Theory question 105
Manufacturing AccountsSection B – Financial Accounting Practice (answer three questions only from this section)
5. Prosperity Industries is a small business producing and selling food beverage. The following list of balances has been extracted from the books as at 31 December, 1998.
Sales N225,000
Purchases of raw materials N45,000
Carriage inwards on raw materials N2,000
Carriage outwards on finished goods N1,000
Wages – Factory operatives N46,250
Salaries – Factory supervisors N11,250
– Management and clerical staff N31,000
– Sales and marketing staff N26,000
General expenses N4,875
Electricity and rent N16,000
Insurance N2,375
Advertising N5,000
Discounts received N1,500
Plant and machinery N23,000
Delivery van N9,000
Stocks at 1/1/98: Raw materials N8,500; Work-in-progress N5,250; Finished goods N10,000
Stocks at 31/12/98: Raw Materials N7,250; Work-in-progress N8,000; Finished goods N12,500
Additional information:
(a) Depreciation for the year is to be charged as follows: Plant and machinery at 10% per annum. Delivery van at 20% per annum. (b) At 31/12/98 insurance prepaid was N375 and general expenses owing amounted to N125 (c) Apportionment of expenses is to be made as follows (Factory; Administration): Electricity and rent 80%; 20%. Insurance and general expenses 75%; 25%.
You are required to prepare: (i) Manufacturing Account; and (ii) a Trading and Profit and Loss Account for the year ended 31st December, 1998.
Show the model answer
Workings: insurance 2,375 − 375 = 2,000; general expenses 4,875 + 125 = 5,000; together 7,000 → factory 5,250, office 1,750. Electricity and rent 16,000 → factory 12,800, office 3,200.
(i) Manufacturing account: raw materials 8,500 + purchases 45,000 + carriage inwards 2,000 − closing 7,250 = 48,250 used; factory wages 46,250; prime cost 94,500.
Overheads: supervisors' salaries 11,250; electricity and rent 12,800; insurance and general expenses 5,250; depreciation of plant 2,300 (10% × 23,000); total 31,600. Add opening WIP 5,250, less closing WIP 8,000: cost of production 123,350.
(ii) Trading: sales 225,000; opening finished goods 10,000 + 123,350 − 12,500 = cost of sales 120,850; gross profit 104,150.
Profit and loss: add discounts received 1,500 = 105,650. Expenses: carriage outwards 1,000; management and clerical salaries 31,000; sales and marketing salaries 26,000; electricity and rent 3,200; insurance and general expenses 1,750; advertising 5,000; depreciation of delivery van 1,800 (20% × 9,000); total 69,750.
Net profit 35,900.
Factory costs go to the manufacturing account, selling and office costs to profit and loss.