Unit 4

Question 1

What is the transfer price?

Manufacturing account

Answer 1

Total production cost + manufacturing profit

Question 2

What is unrealised profit?

Answer 2

Profit that hasn’t happened yet as the good have not been sold (closing inventory of finished goods).
Prudence and realisation say this should not be included so a provision is made.

Question 3

Treatment of unrealised profit

Answer 3

A provision is made and treated as a liability.

The change in the provision each year goes in the income statement, an increase is deducted from manufacturing profit, a decrease is added

Question 4

Formula for break even and target profit.

Answer 4

Break even units = fixed cost
Contribution per unit

Break even revenue = break even output x selling price

Target profit output = Amount of profit + fixed cost
Contribution per unit

Question 5

Two ways to calculate manufacturing profit

Answer 5

The buy in price is give - the difference between total production cost and the buy in price

Manufacturing profit is a percentage of total production cost