#2
a. The company transfers good from a manufacturing account at a transfer price because
overall profitability of the business is recognized since the profit from manufacturing is
separated from the profit made elsewhere within the business.
b.
Osomo Ltd
Manufacturing account for the year ended 31 Dec 2014
$(000) $(000) $(000)
Opening inventory of raw materials 38
Purchases of raw materials 482
Less: returns outwards (4)
Add: carriage inwards 6 484
Less: closing inventory of raw materials (49)
Costs of raw materials consumed 473
Direct wages 485
Prime cost 958
Factory overheads
Factory utility charges 43
Indirect factory wages and salaries 47
Insurance 24
Maintenance of factory plant and machinery 27
Provision for depreciation of plant and machinery 63
Rent paid 102 306
1,264
Add: opening work in progress 29
Less: closing work in progress (33)
Production cost of manufactured goods 1,260
Factory profit @ 15% 189
Transfer price $1,449
c.
Osomo Ltd
Income statement for the year ended 31 Dec 2014
$(000) $(000)
Revenue 1,471
Less: cost of sales at transfer price
Opening inventory of finished goods 92
Add: Transfer price 1,449
Less: closing inventory of finished goods (138) (1,403)
Gross profit 68
Add: factory profit 189
Less: increase in provision of unrealized profit (6)
251
Less: expenses
Administration expenses 36
Insurance 8
Rent paid 34
Selling and distribution expenses 72 (150)
Profit from operations 101
Less: tax on profit (32)
Less: debenture interest (12)
Profit for the year $57
d.
Osomo Ltd
Provision for unrealized account for the year ended 31 Dec 2014
$(000) $(000)
Balance c/d 18 Balance b/d 12
Income statement 6
$18 $18
1 Jan 2015
Balance b/d 18
e. A company values their finished goods at transfer price, meaning, their accounting
treatment involves tracking goods at internal price rather than at costs or market price.
This happens when goods are completed, and they are recorded in the finished goods
inventory account at the transfer price, which includes both the direct costs and an
internal markup. This transfer price represents the value that would be charged if the
goods were transferred to another department or division within the company.
