Theory question 106
Manufacturing AccountsRed Top Manufacturing Enterprises produces plastic bowls. The information relating to its operations for the year ended 31st December, 2021 is as follows:
Stocks — 01/01/2021 / 31/12/2021 (₦)
Raw materials 140,000 / 220,000
Work-in-progress 260,000 / 340,000
Finished goods 550,000 / –
Sales 4,550,000
Purchase of raw materials 1,489,000
Direct wages 850,000
Royalties 77,000
Discounts allowed 92,000
Factory fuel 660,000
Administrative expenses 44,000
Electricity 64,000
Maintenance 48,000
Selling and distribution expenses 33,000
Additional information:
(i) 75% of electricity and maintenance costs are apportioned to the factory.
(ii) 60,000 units were produced and transferred to the trading account at a market value of ₦55 per unit.
You are required to prepare Manufacturing, Trading, Profit and Loss Account for the year ended 31st December, 2021.
Show the model answer
Manufacturing Account (₦): Raw materials 140,000 + 1,489,000 − 220,000 = 1,409,000; direct wages 850,000; royalties 77,000; Prime cost 2,336,000.
Factory overheads: fuel 660,000; electricity (75% × 64,000) 48,000; maintenance (75% × 48,000) 36,000 = 744,000; total 3,080,000; add opening WIP 260,000, less closing WIP 340,000; cost of production 3,000,000.
Market value of goods produced (60,000 × ₦55) 3,300,000; manufacturing profit 300,000.
Trading Account: sales 4,550,000; opening finished goods 550,000 + goods transferred 3,300,000 = cost of sales 3,850,000 (no closing finished goods given); gross profit 700,000.
Profit and Loss Account: gross profit 700,000 + manufacturing profit 300,000 = 1,000,000; less discounts allowed 92,000, administrative 44,000, electricity (25%) 16,000, maintenance (25%) 12,000, selling and distribution 33,000 = 197,000; Net profit ₦803,000.
Goods go to trading at market value; the difference over cost of production is manufacturing profit.