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

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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.

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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.

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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

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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

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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)

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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

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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

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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 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

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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

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376,000
Less: Work-in-progress 11,000
365,000
Manufacturing profit 17,000
Market value of goods 382,000 382,000
manufactured

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

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

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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 1 st 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

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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

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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

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