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
Less: Purchases
Less: Returns Outwards
Net Purchases
Add: Carriage inwards

3000
4500
500
4000
200

4200
7200

Less: Closing stock

3300
3900

Add: Wages for modifications

Depreciation expense on equipment
Gross Profit

400
200

600

4500
6900
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Less: Expenses
Carriage outwards

300

Selling expenses

500

Depreciation expense on motor van

Net Profit

1000

1800
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 50
begin (valued at prime cost)
150
Less: work in progress at end 20
(valued at prime cost)
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

Prime cost

2000

Add: work-in-progress at beg

3000

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

Selling expenses

3200

300 Gross Profit b/d

Net Loss
300

200
100
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

Direct labour

1000

$
3300

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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

Goods manufactured at market value

3300

3300

3300 Sales

3200

Gross loss
3300

100
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

Direct labour

1000

Prime cost

2000

$
3300

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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

Manufacturing profit

3000
300
3300

3300

Goods manufactured at market value

3300

Less: closing stock

3300

Cost of goods sold

Gross profit

Provision for unrealised profit

300 Manufacturing profit

Stock (Year One)

Trading- closing

300

Stock (Year One)

3000

Trading- Closing

3300

Provision for unrealised profits (Year One)

Trading (Year Two)
Stock
Gross profit

3000 Sales

P&L

300

3200

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

6600

2200

600

200

6000

2000

Finished goods
Less: Provision for unrealised profit

Provision for unrealised profit

Profit and Loss

400 Balance b/d

Balance c/d

200

600

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)
Beginning stock
Add: Purchases

Trading
10000 Sales

12000

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

(ii)

7000

7990

10

Trading

Beginning stock

10000 Sales

Add: Purchases

12000

5000
15000

Less: Ending stock

7000

Stock loss

2000

Cost of goods sold

6000

Gross profit

6000
12000

Stock loss due to fire

12000

2000 Gross profit

6000

Beginning stock + Purchases = Ending Stock + Cost of goods sold + Stock Loss
10000

5000

7000

6000

Dr. Profit and Loss: stock loss due to fire

Cr. Trading account: Stock loss

2000
2000

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

Add: Purchases

10000

9000

20000
Less: Ending raw material

5000

Raw materials stolen

6000

Cost of raw material consumed

9000

9000
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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

Add: Purchases

10000

15000

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

482,000
7,000
9,000
9,000

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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
37,000
457,000
410,000
80,000
20,000
8,000
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

Add: Purchases

$
382,000

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

manufactured

382,000

382,000

Trading & Profit & Loss A/C for the year Ended 31-12-19-6
Beginning stock

23,000 Sales

Add: Production cost

382,000 Less: Sales Returns

482,000
7,000

405,000 Net Sales

Less: ending stock

475,000

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

Freehold premises

410,000

Add: Net Profit

Plant & Machinery

80,000

Less: Depreciation

16,000 64,000 474,000

457,000
73,000
530,000

Current Assets

Current liabilities

Stock- raw materials

25,000

Creditors

37,000

- Work-in-progress

11,000

Accruals

4,000

- Finished goods

26,000

Debtors
Less:Provision for B.D.
Prepayment
Cash in hand

41,000

20,000
1,000

19000
5,000
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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ii)

Less: Provision for unrealised profit on stock

Finished goods at cost
Extract of Balance Sheet at the end of the year
Finished goods at make-up price
Less: Provision for unrealised profit on stock
Finished goods at cost

600
6000
2200
200
2000

iii)
Provision for unrealised profit on stock
Profit and Loss a/c

400

Balance c/d

200

Balance b/d

600

600

600

Provision for unrealised profit on stock

Opening stock
Add: Manufactured at
transfer price

6600

Sales

27000

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)
Plant and machinery (bought 1st January 1980)
Motor vans (bought 1st January 1980)
Administrative wages
Loose tools bought
Light and power
Building repairs
Raw materials bought
Salesmens salaries
Drivers wages

900,000
80,000
10,000
18,000
6,400
40,000
20,000
273,400
29,000
24,000
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Advanced Level

Motor van expenses

Direct wages
General administration expenses
Indirect wages
Repairs to machinery
Rates and insurance

5,000
302,000
6,000
54,000
11,000
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

Less: ending stock

800,000

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

Depreciation
Administrative wages

2,000 Gross profit

18,000 Manufacturing profit

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

Net profit

900,000
300,000
160,000

40,000
322,000
460,000

460,000

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