Topic 1 - Manufacturing account

Question 1

Structure of the Manufacturing Account up to Prime Cost

Answer 1

Opening inventory - Raw Materials X
+ Purchases X
+ Carriage In X
- Purchase returns (X)
- Closing inventory (X)
Cost of Raw Materials Consumed XX

+ Direct Labour X
+ Direct Overheads X

Prime Cost XX

Question 2

Structure of the Manufacturing Account after Prime Cost

Answer 2

Factory Overheads X
+ Opening work in progress X
- Closing work in progress (X)
Cost of finished goods XX

+ Manufacturing profit X
Manufacturing Cost of Finished goods XXX

Question 3

How to calculate provision for unrealised profit

Answer 3

Closing inventory/(100+ whatever the % for manufacturing profit is)
* whatever the % for manufacturing profit is

Question 4

Structure of an Income Statment of a manufacturer

Answer 4

Revenue
- Cost of sales (using manufacturing cost of finished goods)
= Gross profit on trading
+ Manufacturing Profit
- Increase/ + Decrease in provision for unrealised profit

Question 5

Advantages of Manufacturing Account

Answer 5

Keeps factory financial performance separate which may motivate managers to keep costs low and improve efficiency

Added manufacturing profit makes the cost of sales more realistic and makes sure that cost savings are not given away through price reductions which could mean that the investment could not have been ever repaid

Greater Financial control

Question 6

Disadvantages of Manufacturing Account

Answer 6

Additional complexity
Gross profit is artificially decreased which may be misleading
A manufacturing account doesn’t necessarily make the business more profitable but records profits where they are made
Further complexity to make adjustments for PUP to comply with the concept of realisation
PUP has to be extracted to provide the correct asset value and correct Profit from Operations

Question 7

What to do with unrealised profit in the final accounts

Answer 7

IS = Extra deduction
BS = Deduct from the finished goods figure in Current Assets