Manufacturing Businesses — practice questions

Step 1: Calculate Cost of Raw Materials Consumed Opening Inventory + Purchases - Closing Inventory $15,000 + $85,000 - $12,000 = $88,000

Step 2: Calculate Prime Cost $\text{Raw Materials Consumed} + \text{Direct Labour}$ $\text{\textdollar}88,000 + \text{\textdollar}60,000 = \text{\textdollar}148,000$

Step 3: Add Factory Overheads $\text{Factory Rent} + \text{Depreciation}$ $\text{\textdollar}24,000 + \text{\textdollar}10,000 = \text{\textdollar}34,000$

Step 4: Calculate Production Cost before WIP adjustment $\text{Prime Cost} + \text{Factory Overheads}$ $\text{\textdollar}148,000 + \text{\textdollar}34,000 = \text{\textdollar}182,000$

Step 5: Adjust for Work in Progress (WIP) Cost before WIP + Opening WIP - Closing WIP $182,000 + $8,000 - $11,000 = $179,000

Final Answer: The production cost of finished goods is $179,000.

1. Calculate Factory Profit for the Year

The profit is a 25% markup on the production cost. Factory Profit = Production Cost × Markup % Factory Profit = $400,000 × 25% = $100,000

The total transfer price for all goods produced is $400,000 + $100,000 = $500,000.

2. Calculate Provision for Unrealised Profit (PUP)

First, we need to find the profit percentage included in the transfer price (the margin). A markup of 25% (or 1/4) on cost is equivalent to a margin of 20% (or 1/5) on the selling/transfer price. $\text{Margin} = \frac{\text{Markup}}{1 + \text{Markup}} = \frac{0.25}{1 + 0.25} = \frac{0.25}{1.25} = 0.20 \text{ or } 20\%$

Now, apply this margin to the closing inventory, which is valued at transfer price. PUP = Closing Inventory at Transfer Price × Profit Margin $\text{PUP} = \text{\textdollar}50,000 \times 20\% = \text{\textdollar}10,000$

Final Answer:

• Factory Profit for the year: $100,000
• Provision for Unrealised Profit: $10,000