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Difficulty: Very hardPreparation of Manufacturing Account and Cost of Production

Kano Industrial Processing Ltd provides the following figures extracted from its books for the financial year ended 31 December 2025:

- Raw materials inventory (1 January 2025): ₦45,000₦45,000
- Purchases of raw materials: ₦220,000₦220,000
- Carriage inwards on raw materials: ₦12,000₦12,000
- Returns outwards of raw materials: ₦8,000₦8,000
- Raw materials inventory (31 December 2025): ₦35,000₦35,000
- Direct wages paid: ₦150,000₦150,000 (with ₦10,000₦10,000 accrued at year-end)
- Direct factory expenses: ₦25,000₦25,000
- Factory power and lighting paid: ₦40,000₦40,000 (includes ₦4,000₦4,000 prepaid for 2026)
- Factory supervisor's salary: ₦65,000₦65,000
- Depreciation of factory plant and machinery: ₦30,000₦30,000
- Work-in-progress inventory (1 January 2025): ₦28,000₦28,000
- Work-in-progress inventory (31 December 2025): ₦34,000₦34,000

What is the total Cost of Production transferred to the Trading Account for the year ended 31 December 2025?

Answer: 544000 ₦

Answer

The total Cost of Production transferred to the Trading Account is ₦544,000.
The Cost of Production is calculated by aggregating Prime Cost (₦419,000₦419,000) and Total Factory Overheads (₦131,000₦131,000), yielding a gross production cost of ₦550,000₦550,000. Adjusting for Work-in-Progress by adding Opening WIP (₦28,000₦28,000) and subtracting Closing WIP (₦34,000₦34,000) results in a final Cost of Production of ₦544,000₦544,000.

Step-by-Step Solution

1
Calculate Cost of Raw Materials Consumed
₦234,000
Cost of Raw Materials Consumed is calculated as Opening Stock (₦45,000₦45,000) + Purchases (₦220,000₦220,000) + Carriage Inwards (₦12,000₦12,000) - Returns Outwards (₦8,000₦8,000) - Closing Stock (₦35,000₦35,000).
2
Calculate Direct Costs and Prime Cost
₦419,000
Direct Wages are adjusted for year-end accrual (₦150,000+₦10,000=₦160,000₦150,000 + ₦10,000 = ₦160,000). Prime Cost = Raw Materials Consumed (₦234,000₦234,000) + Direct Wages (₦160,000₦160,000) + Direct Expenses (₦25,000₦25,000).
3
Calculate Factory Overheads
₦131,000
Factory Power is adjusted for prepayment (₦40,000−₦4,000=₦36,000₦40,000 - ₦4,000 = ₦36,000). Total Factory Overheads = Factory Power (₦36,000₦36,000) + Supervisor's Salary (₦65,000₦65,000) + Factory Plant Depreciation (₦30,000₦30,000).
4
Calculate Net Cost of Production including Work-in-Progress adjustments
₦544,000
Cost of Production = Prime Cost (₦419,000₦419,000) + Factory Overheads (₦131,000₦131,000) + Opening WIP (₦28,000₦28,000) - Closing WIP (₦34,000₦34,000) = ₦544,000.

Key Concept

Preparation of Manufacturing Account and Cost of Production
Estimated Time:3m 0s
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Preparation of Manufacturing Account and Cost of Production

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