Part 6 • Special accounting procedures

(/V) New sports equipment is sold to members at cost plus 50%. Used equipment is sold off to mem-
bers at book valuation. Half the sports equipment bought in the year (all from a cash and carry
supplier) has been used within the club, and half made available for sale, new, to members. The
'used equipment at valuation' figure in the 31 December 2015 statement of financial position
is to remain at £700.
(v) Closing cafe inventory is £850, and £80 is owed to suppliers at 31 December 2015.

Required:
(a) Calculate the profit on cafe operations and the profit on sale of sports equipment.
(fa) Prepare a statement of subscription income for 2015.
(c) Prepare an income and expenditure statement for the year ending 31 December 2015, and state-
ment of financial position as at 31 December 2015.
(d) Why do life subscriptions appear as a liability?

{Association of Chartered Certified Accountants)

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chapter

Manufacturing accounts
37
,

Learning objectives
• •••••
After you have studied this chapter, you should be able to:

• calculate prime cost and production cost of goods manufactured

• draw up a manufacturing account and statement of profit or loss

• adjust the manufacturing account in respect of work-in-progress

Introduction

In this chapter, you'll learn how to prepare manufacturing accounts and the reasons for
doing so.

Manufacturing: not retailing

We now have to deal with businesses which are manufacturers. For these businesses, a manufac-
turing account is prepared in addition to the statement of profit or loss. It is produced for internal
use only. People other than the owners and managers of the organisation concerned rarely see a
manufacturing account.
If a business is using manufacturing accounts, instead of a figure for purchases (of finished goods) the
trading account will contain the cost of manufacturing the goods that were manufactured during the
period. The manufacturing account is used to calculate and show the cost of manufacturing those goods.
The figure it produces that is used in the trading account is known as the production cost.

Divisions of costs

In a manufacturing business the costs are divided into different types. These may be summarised
in chart form as in Exhibit 37.1:

Exhibit 37.1

Direct materials
Direct labour > Prime cost
Direct expenses Production cost
Plus
Indirect manufacturing costs Total cost
Plus
Administration expenses
Selling and distribution expenses
Financial charges

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The prime cost items and the other production cost items are shown in the manufacturing
account. The administration expenses, selling and distribution expenses and the financial charges
appear in the statement of profit or loss.

Direct and indirect costs

With reference to Exhibit 37.1, when you see the word direct followed by a type of cost, you know
that it has been possible to trace the costs to an item being manufactured.
As shown in the chart, the sum of all the direct costs is known as the prime cost. If a
manufacturing-related cost cannot easily be traced to the item being manufactured, then it is an
indirect cost and will be included under indirect manufacturing costs (which are also sometimes
known as 'factory overhead expenses'). 'Production cost' is the sum of prime cost plus the indirect
manufacturing costs.
For example, the wages of a machine operator making a particular item will be direct labour.
The wages of a foreman in charge of many men on different jobs will be indirect labour, and will
be part of the indirect manufacturing costs. Other examples of costs being direct costs would be:

1 Cost of raw materials including carriage inwards on those raw materials.

2 Hire of special machinery for a job.

Think about it for a minute and then list five costs you think are direct and five
that you think are indirect.

Indirect manufacturing costs

'Indirect manufacturing costs' are all those costs which occur in the factory or other place where
production is being done, but which cannot easily be traced to the items being manufactured.
Examples are:

• wages of cleaners
• wages of crane drivers
• rent of a factory
• depreciation of plant and machinery
• costs of operating forklift trucks
• factory power
• factory lighting.

Administration expenses

'Administration expenses' consist of such items as managers' salaries, legal and accounts
charges, the depreciation of accounting machinery and secretarial salaries.

Selling and distribution expenses

'Selling and distribution expenses' are items such as sales staff's salaries and commission, carriage
outwards, depreciation of delivery vans, advertising and display expenses.

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Financial charges

'Financial charges' are expense items such as bank charges and discounts allowed.

Place a tick in the appropriate column for each of the following cost items:

Direct Direct Direct Indirect Administration Selling and Financial

materials labour expenses manufacturing expenses distribution charges
costs expenses
(a) Purchases of raw materials
(b) Direct wages
(c) General factory expenses
(d) Depreciation of machinery
(e) Commission on sales
(f) Factory rent
(g) Carriage inwards of raw
materials
(h) Royalties paid
{/) Inventory of raw materials
(/) Administration salaries
{k) Indirect labour
(/) Bank charges
(m) Carriage outwards
(n) Discounts allowed
(o) Factory lighting

Format of financial statements

Manufacturing account section

This is debited with the production cost of goods completed during the accounting period. It
contains costs of:

• direct materials;
• direct labour;
• direct expenses; and
• indirect manufacturing costs.

The manufacturing account includes all purchases of raw materials, including the inventory
adjustments for raw materials. It also includes inventory adjustments for work-in-progress (goods
that are partly completed at the end of a period). Let's put this into a series of steps:

1 Add opening inventory of raw materials to purchases and subtract the closing inventory of raw
materials.
2 Add in all the direct costs to get the prime cost.
3 Add in all the indirect manufacturing costs.
4 Add the opening inventory of work-in-progress and subtract the closing inventory of work-in-
progress to get the production cost of all goods completed in the period.

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Thus, when completed, the manufacturing account shows the total of production cost that
relates to those manufactured goods that have been available for sale during the period. This
figure will then be transferred down to the statement of profit or loss where it will replace the
entry for purchases.

Trading account section of the statement of profit or loss

This account includes:

• production cost brought down from the manufacturing account

• opening and closing inventory of finished goods
• sales.

When completed, this account shows the gross profit. This is then carried down to the profit and
loss account part.
The manufacturing account and the trading account can be shown as in Exhibit 37.2.

Exhibit 37.2
Manufacturing Account

Production costs for the period: £

Direct materials xxx
Direct labour xxx
Direct expenses xxx
Prime cost xxx
Indirect manufacturing costs xxx
Production cost of goods completed c/d to trading account xxx

Trading Account

£ £
Sales xxx
Less Production cost of goods sold:
Opening inventory of finished goods (A) xxx
-te-Add Production costs of goods completed b/d xxx
xxx
Less Closing inventory of finished goods (B) (xxx)
Gross profit (xxx)
xxx

(A) is production costs of goods unsold in previous period.

(B) is production costs of goods unsold at end of the current period.

Profit and loss section of the statement of profit or loss

This is prepared in the way you learnt in earlier chapters in this book. You know, therefore, that
it includes:

• gross profit brought down from the trading account

• all administration expenses
• all selling and distribution expenses
• all financial charges.

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However, some of the items you would normally put in the profit and loss account part are already
included in the manufacturing account, e.g. depreciation on machines, and canteen wages. When
completed, this account will show the net profit.

Why do you think some expenses have been moved to the manufacturing
account?

A worked example of a manufacturing account

Exhibit 37.3 shows the necessary details for a manufacturing account. It has been assumed that
there were no partly completed units (work-in-progress) either at the beginning or end of the
period.

Exhibit 37.3

Details of production costs for the year ended 31 December 2014:

£
1 January 2014, inventory of raw materials 5,000
31 December 2014, inventory of raw materials 7,000
Raw materials purchased 80,000
Manufacturing (direct) wages 210,000
Royalties 1,500
Indirect wages 90,000
Rent of factory - excluding administration and selling and distribution blocks 4,400
Depreciation of plant and machinery in factory 4,000
General indirect expenses 3,100

Manufacturing Account for the year ending 31 December 2014

£ £
Inventory of raw materials 1.1.2014 5,000
Add Purchases 80,000
85,000
Less Inventory of raw materials 31.12.2014 (7,000)
Cost of raw materials consumed 78,000
Manufacturing wages 210,000
Royalties 1,500
Prime cost 289,500
Indirect manufacturing costs
Rent 4,400
Indirect wages 90,000
General expenses 3,100
Depreciation of plant and machinery 4,000
101,500
Production cost of goods completed c/d 391,000

Sometimes, if a business has produced less than the customers have demanded, it may buy in some
finished goods. In this case, the trading account will have both a figure for purchases of finished
goods and a figure for production cost of goods completed.

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Work-in-progress

The production cost to be carried down to the trading account is that of production cost of goods
completed during the period. If items have not been completed, they cannot be sold. Therefore,
they should not appear in the trading account.
For instance, if we have the following information, we can calculate the transfer to the trading
account:

£
Total production costs expended during the year 50,000
Production costs last year on goods not completed last year, but completed in this year
(work-in-progress) 3,000
Production costs this year on goods which were not completed by the year end
(work-in-progress) 4,400

The calculation is:

Total production costs expended this year 50,000

Add Costs from last year, in respect of goods completed in this year (work-in-progress) 3,000
53,000
Less Costs in this year, for goods to be completed next year (work-in-progress) (4,400)
Production costs expended on goods completed this year 48,600

Another worked example

Exhibit 37.4

£
1 January 2014, Inventory of raw materials 8,000
31 December 2014, Inventory of raw materials 10,500
1 January 2014, Work-in-progress 3,500
31 December 2014, Work-in-progress 4,200
Year to 31 December 2014:
Wages: Direct 39,600
Indirect 25,500
Purchase of raw materials 87,000
Fuel and power 9,900
Direct expenses 1,400
Lubricants 3,000
Carriage inwards on raw materials 2,000
Rent of factory 7,200
Depreciation of factory plant and machinery 4,200
Internal transport expenses 1,800
Insurance of factory buildings and plant 1,500
General factory expenses 3,300

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This information produces the following manufacturing account:

Manufacturing Account for the year ending 31 December 2014
~£ r
Inventory of raw materials 1.1.2014 8,000
Add Purchases 87,000
Carriage inwards 2,000
97,000
Less Inventory of raw materials 31.12.2014 (10,500)
Cost of raw materials consumed 86,500
Direct wages 39,600
Direct expenses 1,400
Prime cost 127,500
Indirect manufacturing costs:
Fuel and power 9,900
Indirect wages 25,500
Lubricants 3,000
Rent 7,200
Depreciation of plant and machinery 4,200
Internal transport expenses 1,800
Insurance 1,500
General factory expenses 3,300
56,400
183,900
Ac/c/Work-in-progress 1.1.2014 3,500
187,400
Less Work-in-progress 31.12.2014 (4,200)
Production cost of goods completed c/d 183,200

The trading account is concerned with finished goods. If in the above example there had been
£3,500 inventory of finished goods at 1 January 2014 and £4,400 at 31 December 2014, and the
sales of finished goods amounted to £250,000 then the trading account would be:
Trading Account for the year ending 31 December 2014

£ £
Sales 250,000
Less Cost of goods sold:
Inventory of finished goods 1.1.2014 3,500
Add Production cost of goods completed b/d 183,200
186,700
Less Inventory of finished goods 31.12.2014 (4,400)
182,300
Gross profit c/d 67,700

The profit and loss section is then constructed in the normal way.

Apportionment of expenses

Quite often expenses will have to be split between -

• Indirect manufacturing costs: to be charged in the manufacturing account section;

and
• Administration expenses:
• Selling and distribution expenses: to be charged in the profit and loss section.
• Financial charges:

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Part 6 • Special accounting procedures

An example of this could be the rent expense. If the rent is paid separately for each part of the
organisation, then it is easy to charge the rent to each sort of expense. However, only one figure
of rent may be paid, without any indication as to how much is for the factory, how much is for
the selling and distribution building and how much is for the administration building.
How the rent expense will be apportioned in the latter case will depend on the circumstances,
using the most equitable way of doing it. A range of methods may be used. Common ones include
apportionment on the basis of:

• floor area
• property valuations of each part of the buildings and land.

Full set of financial statements

A complete worked example is now given. Note that in the profit and loss account part the
expenses have been separated so as to show whether they are administration expenses, selling and
distribution expenses, or financial charges.
The trial balance in Exhibit 37.5 has been extracted from the books of J. Jarvis, Toy Manu-
facturer, as at 31 December 2014.

Exhibit 37.5
J. Jarvis
Trial Balance as at 31 December 2014
Dr Cr

£ £
Inventory of raw materials 1.1.2014 21,000
Inventory of finished goods 1.1.2014 38,900
Work-in-progress 1.1.2014 13,500
Wages (direct £180,000; factory indirect £145,000) 325,000
Royalties 7,000
Carriage inwards (on raw materials) 3,500
Purchases of raw materials 370,000
Productive machinery (cost £280,000) 230,000
Administration computers (cost £20,000) 12,000
General factory expenses 31,000
Lighting 7,500
Factory power 13,700
Administration salaries 44,000
Sales reps' salaries 30,000
Commission on sales 11,500
Rent 12,000
Insurance 4,200
General administration expenses 13,400
Bank charges 2,300
Discounts allowed 4,800
Carriage outwards 5,900
Sales 1,000,000
Accounts receivable and accounts payable 142,300 64,000
Bank 16,800
Cash 1,500
Drawings 60,000
Capital as at 1.1.2014 357,800
1,421,800 1,421,800

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Notes at 31.12.2014:

1 Inventory of raw materials £24,000; inventory of finished goods £40,000; work-in-progress £15,000.
2 Lighting, rent and insurance are to be apportioned: factory 5/6, administration 1/6-
3 Depreciation on productive machinery and administration computers at 10 per cent per annum
on cost.
J. Jarvis
Manufacturing Account and Statement of Profit or Loss for the year ending 31 December 2014

£ £ £
Inventory of raw materials 1.1.2014 21,000
Add Purchases 370,000
Carriage inwards 3,500
394,500
Less Inventory raw materials 31.12.2014 (24,000)
Cost of raw materials consumed 370,500
Direct labour 180,000
Royalties 7,000
Prime cost 557,500
Indirect manufacturing costs:
General factory expenses 31,000
Lighting 5/6 6,250
Power 13,700
Rent 5/6 10,000
Insurance 5/6 3,500
Depreciation of productive machinery 28,000
Indirect labour 145,000
237,450
794,950
Add Work-in-progress 1.1.2014 13,500
808,450
Less Work-in-progress 31.12.2014 (15,000)
Production cost of goods completed c/d 793,450
Sales 1,000,000
Less Cost of goods sold:
Inventory of finished goods 1.1.2014 38,900
Add Production cost of goods completed b/d 793,450
832,350
Less Inventory of finished goods 31.12.2014 (40,000)
(792,350)
Gross profit 207,650
Administration expenses
Administration salaries 44,000
Rent Ve 2,000
Insurance Ve 700
General expenses 13,400
Lighting Ve 1,250
Depreciation of administration computers 2,000
63,350
Selling and distribution expenses
Sales reps' salaries 30,000
Commission on sales 11,500
Carriage outwards 5,900
47,400
Financial charges
Bank charges 2,300
Discounts allowed 4,800
7,100
(117,850)
Net profit 89,800 -T

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J. Jarvis
Statement of Financial Position as at 31 December 2014

Non-current assets £
Productive machinery at cost 280,000
Less Depreciation to date (78,000)
202,000
Administration computers at cost 20,000
Less Depreciation to date (10,000)
10,000
212,000
Current assets
Inventory
Raw materials 24,000
Finished goods 40,000
Work-in-progress 15,000
Accounts receivable 142,300
Bank 16,800
Cash 1,500
239,600
451,600
Less Current liabilities
Accounts payable (64,000)
387,600
Financed by
Capital
Balance as at 1.1.2014 357,800
Add Net profit 89,800
447,600
Less Drawings (60,000)
387,600

Market value of goods manufactured

The financial statements of Jarvis, just illustrated, are subject to the limitation that the respective
amounts of the gross profit which are attributable to the manufacturing side or to the selling side
of the business are not known. A technique is sometimes used to bring out this additional infor-
mation. This method uses the cost which would have been involved if the goods had been bought
in their finished state instead of being manufactured by the business. This figure is credited to the
manufacturing account and debited to the trading account so as to throw up two figures of gross
profit instead of one. It should be pointed out that the net profit will remain unaffected. All that
will have happened will be that the figure of £207,650 gross profit will be shown as two figures
instead of one. When added together, they will total £207,650.
Assume that the cost of buying the goods instead of manufacturing them had been £950,000.
The relevant parts of the Manufacturing Account and Statement of Profit or Loss will then be:

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 Chapter 37 • Manufacturing accounts

Manufacturing Account and Statement of Profit or Loss extract for the year ending
31 December 2014

£ £
Market value of goods completed 950,000
Less Production cost of goods completed (as before) (793,450)
Gross profit on manufacture c/d 156,550
Sales 1,000,000
Inventory of finished goods 1.1.2014 38,900
Add Market value of goods completed b/d 950,000
988,900
Less Inventory of finished goods 31.12.2014 (40,000)
(948,900)
Gross profit on trading c/d 51,100
Gross profit
On manufacturing 156,550
On trading 51,100
207,650

Learning outcomes
•••••••••
You should now have learnt:

1 Why manufacturing accounts are used.

2 How to prepare a manufacturing account and statement of profit or loss.

3 That the trading account section of the statement of profit or loss is used for calculating the
gross profit made by selling the goods manufactured.

4 That the profit and loss account section of the statement of profit or loss shows as net profit
what is left of gross profit after all administration, selling and distribution and finance costs
incurred have been deducted.

5 That work-in-progress, both at the start and the close of a period, must be adjusted so as to
identify the production costs of goods completed in the period.

Answers to activities

37.1 You may have included some of the following:

Direct costs Indirect costs

(1) raw materials canteen wages
(2) machine operator's wages business rates
(3) packer's wages rent
(4) machine set-up costs insurance
(5) crane hire for building contract storage of finished goods costs
However, you can only really do a split like this if you have a specific job or product in mind.
You must first identify the 'cost object', that is, the item you are making or providing. Taking
the example of a construction company building a hotel (it is engaged in other similar projects
at the same time). The direct and indirect costs may include:
Direct costs Indirect costs
(1) concrete site canteen wages
(2) forklift truck operator's wages company lawyer's salary
(3) bricklayer's wages company architect's salary
(4) steel girders company headquarters insurance
(5) windows company warehousing costs

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Now you should see that the indirect costs are not solely incurred in order to build the hotel. This is
the key. Direct costs are those costs you can specifically link to a specific job. All the other costs of
a job are indirect.

37.2 Direct materials (a) (g) (/)

Direct labour (b)
Direct expenses (h)
Indirect manufacturing costs (c) (d) (f) (k) (o)
Administration expenses (j)
Selling and distribution expenses (e) (m)
Financial charges (/) (n)

37.3 Because only administration expenses, selling and distribution expenses, and financial charges appear
in the profit and loss account part when a manufacturing account is being used. The rest all arose
because manufacturing was taking place and can be directly or indirectly attributed to the products
being produced, so they appear in the manufacturing account.

Review questions

37.1 A business both buys loose tools and also makes some itself. The following data is available
concerning the years ended 31 December 2014, 2015 and 2016.

2014 £
Jan 1 Inventory of loose tools 6,000
During the year:
Bought loose tools from suppliers 8,000
Made own loose tools: the cost of wages of employees being £1,300
and the materials cost £900
Dec 31 Loose tools valued at 12,000
2015
During the year:
Loose tools bought from suppliers 4,000
Made own loose tools: the cost of wages of employees being £1,600
and the materials cost £1,200
Dec 31 Loose tools valued at 12,800
2016
During the year:
Loose tools bought from suppliers 7,200
Made own loose tools: the cost of wages of employees being £1,000 320
and the materials cost £1,340. Received refund from a supplier for
faulty tools returned to him
Dec 31 Loose tools valued at 14,600

You are to draw up the Loose Tools Account for the three years, showing the amount transferred as
an expense in each year to the Manufacturing Account.

37.2 Using whichever of the following figures are required, prepare a manufacturing account and
trading account for 2017. The manufacturing account should show clearly the prime cost of manu-
facture and the production cost of finished goods produced.

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 Chapter 37 • Manufacturing accounts

£
Inventory, 1 January 2017:
Raw materials 24,600
Partly finished goods 20,200
Finished goods 18,600
Inventory, 31 December 2017:
Raw materials 31,300
Partly finished goods 23,400
Finished goods 29,200
Purchases of raw materials 165,400
Carriage on raw materials 9,100
Salaries and wages: factory (including £44,500 for management and supervision) 151,400
Salaries and wages: general office 28,400
Rent and business rates (three-quarters works, one-quarter office) 3,000
Lighting and heating (seven-eighths works, one-eighth office) 5,600
Repairs to machinery 3,400
Depreciation of machinery 5,600
Factory direct expenses 730
Insurance of plant and machinery 860
Sales 406,120

Note: partly finished goods are valued at their production cost.

37.3A From the following information, prepare a manufacturing account and statement of profit
or loss for the year ending 31 December 2016 and a statement of financial position as at 31 December
2016 for J. Jones Limited.

£ £
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 business rates 21,000
Sales 482,000
Returns inward 7,000
General office expenses 9,000
Repairs to plant and machinery 9,000
Inventory at 1 January 2016:
Raw materials 21,000
Work-in-progress 14,000
Finished goods 23,000
Sundry accounts payable 37,000
Capital account 457,000
Freehold premises 410,000
Plant and machinery 80,000
Accounts receivable 20,000
Accumulated provision for depreciation on plant and machinery 8,000
Cost in hand 11,000
984,000 984,000

Make provision for the following:

(/) Inventory in hand at 31 December 2016:
Raw materials £25,000
Work-in-progress £11,000
Finished goods £26,000.
Part 6 • Special accounting procedures

(//) Depreciation of 10% on plant and machinery using the straight line method.
(//V) 80% of fuel and light and 75% of rent and rates to be charged to manufacturing.
(/V) Allowance for doubtful debts: 5% of sundry accounts receivable.
M £4,000 outstanding for fuel and light.
ivi) Rent and business rates paid in advance: £5,000.
(wV) Market value of finished goods: £382,000.

37.4 Prepare a manufacturing account and statement of profit or loss from the following balances
of Z. Varga for the year ending 31 December 2017.
£
Inventory at 1 January 2017:
Raw materials 50,800
Work-in-progress 62,200
Finished goods 46,520
Purchases: Raw materials 183,070
Carriage on raw materials 3,920
Direct labour 168,416
Office salaries 66,838
Rent 10,400
Office lighting and heating 8,840
Depreciation: Works machinery 20,400
Office equipment 4,600
Sales 637,244
Factory fuel and power 16,240
Rent is to be apportioned: Factory Office V4. Inventory at 31 December 2017 was: Raw materials
£57,800; Work-in-progress £49,200; Finished goods £57,692.

37.5 From the following information, draw up a manufacturing account and the trading account section
of the statement of profit or loss for the six months ending 30 September 2017. You should show clearly:

(a) Cost of raw materials consumed.

(fa) Prime cost of production.
(c) Production cost of finished goods.
(c/) Gross profit on sales.
£
Inventory, 1 April 2017:
Raw materials 2,990
Work-in-progress 3,900
Finished goods 15,300
Inventory, 30 September 2017:
Raw materials 4,200
Work-in-progress 3,600
Finished goods 17,700
Purchases of raw materials 15,630
Carriage on raw materials 126
Direct wages 48,648
Factory general expenses 7,048
Office salaries 22,200
Depreciation of office furniture 420
Carriage outwards 191
Advertising 1,472
Bad debts 200
Sales less returns 112,410
Sales of scrap 1,317
Discounts received 188
Depreciation of factory equipment 4,200
Rent and business rates (factory three-quarters, office one-quarter) 2,800

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3 7.6 A From the following figures prepare a manufacturing account and the trading account section
of the statement of profit or loss so as to show:

(a) Cost of raw materials used in production.

(b) Prime cost.
(c) Production cost of finished goods produced.
(d) Cost of goods sold.
(e) Gross profit.

£
Inventory at 1 January 2017:
Raw materials 10,500
Goods in course of manufacture (at factory cost) 2,400
Finished goods 14,300
Inventory at 31 March 2017:
Raw materials 10,200
Goods in course of manufacture (at factory cost) 2,900
Finished goods 13,200
Expenditure during the quarter:
Purchases of raw materials 27,200
Factory wages: direct 72,600
indirect 13,900
Carriage on purchases of raw materials 700
Rent and business rates of the factory 1,200
Power 2,000
Depreciation of machinery 3,900
Repairs to factory buildings 1,300
Sundry factory expenses 900
Sales during the quarter 160,400

37.7 E. Wilson is a manufacturer. His trial balance at 31 December 2017 is as follows:

Delivery van expenses 1,760

Lighting and heating: Factory 7,220
Office 1,490
Manufacturing wages 72,100
General expenses: Factory 8,100
Office 1,940
Sales reps: commission 11,688
Purchase of raw materials 57,210
Rent: Factory 6,100
Office 2,700
Machinery (cost £40,000) 28,600
Office equipment (cost £9,000) 8,200
Office salaries 17,740
Accounts receivable 34,200
Accounts payable 9,400
Bank 16,142
Sales 194,800
Van (cost £6,800) 6,200
Inventory at 31 December 2016:
Raw materials 13,260
Finished goods 41,300
Drawings 24,200
Capital 155,950
360,150 360,150

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Prepare the manufacturing account and statement of profit or loss for the year ending 31 December
2017 and a statement of financial position as at that date. Give effect to the following adjustments:

1 Inventory at 31 December 2017; raw materials £14,510; finished goods £44,490. There is no
work-in-progress.
2 Depreciate machinery £3,000; office equipment £600; van £1,200.
3 Manufacturing wages due but unpaid at 31 December 2017 £550; office rent prepaid £140.

37.8 The financial year end of Mendip Limited is 30 June. At 30 June 2017, the following balances
are available:

£
Freehold land and buildings at cost 143,000
Plant and machinery at cost 105,000
Accumulated depreciation on plant and machinery 23,000
Purchase of raw materials 130,100
Sales 317,500
Factory rates 3,000
Factory heat and light 6,500
Accounts receivable 37,200
Accounts payable 30,900
Wages (including £15,700 for supervision) 63,000
Direct factory expenses 9,100
Selling expenses 11,000
Office salaries and general expenses 43,000
Bank 24,500
General reserve 30,000
Retained profits 18,000
Inventory 1 July 2016: Raw materials 20,000
Finished goods 38,000
Dividends paid: Preference shares 840
Ordinary shares 20,000

(7) The inventory at 30 June 2017 was: raw materials £22,000; finished goods £35,600.
(77) Salaries include £6,700 for directors' fees.
(Hi) Depreciation is to be charged at 10% on cost of plant and machinery.

Required:
Prepare a manufacturing account and statement of profit or loss for the year ending 30 June 2017.

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 Chapter 37 • Manufacturing accounts

37.9A Jean Marsh owns a small business making and selling children's toys. The following trial
balance was extracted from her books on 31 December 2017.

Dr Cr

£ £
Capital 15,000
Drawings 2,000
Sales 90,000
Inventory at 1 January 2017:
Raw materials 3,400
Finished goods 6,100
Purchases of raw materials 18,000
Carriage inwards 800
Factory wages 18,500
Office salaries 16,900
J. Marsh; salary and expenses 10,400
General expenses:
Factory 1,200
Office 750
Lighting 2,500
Rent 3,750
Insurance 950
Advertising 1,400
Bad debts 650
Discount received 1,600
Carriage outwards 375
Plant and machinery, at cost less depreciation 9,100
Car, at cost less depreciation 4,200
Bank 3,600
Cash in hand 325
Accounts receivable and accounts payable 7,700 6,000
112,600 112,600

You are given the following additional information.

1 Inventory at 31 December 2017

Raw materials £2,900

Finished goods £8,200

There was no work-in-progress.

2 Depreciation for the year is to be charged as follows:

Plant and machinery £1,500

Car £500

3 At 31 December 2017 insurance paid in advance was £150 and office general expenses unpaid
were £75.
4 Lighting and rent are to be apportioned: 4/5 Factory, V5 Office.
Insurance is to be apportioned: 3/A Factory, Office.
5 Jean is the business's salesperson and her salary and expenses are to be treated as a selling
expense. She has sole use of the business's car.

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Part 6 • Special accounting procedures

Questions:
For the year ended 31 December 2017 prepare
(a) the manufacturing account showing prime cost and factory cost of production.
(fa) the trading account section of the statement of profit or loss.
(c) the profit and loss account section of the statement of profit or loss, distinguishing between
administrative and selling costs.
(d) a statement of financial position as at 31 December 2017.Author's Note

(Midland Examining Group: GCSE)

Author's Note: Part (d) of the question was not in the original examination question. It has been
added to give you further practice.

37.10 The following list of balances as at 31 July 2016 has been extracted from the books of Jane
Seymour who commenced business on 1 August 2015 as a designer and manufacturer of kitchen
furniture:

£
Plant and machinery, at cost on 1 August 2015 60,000
Motor vehicles, at cost on 1 August 2015 30,000
Loose tools, at cost 9,000
Sales 170,000
Raw materials purchased 43,000
Direct factory wages 39,000
Light and power 5,000
Indirect factory wages 8,000
Machinery repairs 1,600
Motor vehicle running expenses 12,000
Rent and insurances 11,600
Administrative staff salaries 31,000
Administrative expenses 9,000
Sales and distribution staff salaries 13,000
Capital at 1 August 2015 122,000
Sundry accounts receivable 16,500
Sundry accounts payable 11,200
Balance at bank 8,500
Drawings 6,000

Additional information for the year ended 31 July 2016:

(/) It is estimated that the plant and machinery will be used in the business for ten years and the
motor vehicles used for four years: in both cases it is estimated that the residual value will be
nil. The straight line method of providing for depreciation is to be used.
(//) Light and power charges accrued due at 31 July 2016 amounted to £1,000 and insurances prepaid
at 31 July 2016 totalled £800.
(Hi) Inventory was valued at cost at 31 July 2016 as follows:

Raw materials £7,000

Finished goods £10,000

(/V) The valuation of work-in-progress at 31 July 2016 included variable and fixed factory overheads
and amounted to £12,300.
(v) Two-thirds of the light and power and rent and insurances costs are to be allocated to the factory
costs and one-third to general administration costs.
(vi) Motor vehicle costs are to be allocated equally to factory costs and general administration costs.
(vii) Goods manufactured during the year are to be transferred to the trading account at £95,000.
(viii) Loose tools in hand on 31 July 2016 were valued at £5,000.

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