9706 · 3.1.4
Manufacturing Businesses — FAQ
Frequently asked questions for 9706 Manufacturing Businesses. Direct answers first, then deeper explanation — then practise with marking.
Why are administrative and selling costs not included in the Manufacturing Account?
The Manufacturing Account's sole purpose is to calculate the cost of producing goods. Administrative costs (like office salaries) and selling costs (like advertising) are not related to the production process. They are period costs and are charged directly to the Statement of Profit or Loss after the gross profit has been calculated.
What is the difference between a markup and a margin when calculating factory profit?
A markup is a percentage added to the cost. For example, a 20% markup on a cost of $100 gives a profit of $20 and a transfer price of $120. A margin is a percentage of the final selling/transfer price. A 20% margin on a transfer price of $120 means the profit is $24 and the cost was $96. It's crucial to use the correct calculation based on the question's wording.
If the Provision for Unrealised Profit decreases, why does it increase my overall profit?
A decrease in the provision means there was less unrealised profit locked in inventory at the end of this year compared to last year. This implies that more of the profit generated by the factory (including some from last year) was realised through external sales this year. Therefore, the downward adjustment to profit is smaller than last year, resulting in a net increase to the current year's reported profit.