Section A: Key terms and recall
Define the following terms:
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a) Direct costs: Costs that can be directly attributed to a specific product or service, such as raw materials and labour directly involved in production. b) Indirect costs: Costs that cannot be directly attributed to a specific product or service, such as factory rent and utilities. c) Prime cost: The total of direct material costs and direct labour costs. d) Factory overheads: Indirect costs associated with the production process, such as rent, utilities, and depreciation of factory equipment. [4 marks total]
List two examples of direct material costs and two examples of direct labour costs. [2 marks]
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Direct material costs: Raw materials, components. Direct labour costs: Wages of production workers, salaries of production supervisors. [2 marks total]
What is the purpose of adjusting for work in progress in a manufacturing account? [1 mark]
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To accurately reflect the value of goods that are partially completed at the end of an accounting period. [1 mark]
Name the four sections of a manufacturing account. [2 marks]
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Raw materials, Work in progress, Factory overheads, Cost of production. [2 marks]
What is the formula to calculate the factory cost of production? [1 mark]
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Factory cost of production = Prime cost + Factory overheads. [1 mark]
Section B: Applying your knowledge
A manufacturer has the following costs for the year:
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Prime cost = Direct materials + Direct labour = £20,000 + £15,000 = £35,000. Total factory overheads = Factory rent + Factory utilities = £5,000 + £2,000 = £7,000. [2 marks total]
A company has work in progress at the start of the year valued at £3,000 and at the end of the year valued at £4,000. What adjustment needs to be made in the manufacturing account? [2 marks]
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The adjustment is to add the increase in work in progress to the factory cost of production. Adjustment = Ending work in progress - Starting work in progress = £4,000 - £3,000 = £1,000. [2 marks total]
A manufacturer has the following information for the year:
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Prime cost = Direct materials + Direct labour = £18,000 + £12,000 = £30,000. Adjustment for work in progress = Ending work in progress - Starting work in progress = £3,000 - £2,000 = £1,000. Factory cost of production = Prime cost + Factory overheads + Adjustment for work in progress = £30,000 + £6,000 + £1,000 = £37,000. [3 marks total]
Explain how the factory cost of production is transferred to the trading account. [2 marks]
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The factory cost of production is transferred to the trading account as the opening inventory of finished goods. This is then used to calculate the cost of goods sold and ultimately the gross profit. [2 marks]
Section C: Explain and analyse
A sole trader manufactures furniture. For the year ended 31 December 2023, the following information is available:
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Manufacturing Account for the year ended 31 December 2023 Raw materials: Opening inventory: £3,000 Purchases: £25,000 Closing inventory: (£4,000) Total raw materials used: £24,000 Direct labour: £20,000 Prime cost: £24,000 + £20,000 = £44,000 Factory overheads: Rent: £5,000 Utilities: £3,000 Total factory overheads: £8,000 Total factory cost of production: £44,000 + £8,000 = £52,000 Adjustment for work in progress: Ending work in progress: £3,500 Starting work in progress: (£2,500) Adjustment: £1,000 Total factory cost of production: £52,000 + £1,000 = £53,000 Transfer to trading account: £53,000 [6 marks total]
Explain the importance of preparing a manufacturing account for a manufacturing business. [4 marks]
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A manufacturing account helps a business to: 1. Calculate the cost of production accurately, which is essential for pricing products and determining profitability. 2. Monitor and control production costs by identifying areas where costs can be reduced or efficiencies improved. 3. Provide information for decision-making, such as whether to continue producing certain products or invest in new production methods. 4. Comply with accounting standards and legal requirements, ensuring that financial statements are accurate and reliable. [4 marks total]
Section D: Challenge
A manufacturing business has the following information for the year:
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Manufacturing Account for the year ended 31 December 2023 Raw materials: Opening inventory: £2,000 Purchases: £30,000 Closing inventory: (£3,000) Total raw materials used: £29,000 Direct labour: £25,000 Prime cost: £29,000 + £25,000 = £54,000 Factory overheads: £10,000 Total factory cost of production: £54,000 + £10,000 = £64,000 Adjustment for work in progress: Ending work in progress: £2,500 Starting work in progress: (£1,500) Adjustment: £1,000 Total factory cost of production: £64,000 + £1,000 = £65,000 Transfer to trading account: £65,000 Trading Account for the year ended 31 December 2023 Opening inventory of finished goods: £5,000 Add: Factory cost of production: £65,000 Total inventory available for sale: £70,000 Closing inventory of finished goods: (£6,000) Cost of goods sold: £64,000 Sales revenue: £100,000 Gross profit: £100,000 - £64,000 = £36,000 [8 marks total]