Theory question 105
Manufacturing AccountsSection B – Financial Accounting Practice
5. The following balances were extracted from the books of A. Ade and Sons Ltd., a manufacturer of laundry soaps as at 31st December, 2002.
Stock 1/1/02: raw materials N18,900; work-in-progress N23,000; finished goods N17,000
Purchases of raw materials N72,000
Carriage on raw materials N840
Manufacturing wages N60,000
Rent N3,200
Rates N4,800
Selling expenses N5,100
Stock 31/12/02: raw materials N15,240; work-in-progress N36,178; finished goods N16,000
Depreciation of plant and equipment N7,200
Fuel N3,200
Office salaries N6,200
Discount allowed N2,800
Discount received N1,200
Returns inwards N2,120
Returns outwards N1,800
Factory salaries N4,540
Insurance N1,260
General expenses N4,260
Sales N228,200
Advertising N6,124
Carriage outwards N1,200
Bad debts N680
Additional information: (a) Rent, rates and insurance should be shared between factory and the office in the ratio of 4:1 respectively. (b) the goods are transferred to the sales department at cost plus 20%. (c) Salaries due are N1,200; general expenses paid in advance are N146 and insurance paid in advance is N400.
You are required to prepare manufacturing, Trading and Profit and Loss Account for the year ended 31st December, 2002.
Show the model answer
Manufacturing account: raw materials 18,900 + purchases 72,000 + carriage 840 − returns outwards 1,800 − closing 15,240 = 74,700; manufacturing wages 60,000; prime cost 134,700.
Overheads: rent 2,560 (4/5 × 3,200); rates 3,840; insurance 688 (4/5 × 860, after the 400 prepaid); depreciation 7,200; fuel 3,200; factory salaries 4,540; total 22,028. Add opening WIP 23,000, less closing WIP 36,178: cost of production 143,550. Add 20% manufacturing profit 28,710: transfer price 172,260.
Trading: sales 228,200 − returns inwards 2,120 = 226,080; opening finished goods 17,000 + 172,260 − 16,000 = 173,260; gross profit 52,820.
Profit and loss: gross profit 52,820 + manufacturing profit 28,710 + discount received 1,200 = 82,730. Expenses: selling 5,100; office salaries 7,400 (6,200 + 1,200 due); discount allowed 2,800; rent 640; rates 960; insurance 172; general expenses 4,114 (4,260 − 146); advertising 6,124; carriage outwards 1,200; bad debts 680; total 29,190. Net profit 53,540.
Split rent, rates and insurance 4:1 after adjusting insurance for the prepayment.