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9706 · 3.1.4

Manufacturing Businesses — practice questions

Practice and worked examples for 9706 Manufacturing Businesses. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

Forge Ltd provides the following data for the year ended 31 December 2023. Calculate the production cost of finished goods.

  • Opening inventory of raw materials: $15,000
  • Purchases of raw materials: $85,000
  • Closing inventory of raw materials: $12,000
  • Direct factory wages: $60,000
  • Factory rent: $24,000
  • Depreciation of machinery: $10,000
  • Opening work in progress: $8,000
  • Closing work in progress: $11,000
Show solution outline

Step 1: Calculate Cost of Raw Materials Consumed Opening Inventory+Purchases−Closing Inventory\text{Opening Inventory} + \text{Purchases} - \text{Closing Inventory} $15,000+$85,000−$12,000=$88,000\text{\textdollar}15,000 + \text{\textdollar}85,000 - \text{\textdollar}12,000 = \text{\textdollar}88,000

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

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

Step 4: Calculate Production Cost before WIP adjustment Prime Cost+Factory Overheads\text{Prime Cost} + \text{Factory Overheads} $148,000+$34,000=$182,000\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\text{Cost before WIP} + \text{Opening WIP} - \text{Closing WIP} $182,000+$8,000−$11,000=$179,000\text{\textdollar}182,000 + \text{\textdollar}8,000 - \text{\textdollar}11,000 = \text{\textdollar}179,000

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

Worked example 2

Precision Parts Ltd transfers goods from its factory to its sales department at cost plus a 25% markup. The production cost of finished goods for the year was $400,000. At the year-end, the closing inventory of finished goods was valued at its transfer price of $50,000. There was no opening inventory of finished goods.

Calculate:

  1. The factory profit for the year.
  2. The provision for unrealised profit (PUP) required at the year-end.
Show solution outline

1. Calculate Factory Profit for the Year

The profit is a 25% markup on the production cost. Factory Profit=Production Cost×Markup %\text{Factory Profit} = \text{Production Cost} \times \text{Markup \%} Factory Profit=$400,000×25%=$100,000\text{Factory Profit} = \text{\textdollar}400,000 \times 25\% = \text{\textdollar}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. Margin=Markup1+Markup=0.251+0.25=0.251.25=0.20 or 20%\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{Closing Inventory at Transfer Price} \times \text{Profit Margin} PUP=$50,000×20%=$10,000\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
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