Opening raw material XX

Purchases of raw material (less any purchase returns) XX
Carriage on raw material XX
Closing raw material (XX) XX

Direct production/factory wages XX

Direct expenses (if any) XX

Prime cost XX

Factory overheads

Indirect material XX
Factory insurance XX
Factory rent XX
Depreciation of plant XX
Depreciation of factory building XX
XX
XX
Opening work in progress XX
Closing work in progress (XX)
Cost of production XX
Manufacturing/Factory profit

Sometimes the managers of a business will wish to gauge how efficiently their factory is operating. They
compare the price that the costs of goods produce in their factory with the cost of purchasing the same goods
from an outside supplier. If it would be cheap to purchase the goods externally then it may be in the best
interest of the business to cease manufacturing and purchase the goods.
When the managers of a business transfer the total production cost to the trading account, gross profit is found
 by deducting the cost of sales from the sales revenue. This method does have a flaw- there is no indication of
how profitable the factory is.
We can determine the factory manufacturing profit by finding the difference between the cost of production
and cost of goods purchasing externally

Importance of Transfer Price

 Better control of manufacturing cost.

 Transferred price is compared with market price.
 Manufacturing department is a profit centre.
 Better way to measure the performance of the manufacturing department.

Drawbacks

 However, the use of this technique does not improve overall profitability of the business.
 Can give an unrealistic view of the factory profitability unless other production prices
are researched and used to set the transfer price.

Treatment of factory profit

Transfer price = cost of production + factory

profit Example 1

The following information is provided by El Sayed Manufacturing Company.

Prime cost $86000

Cost of production $124000

Finished goods are transferred from factory to warehouse at cost plus 20% What will

be the transfer price shown in manufacturing account?

Provision for Unrealized Profit (PURP)

The finished goods at the year-end are valued at cost plus the manufacturing profit margin. Unrealised profit
should not be anticipated and the profit element should be removed from the inventory by creating a provision
for unrealised profit.
IAS 2 Lower of cost and net realisable value
 Prudence /not overstating profits/assets
Realization

Treatment of Factory profit and PURP in Income Statement

 Factory profit same amount is again added in gross profit in Income Statement
 PURP adjustment is same as provision for doubtful debts in Income Statement and is
calculated as follows

F.G at transfer price = finished goods at cost (1+ mark-up)

Increase/ Decreased in Provision of Unrealized Profit

Increase in Provision (Expense) Reduction in Provision (Income)

Dr Income Statement Dr Provision for Unrealized Profit
Cr Provision for Unrealized Profit Cr Income Statement

T account of Provision for unrealised profit

Statement of Financial Position (extract)

Once the factory profit on the closing finished goods has been calculated then the adjustment would have to
be made in the Statement of Financial Position. The closing finished goods would appear as follows:
Current assets
£
Finished goods at transfer price XX
Less provision for unrealised profit (XX)
Finished goods at cost XX
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ON/22/32
Manufacturing AZ Limited is a manufacturing business which adds factory profit to its cost of production. It
manufactures and sells one product. It provided the following information.

Year ended Cost of Annual Units in Rate of factory

31 December production production inventory at profit
(before factory (units) year-end
profit)
$
2019 600 000 15 000 500 20%
2020 714 000 17 000 850 20%
2021 765 000 18 000 480 25%

No units remained in the inventory for more than two months.

Answer the following questions in the question paper. Questions are printed here for
reference only.

(a) Prepare the provision for unrealised profit account for each of the years ended 31
December 2020 and 2021. [8]

(b) Complete the table (on the question paper). Identify which figures connected to factory profit
were recorded in AZ Limited’s income statement for the year ended 31 December 2021. State the
amounts and their position in the income statement.
[9]

(c) Name two costs which might be included in a manufacturer’s cost of production but would
not be included in prime cost. [2]

Additional information

1 The directors use the value of factory profit to set the bonuses for senior factory staff.

2 In 2020 the units could have been bought in for $44, and in 2021 for $41.65.

(d) Discuss whether the rates of factory profit being applied by AZ Limited are suitable. [6]

ON/22/31
Amit’s business has a year end of 31 December. It manufactures speciality pastries. The business’s premises
comprise a factory area and an office area.

Amit extracted the following trial balance from his books of account on 31 December 2021 prior to
preparing his financial statements.

Debit Credit
$ $
Inventory of raw materials at 1 January 2021 2 810
Inventory of work in progress at 1 January 2021 1 190
Inventory of finished goods at 1 January 2021 6 700
Revenue 288 830
Purchases of raw materials 81 750
Trade receivables 8 600
Trade payables 9 150
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Machine operators’ wages 53 000

Factory supervisor’s salary 26 000
Administrative salaries 28 500
Bank 580
Capital 51 850
Factory machinery (at cost) 96 800
Office equipment (at cost) 19 000
Rent and rates 9 600
Selling and distribution costs 14 700
Administrative expenses 16 100
Accumulated depreciation of factory machinery 24 960
Accumulated depreciation of office equipment 1 900
Provision for unrealised profit 1 340
8% bank loan 18 000
General expenses 10 200
Drawings 20 100
Carriage inwards 400
396 030 396 030

The following information was also available.

1 Inventory at 31 December 2021

$
Raw materials 2350
Work in progress 1100
Finished goods 6900

2 Prepaid rates amounted to $600 on 31 December 2021 while accrued rent amounted to $1400. Factory
rent and rates are 65% of the total incurred.

3 Of the general expenses, $7140 relate to the factory.

4 Factory profit is accounted for at the rate of 25%.

5 The bank loan was taken out on 1 April 2021. No interest had been paid by the year end.

6 Depreciation for the year ended 31 December 2021 had not yet been provided. Amit provides for
depreciation as follows:

Rate per annum Method

Factory machinery 15% Straight-line

Office equipment 10% Reducing balance

Answer the following questions in the question paper. Questions are printed here for
reference only.

(a) Prepare the manufacturing account for the year ended 31 December 2021. [11]

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(b) Prepare the income statement for the year ended 31 December 2021. [9]

Additional information

The cost of the general expenses was divided on the basis of floor area. The floor area of the factory
was 1400 m2.

(c) Calculate the floor area of the office. [1]

(d) Name the section of a statement of financial position where the closing balance on a provision for
unrealised profit account would be recorded.
[1]

Additional information

Amit is considering allowing the public to take tours of the factory to see how the pastries are made,
ending with a visit to a gift shop which he would open.

(e) Discuss the factors which Amit should consider before deciding on whether to start the public tours.
[3]

MJ/22/33
G Limited manufactures luxury sofas. In 2020, it also started trading in standard sofas which are purchased
from local suppliers.

The following balances were extracted from the books of G Limited at 31 December 2020.

$
Revenue from luxury sofas 944 000
Revenue from standard sofas 175 000
Purchases of raw materials 292 000
Purchases of standard sofas 158 600
Direct wages 200 200
Indirect manufacturing expenses 108 000
Administrative expenses 206 000
Selling and distribution costs 123 000
Machinery
Cost 325 000
accumulated depreciation at 1 January 2020 155 000
Inventories at 1 January 2020
Raw materials 66 000
Work in progress 42 600
Finished goods – luxury sofas (at transfer price) 126 000

The following information is also available.

1 The mark-up on cost of production for 2019 was 20%. It was increased to 25% in 2020.

2 Inventories at 31 December 2020:

$
Raw materials 72 000
Work in progress 54 000
Finished goods
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luxury sofas (at transfer price) 150 000
standard sofas 16 000

3 The selling and distribution costs included:

$
Transportation of raw materials 7800
Installation of new machinery 5000

4 Factory rent, $48 000, had been included in the administrative expenses.

5 Machinery is to be depreciated at an annual rate of 20% using the reducing balance method.

Answer the following questions in the question paper. Questions are printed here for reference
only.

(a) Prepare the manufacturing account for the year ended 31 December 2020. [8]

(b) Prepare the provision for unrealised profit account for the year ended 31 December 2020. [3]

(c) Explain the treatment of unrealised profit in G Limited’s statement of financial position at 31
December 2020. Your answer should refer to relevant accounting concepts.
[5]

(d) Prepare the trading section of the income statement for the year ended 31 December 2020 showing
separately the gross profit from each of luxury sofas and standard sofas.
[4]

Additional information

The directors have the opportunity in 2021 of buying in the luxury sofas which would sell at a gross
profit margin of 20%. They are considering two options:

Option 1 continue manufacturing luxury sofas without buying in

Option 2 cease production and buy in luxury sofas for resale

(e) Advise the directors which option to choose. Justify your answer and support the answer with
calculations.
[5]

ON/21/33

Anil runs a manufacturing business. He rents the factory, the administrative office and the distribution area. His
trial balance at 31 December 2020 was as follows.

Debit Credit
$ $
Capital 60 560
Bank 3 200
Trade receivables 17 100
Trade payables 15 200
Inventory (1 January 2020)
Raw materials 6 300

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Work in progress 4 400
Finished goods 8 400
Provision for unrealised profit (1 January 2020) 1 400
Purchases of raw materials 87 000
Carriage inwards 8 000
Purchases of finished goods 29 600
Factory labour 46 200
Rent 17 100
Factory machinery 80 000
Provision for depreciation of factory machinery 28 800
Office equipment 30 000
Provision for depreciation of office equipment 12 000
Delivery vehicles 40 000
Provision for depreciation of delivery vehicles 10 000
Factory overheads 40 860
Administrative expenses 45 600
Distribution costs 11 200
Sales 362 000
Drawings 15 000
489 960 489 960

The following information was also available.

1 The rate of factory profit Anil used for 2020 was 25%.

2 The inventory of finished goods on 1 January 2020 was all goods manufactured in Anil’s factory.

3 On 31 December 2020 Anil’s inventory was as follows.

$
Raw materials 5 800
Work in progress 4 600
Finished goods 10 000

The inventory of finished goods included $1000 of goods which had been bought in from another supplier.
The remainder had been manufactured in Anil’s factory and were valued at transfer price.

Answer the following questions in the question paper. Questions are printed here for reference
only.

(a) Prepare the provision for unrealised profit account for the year ended 31 December 2020. [4]

(b) Explain two possible reasons for the change in the balance on the provision for unrealised profit
account.
[4]

Additional information

1 The rent included $6300 for the office and $1600 for the distribution area.

2 15% of the carriage inwards related to the purchases of finished goods.

3 Anil provides depreciation as follows.

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rate per annum method

factory machinery 20% reducing balance
office equipment 10% straight-line
delivery vehicles 25% reducing balance

Depreciation for the year ended 31 December 2020 is yet to be provided.

(c) Prepare, for the year ended 31 December 2020,

(i) the manufacturing account [8]

(ii) the income statement. [9]

MJ/21/31
G Limited manufactures luxury sofas. In 2020, it also started trading in standard sofas which are purchased
from local suppliers.

The following balances were extracted from the books of G Limited at 31 December 2020.

$
Revenue from luxury sofas 944 000
Revenue from standard sofas 175 000
Purchases of raw materials 292 000
Purchases of standard sofas 158 600
Direct wages 200 200
Indirect manufacturing expenses 108 000
Administrative expenses 206 000
Selling and distribution costs 123 000
Machinery
Cost 325 000
accumulated depreciation at 1 January 2020 155 000
Inventories at 1 January 2020
Raw materials 66 000
Work in progress 42 600
Finished goods – luxury sofas (at transfer price) 126 000

The following information is also available.

1 The mark-up on cost of production for 2019 was 20%. It was increased to 25% in 2020.

2 Inventories at 31 December 2020:

$
Raw materials 72 000
Work in progress 54 000
Finished goods
luxury sofas (at transfer price) 150 000
standard sofas 16 000

3 The selling and distribution costs included:

$
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Transportation of raw materials 7800
Installation of new machinery 5000

4 Factory rent, $48 000, had been included in the administrative expenses.

5 Machinery is to be depreciated at an annual rate of 20% using the reducing balance method.

Answer the following questions in the question paper. Questions are printed here for reference
only.

(a) Prepare the manufacturing account for the year ended 31 December 2020. [8]

(b) Prepare the provision for unrealised profit account for the year ended 31 December 2020. [3]

(c) Explain the treatment of unrealised profit in G Limited’s statement of financial position at 31
December 2020. Your answer should refer to relevant accounting concepts.
[5]

(d) Prepare the trading section of the income statement for the year ended 31 December 2020 showing
separately the gross profit from each of luxury sofas and standard sofas.
[4]

Additional information

The directors have the opportunity in 2021 of buying in the luxury sofas which would sell at a gross
profit margin of 20%. They are considering two options:

Option 1 continue manufacturing luxury sofas without buying in

Option 2 cease production and buy in luxury sofas for resale

(e) Advise the directors which option to choose. Justify your answer and support the answer with
calculations.
[5]

MJ/21/33
G Limited manufactures luxury sofas. In 2020, it also started trading in standard sofas which are purchased
from local suppliers.

The following balances were extracted from the books of G Limited at 31 December 2020.

$
Revenue from luxury sofas 944 000
Revenue from standard sofas 175 000
Purchases of raw materials 292 000
Purchases of standard sofas 158 600
Direct wages 200 200
Indirect manufacturing expenses 108 000
Administrative expenses 206 000
Selling and distribution costs 123 000
Machinery
Cost 325 000
accumulated depreciation at 1 January 2020 155 000
Inventories at 1 January 2020
Raw materials 66 000
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Work in progress 42 600
Finished goods – luxury sofas (at transfer price) 126 000

The following information is also available.

1 The mark-up on cost of production for 2019 was 20%. It was increased to 25% in 2020.

2 Inventories at 31 December 2020:

$
Raw materials 72 000
Work in progress 54 000
Finished goods
luxury sofas (at transfer price) 150 000
standard sofas 16 000

3 The selling and distribution costs included:

$
Transportation of raw materials 7800
Installation of new machinery 5000

4 Factory rent, $48 000, had been included in the administrative expenses.

5 Machinery is to be depreciated at an annual rate of 20% using the reducing balance method.

Answer the following questions in the question paper. Questions are printed here for reference
only.

(a) Prepare the manufacturing account for the year ended 31 December 2020. [8]

(b) Prepare the provision for unrealised profit account for the year ended 31 December 2020. [3]

(c) Explain the treatment of unrealised profit in G Limited’s statement of financial position at 31
December 2020. Your answer should refer to relevant accounting concepts.
[5]

(d) Prepare the trading section of the income statement for the year ended 31 December 2020 showing
separately the gross profit from each of luxury sofas and standard sofas.
[4]

Additional information

The directors have the opportunity in 2021 of buying in the luxury sofas which would sell at a gross
profit margin of 20%. They are considering two options:

Option 1 continue manufacturing luxury sofas without buying in

Option 2 cease production and buy in luxury sofas for resale

(e) Advise the directors which option to choose. Justify your answer and support the answer with
calculations.
[5]

ON/20/32
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FG Limited is a manufacturing business. The rate at which it accounts for factory profit has not changed for some
years. Inventory is valued at transfer price.

The company’s accountant produced draft financial statements for the year ended 31 December 2019 as follows.

Draft manufacturing account for the year ended 31 December 2019

$
Cost of raw materials consumed 31 200
Direct labour 52 800
Prime cost 84 000
Overheads 54 900
Change in work in progress 1 100
Production cost of manufactured goods 140 000
Factory profit 28 000
Transfer price 168 000

Draft income statement for the year ended 31 December 2019

$ $
Revenue 320 800
Inventory 1 January 2019 36 000
Transfer price 168 000
204 000
Inventory 31 December 2019 30 000
Cost of sales 174 000
Gross profit 146 800
Factory profit 28 000
Change in provision for unrealised profit 1 000
Distribution costs 42 700
Administrative expenses 78 900 121 600
Draft profit for the year 54 200

Answer the following questions in the question paper. Questions are printed here for
reference only.

(a) Explain two reasons why a factory profit is added in an income statement. [4]

Additional information

After the preparation of the draft financial statements the following errors were discovered.

1 The rent expense, $60 000, should have been split 70% factory, 10% distribution centre and 20%
offices. In error it had been split 50% factory, 10% distribution centre and 40% offices.

2 An item of factory machinery, cost $50 000, had been bought on 1 January 2019. This had been
recorded in error as office equipment. Factory machinery is depreciated at the rate of 20% per annum
and office equipment at 10% per annum.

3 An error had occurred in counting the inventory of finished goods at the year end. The value in the
draft financial statements was based on an inventory of 5000 units but in fact there were only 4000
units.
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(b) Calculate for the year ended 31 December 2019:

(i) the correct value for the production cost of manufactured goods [3]

(ii) the correct value of factory profit. [1]

(c) Prepare for the year ended 31 December 2019:

(i) the corrected provision for unrealised profit account [3]

(ii) the corrected income statement. [9]

Additional information

One of the directors has suggested that the company should stop accounting for factory profit.

(d) Advise the directors whether or not they should stop accounting for factory profit. Justify your
answer.
[5]

ON/20/31
Barry owns a manufacturing business. He applies a rate of factory profit which varies each year. In this way
inventory is valued at a transfer price similar to the price at which the goods could be bought from an external
supplier.

Barry provided the following information.

At 1 January 2019 $
Inventory of finished goods at transfer price 140 000
Unrealised profit included in inventory value 40 000

For the year ended 31 December 2019

Prime cost 505 000
Decrease in work in progress 12 000
Revenue 1 550 000
Decrease in provision for unrealised profit 15 000
Factory overheads 283 000
Distribution costs 212 000
Administrative expenses 484 000
Finance charges 20 000

At 31 December 2019
Inventory of finished goods at transfer price 125 000

Answer the following questions in the question paper. Questions are printed here for
reference only.

(a) Calculate the amount of unrealised profit included in inventory on 31 December 2019. [2]

(b) Calculate the rate of factory profit being applied in 2019. [2]

(c) Prepare the income statement for the year ended 31 December 2019. [14]
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Additional information

The factory manager has suggested that a rate of factory profit of 50% should be applied every year.

(d) Advise Barry whether or not he should apply a rate of factory profit of 50%. Justify your answer.
[5]

(e) Explain where carriage on raw materials is recorded in the financial statements of a manufacturing
business. [2]

MJ/20/31
AD Limited sells watches and clocks. Watches are manufactured by the company and clocks are bought
from a local manufacturer.

The following balances were extracted from the books of AD Limited at 31 December 2019.

$
Sales revenue
watches 628 000
clocks 332 000
Purchases
raw materials 132 700
clocks 252 600
Plant and machinery (at cost) 320 000
Office equipment (at cost) 210 000
Accumulated depreciation at 1 January 2019
plant and machinery 184 000
office equipment 94 000
Inventory at 1 January 2019
watches finished goods (cost) 40 000
watches work in progress 9 000
raw materials 12 500
clocks 28 400
Direct wages 168 000
Manufacturing overheads 63 500
Rent and rates 68 000
Administrative expenses 94 000

The following information is also available.

1 Manufactured watches are transferred to the trading account at production cost plus a mark-up of 20%.

2 Inventory at 31 December 2019 is as follows:

$
watches finished goods (at transfer price) 54 000
watches work in progress 9 700
raw materials 13 400
clocks 29 600

3 Prepaid rent and rates at 31 December 2019 were $4000.

4 Rent and rates are allocated between manufacturing and administrative expenses in the ratio of 3 : 2.

5 Depreciation is provided as follows:

plant and machinery 25% per annum using the reducing balance method
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office equipment 15% per annum using the straight-line method

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(a) State:
REQUIRED

(i) the meaning of the term ‘work in progress’. [1]

(ii) how work in progress is valued. [2]

(b) Prepare the manufacturing account (for watches) for the year ended 31 December 2019. [7]

(c) Calculate the gross profit for the year ended 31 December 2019 on the sale of watches and
clocks. [2]

(d) Prepare an extract from the income statement for the year ended 31 December 2019, showing the
gross profit, the manufacturing profit and the adjustment of the provision for unrealised profit. [3]

(e) Explain the accounting treatment in the income statement and the statement of financial position
of the provision for unrealised profit. Support your answer with reference to the accounting
concepts. [5]

Additional information

The directors are considering whether they should stop selling watches and sell only clocks in the
future.

(f) Advise the directors whether they should sell only clocks in the future. Justify your answer with
reference to your calculations in (c) and (d). [5]
Mar/20
T Limited, a manufacturing company, extracted the following balances from its books of account for the year
ended 31 December 2019.

$
Sales revenue 782 000
Purchases of raw materials 200 400
Direct wages 206 400
Direct manufacturing expenses 8 600
Rent and rates 72 000
Repairs 18 000
Carriage inwards 6 600
Carriage outwards 16 300
Inventory at 1 January 2019
Raw materials 17 300
Work in progress 20 400
Finished goods (cost) 55 000
Other administrative expenses 66 200

The following information is also available.

1 T Limited transfers the finished goods to the trading section of the income statement at total
production costs plus a mark-up which is not constant. The transfer price represents the amount
that T Limited would have had to pay if the goods were purchased from an outside supplier.

2 The transfer value for the year ended 31 December 2019 was $632 400. The mark-up for the 2018
transfer value was 20%.

3 Inventory at 31 December 2019:

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REQUIRED $
Raw materials 18 700
Work in progress 21 500
Finished goods (at transfer price) 75 888

4 At 31 December 2019, rent and rates remaining unpaid amounted to $3000.

5 The depreciation charge for the year 2019 amounted to $48 000.

6 The following expenses are to be apportioned as follows:

Factory Administrative
Rent and rates 3/5 2/5
Repairs 3/4 1/4
Depreciation 2/3 1/3

Answer the following questions in the Question Paper. Questions are printed here for
reference only.

(a) Prepare the manufacturing account for the year ended 31 December 2019. [8]

(b) Prepare the income statement for the year ended 31 December 2019. [7]

(c) Calculate the amount at which finished goods are included in inventory at 31 December 2019.
[2]

(d) Explain, with the support of accounting concepts, the treatment of unrealised profit on finished
goods in both the income statement and statement of financial position. [5]

(e) Advise the directors of T Limited whether or not they should continue basing the transfer price on
the price paid to an outside supplier. Justify your answer. [3]

ON/17/31
1 Ted is the owner of a manufacturing business.

The following information is available for the year ended 31 December 2016:

$
Factory machinery – at cost 330 000
Office equipment – at cost 142 000
Provision for depreciation at 1 January 2016
Factory machinery 276 000
Office equipment 67 000
Inventory at 1 January 2016
Raw materials 52 000
Work in progress 97 000
Finished goods (at cost) 122 000
Revenue 4 268 000
Purchases of raw materials 484 000
Factory direct wages 626 000
Factory indirect wages 132 000
Office salaries 548 000
Carriage inwards 21 000
Carriage outwards 87 600
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Direct expenses 120 000
REQUIRED
Factory overheads 510 900
General office expenses 276 000
Insurance and rates 92 000
Rent 440 000
Heat and light 178 000

Additional information

1 Goods are transferred from the factory at a mark-up of 20%. Increase in provision for unrealised
profit at 31 December 2016 amounted to $15 840.

2 Inventory at 31 December 2016:

$
Raw materials 67 000
Work in progress 102 000
Finished goods ?

3 Non-current assets are depreciated at 15% per annum using the reducing balance method.

4 At 31 December 2016:

$
Rent owing 40 000
Insurance and rates prepaid 6 000

Insurance and rates, rent and heat and light are apportioned ¾ factory and ¼ general office.

5 Production for the year ended 31 December 2016 was 80 000 units.

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(a) Explain why a mark-up is added to the factory cost of production. [3]

(b) Prepare the manufacturing account for the year ended 31 December 2016.

[10]

(c) Prepare the trading section of the income statement to show the gross profit for the year
ended 31 December 2016. [6]

(d) Prepare an extract from the statement of financial position to show the value of
finished goods inventory at 31 December 2016. [2]

Additional information

In February 2017, Ted was approached by an existing customer for an extra order of 5000 units.
The budgeted production for 2017 was already set at the maximum production capacity. Ted
considered whether or not to source the extra 5000 units from an external supplier at a cost of
$28 per unit.

REQUIRED

(e) Advise Ted whether or not he should have accepted the extra order. Justify your answer. [4]

MJ/17/32
1 Richard Ang is a sole proprietor manufacturing one type of sofa bed. The following balances
are extracted from his books of account at 31 July 2016.

$
Revenue 986 000
Purchases of direct materials 207 600
Carriage inwards 6 800
Carriage outwards 17 500
Returns inwards 12 000
Factory wages
Direct 168 000
Indirect 51 400
Overheads
Factory 155 000
Office 194 000

Additional information

1 Richard maintains a provision for unrealised profit account. Completed products are
transferred from the factory at a mark-up of 20%.

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2 Inventories at 31 July 2015 were:

$
Raw materials 14 800
Work in progress 23 500
Finished goods (at cost) 32 000

3 Inventories at 31 July 2016 were:

$
Raw materials 16 400
Work in progress 20 200
Finished goods (at transfer price) 54 000

4 Unpaid direct wages at 31 July 2016 amounted to $3500.

5 Rent had been allocated to factory overheads and office overheads at $24 000 and $16 000
respectively. The allocation should have been in the ratio of 3 : 1 respectively.

REQUIRED

(a) Prepare the manufacturing account for the year ended 31 July 2016.

(b) Prepare an income statement for the year ended 31 July 2016.

additional information

Richard Ang thought of taking some of the finished goods inventory at 31 July 2016 to help his
sister set up a furniture business on the same day.

REQUIRED

(c) Prepare an extract from the statement of financial position of Richard Ang’s business
at 31 July 2016 to show how inventories are recorded.[3]

(d) Explain why it is important for Richard to create a provision for unrealised profit.[4]

(e) State two advantages and two disadvantages to Richard Ang of helping his sister set up her
business. [4]

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