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Difficulty: Very hardValuation and Adjustment for Work-in-Progress (WIP)

The accounting records of Bamidele Manufacturing Ltd for the year ended 31 December 2025 reveal the following financial data:

Cost ItemAmount (₦\text{₦})
Direct raw materials consumed180,000180,000
Direct wages paid (includes ₦10,000\text{₦}10,000 paid in advance for 2026)90,00090,000
Factory overheads paid120,000120,000
Opening work-in-progress45,00045,000

Additional Information:
1. Factory power accrued and unpaid at year-end amounted to ₦15,000\text{₦}15,000.
2. The cost of finished goods produced transferred to trading account was ₦410,000\text{₦}410,000.

What is the valuation of closing work-in-progress as at 31 December 2025?

  1. A
    ₦15,000\text{₦}15,000
  2. B
    ₦20,000\text{₦}20,000
  3. ₦30,000\text{₦}30,000Answer
  4. D
    ₦60,000\text{₦}60,000

Answer

The valuation of closing work-in-progress as at 31 December 2025 is ₦30,000\text{₦}30,000.
The correct answer of ₦30,000\text{₦}30,000 is obtained by first adjusting direct wages for prepayment (₦90,000−₦10,000=₦80,000\text{₦}90,000 - \text{₦}10,000 = \text{₦}80,000) to get Prime Cost of ₦260,000\text{₦}260,000. Adding adjusted factory overheads (₦120,000+₦15,000=₦135,000\text{₦}120,000 + \text{₦}15,000 = \text{₦}135,000) gives total manufacturing costs of ₦395,000\text{₦}395,000. Adding opening WIP of ₦45,000\text{₦}45,000 gives ₦440,000\text{₦}440,000. Subtracting the transferred cost of production (₦410,000\text{₦}410,000) yields the closing WIP valuation of ₦30,000\text{₦}30,000.

Step-by-Step Solution

1
Calculate adjusted direct wages incurred for the period
Direct Wages=₦90,000−₦10,000 (prepayment)=₦80,000\text{Direct Wages} = \text{₦}90,000 - \text{₦}10,000\text{ (prepayment)} = \text{₦}80,000
Prepaid expenses must be deducted because they relate to the subsequent accounting period.
2
Determine Prime Cost
Prime Cost=Direct Materials(₦180,000)+Direct Wages(₦80,000)=₦260,000\text{Prime Cost} = \text{Direct Materials} (\text{₦}180,000) + \text{Direct Wages} (\text{₦}80,000) = \text{₦}260,000
Prime Cost consists of all direct manufacturing costs incurred during the period.
3
Calculate adjusted total factory overheads
Factory Overheads=₦120,000+₦15,000 (accrual)=₦135,000\text{Factory Overheads} = \text{₦}120,000 + \text{₦}15,000\text{ (accrual)} = \text{₦}135,000
Accrued expenses must be added as they represent costs incurred in the current period but unpaid.
4
Compute total manufacturing costs incurred during the period
Total Manufacturing Costs=Prime Cost(₦260,000)+Factory Overheads(₦135,000)=₦395,000\text{Total Manufacturing Costs} = \text{Prime Cost} (\text{₦}260,000) + \text{Factory Overheads} (\text{₦}135,000) = \text{₦}395,000
Total current production costs equal direct costs plus indirect factory costs.
5
Apply the Work-in-Progress formula to solve for Closing Work-in-Progress
Closing WIP=Total Manufacturing Costs(₦395,000)+Opening WIP(₦45,000)−Cost of Production(₦410,000)=₦30,000\text{Closing WIP} = \text{Total Manufacturing Costs} (\text{₦}395,000) + \text{Opening WIP} (\text{₦}45,000) - \text{Cost of Production} (\text{₦}410,000) = \text{₦}30,000
Rearranging the formula Cost of Production=Total Manufacturing Costs+Opening WIP−Closing WIP\text{Cost of Production} = \text{Total Manufacturing Costs} + \text{Opening WIP} - \text{Closing WIP} isolates closing work-in-progress.

Key Concept

Valuation and Adjustment for Work-in-Progress (WIP)
Estimated Time:2m 30s
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Valuation and Adjustment for Work-in-Progress (WIP)

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