7 Bought $ 230 in supplies on account from StoreMart Supply, Invoice S M 101, terms n / 30. 5 Issued Check 887 for $ 98 to Santini Trucking Company for delivery of merchandise purchased from Trailhead Canoes. In your working papers, record the following transactions on page 16 of the general journal.ĭate Transactions Mar. 1 Purchased $ 8, 200 in merchandise on account from Trailhead Canoes, Invoice T C 202, terms 2 / 10, n / 30.
Provision for unrealised profit must be deducted from inventory of finished goods at transfer value (TV) in the statement of financial position.River’s Edge Canoe & Kayak had the following purchases and cash payment transactions for the month of March. Provision for unrealised profit at start is calculated using opening inventory of finished goods and at end using closing inventory of finished goods. = margin × closing inventory of finished goods (FG) at transfer value (TV) If inventory of finished goods is at transfer value: = mark up × closing inventory of finished goods at cost PFUP = × closing inventory of finished goods at cost If inventory of finished goods is at cost: Provision for unrealised profit may be calculated as follows: For this purpose a provision for unrealised profit is set up and maintained. Therefore the factory profit must be adjusted for any unrealised profit and inventories of finished goods must be disclosed at cost (not at transfer value). In that case it is necessary to provide for the element of manufacturing (unrealised) profit which is included in their valuation since it is against the prudence concept and realisation concept. Therefore closing inventory of finished goods will be valued at market price and will include an element of factory profit. Many businesses transfer finished goods at market value. = cost of production at transfer value – cost of productionįactory profit must be added with cost of production in the manufacturing account and recorded as an income in the income statement. = margin × cost of production at transfer value (TV) Factory profit may be calculated as follows: Factory profit (loss) is the difference between the market price (the price the business has to pay if the goods produced were to be purchased in the wholesale market from other suppliers) and the cost of producing these goods. This profit is known as factory profit/ manufacturing profit. The market value or transfer value is obtained by adding a percentage of profit to the cost of production. Manufacturing businesses usually transfer finished goods from the manufacturing account to the income statement at market value (wholesale price) to evaluate how efficiently the factory is operating. Bad debts and provision for doubtful debtsĬlosing inventories must be recorded at cost and not at transfer value in the statement of financial position. General expenses, sundry expenses, advertising cost. 
Administrative, selling and distribution cost. Depreciation of office non-current assets. Items not included in the manufacturing account but treated as an expense in the income statement: Whatever be the level of production, indirect cost remains the same. Indirect cost does not vary with the level of output. It is commonly termed as factory overheads and is incurred in running the operation of the factory. Indirect costs are factory expenses that are not directly related with the final product. 
The total of the direct cost is termed as prime cost. Direct labour/ direct wages/ factory direct wages/ factory direct labour/ manufacturing wages.It has a direct relationship with number of output (units produced). Cost of production includes direct cost and indirect cost.ĭirect costs are expenditure which can be economically identified with a specific cost unit. It is prepared to calculate the cost of goods produced during the year and it is also known as the production account. A manufacturing account shows the cost of running and maintaining the factory.
Businesses that make their own products must prepare a manufacturing account as part of their internal financial statements. A manufacturing business is the most complete form of a business because it buys raw materials, converts them into finished items and then sells these items to its customers. Some businesses may manufacture their own products instead of trading in finished goods.
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