Grace manufactures goods. The following information is available for two years. 2024 $ 2023 $ Opening inventory of raw materials 15 000 12 000 Closing inven...
Question 1 Report
Grace manufactures goods. The following information is available for two years.
| 2024 $ | 2023 $ | |
|---|---|---|
| Opening inventory of raw materials | 15 000 | 12 000 |
| Closing inventory of raw materials | 13 000 | 15 000 |
| Purchases of raw materials | 80 000 | 70 000 |
| Direct wages | 52 000 | 45 000 |
| Factory overheads | 30 000 | 20 000 |
| Opening work in progress | 6 000 | 4 500 |
| Closing work in progress | 7 500 | 6 000 |
| Revenue | 250 000 | 210 000 |
| Opening inventory of finished goods | 8 000 | 6 000 |
| Closing inventory of finished goods | 10 000 | 8 000 |
(a) Prepare the manufacturing account for 2024, showing cost of raw materials consumed, prime cost, and cost of production. [10]
(b) Prepare a trading account for 2024 showing the gross profit. [4]
(c) Calculate the cost of production for 2023. [2]
(d) Express the cost of production as a percentage of revenue for both 2024 and 2023, and comment on the change. [4]
Answer Details
(a) Manufacturing account for 2024
| Grace - Manufacturing Account for the year ended 31 December 2024 | $ | $ |
|---|---|---|
| Opening inventory of raw materials | 15 000 [1] | |
| Add: Purchases of raw materials | 80 000 [1] | |
| 95 000 | ||
| Less: Closing inventory of raw materials | (13 000) [1] | |
| Cost of raw materials consumed | 82 000 [1] | |
| Add: Direct wages | 52 000 [1] | |
| Prime cost | 134 000 [1] | |
| Add: Factory overheads | 30 000 [1] | |
| 164 000 | ||
| Add: Opening work in progress | 6 000 | |
| Less: Closing work in progress | (7 500) [1] | |
| Cost of production | 162 500 [1] |
Correct layout showing the progression from raw materials to prime cost to cost of production. [1]
(b) Trading account for 2024
| Grace - Trading Account for the year ended 31 December 2024 | $ |
|---|---|
| Revenue | 250 000 [1] |
| Opening inventory of finished goods | 8 000 |
| Add: Cost of production (transferred from manufacturing account) | 162 500 |
| Less: Closing inventory of finished goods | (10 000) [1] |
| Cost of goods sold | (160 500) |
| Gross profit | 89 500 [1] |
The cost of goods sold uses the cost of production (from the manufacturing account) instead of purchases, plus adjustments for opening and closing finished goods inventory. Correct layout. [1]
(c) Cost of production for 2023
Raw materials consumed: $12,000 + $70,000 - $15,000 = $67,000
Prime cost: $67,000 + $45,000 = $112,000
Cost of production: $112,000 + $20,000 + $4,500 - $6,000 = $130,500 [1]
The calculation follows the same structure as the 2024 manufacturing account: materials consumed plus direct wages gives prime cost, then add factory overheads, add opening WIP, and deduct closing WIP. [1]
(d) Cost of production as a percentage of revenue
2024: \( \frac{162\,500}{250\,000} \times 100 = 65\% \) [1]
2023: \( \frac{130\,500}{210\,000} \times 100 = 62.1\% \) [1]
The cost of production as a percentage of revenue has increased from 62.1% in 2023 to 65% in 2024. This means a larger proportion of each dollar of revenue is being consumed by manufacturing costs. [1]
This upward trend suggests that production costs (raw materials, direct wages, and/or factory overheads) are rising faster than revenue. Management should investigate whether supplier prices have increased, whether labour efficiency has declined, or whether factory overheads can be better controlled, as the trend will reduce overall profitability if it continues. [1]
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