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Difficulty: HardTransfer of Finished Goods at Market Value and Manufacturing Profit

Kambai Manufacturing Enterprise provided the following cost data for the year ended 31st December 2025:

Cost ComponentAmount (N\text{N})
Raw materials consumed180,000
Direct factory wages90,000
Factory overhead expenses50,000
Work-in-progress (1st January 2025)15,000
Work-in-progress (31st December 2025)25,000

Finished goods are transferred from the manufacturing department to the trading department at market value, calculated using a mark-up of 25%25\% on the cost of production. What is the amount of manufacturing profit to be transferred to the Profit and Loss Account for the year?

  1. N77,500\text{N}77,500Answer
  2. B
    N82,500\text{N}82,500
  3. C
    N62,000\text{N}62,000
  4. D
    N80,000\text{N}80,000

Answer

N77,500\text{N}77,500
The correct answer of N77,500\text{N}77,500 is determined by calculating the true Cost of Production first: N180,000+N90,000+N50,000+N15,000−N25,000=N310,000\text{N}180,000 + \text{N}90,000 + \text{N}50,000 + \text{N}15,000 - \text{N}25,000 = \text{N}310,000. Applying the 25%25\% mark-up on this cost gives N310,000×0.25=N77,500\text{N}310,000 \times 0.25 = \text{N}77,500, which is credited to the Manufacturing Account as manufacturing profit.

Step-by-Step Solution

1
Calculate Prime Cost
Prime Cost=Raw Materials Consumed+Direct Factory Wages=N180,000+N90,000=N270,000\text{Prime Cost} = \text{Raw Materials Consumed} + \text{Direct Factory Wages} = \text{N}180,000 + \text{N}90,000 = \text{N}270,000
Prime cost consists of all direct manufacturing costs.
2
Calculate Total Factory Cost
Total Factory Cost=Prime Cost+Factory Overheads=N270,000+N50,000=N320,000\text{Total Factory Cost} = \text{Prime Cost} + \text{Factory Overheads} = \text{N}270,000 + \text{N}50,000 = \text{N}320,000
Factory overheads represent indirect manufacturing expenses added to prime cost.
3
Adjust for Work-in-Progress (WIP) to find Cost of Production
Cost of Production=Total Factory Cost+Opening WIP−Closing WIP=N320,000+N15,000−N25,000=N310,000\text{Cost of Production} = \text{Total Factory Cost} + \text{Opening WIP} - \text{Closing WIP} = \text{N}320,000 + \text{N}15,000 - \text{N}25,000 = \text{N}310,000
Opening WIP is added because it was completed during the current period, while closing WIP is deducted as it remains incomplete.
4
Compute Manufacturing Profit
Manufacturing Profit=25%×Cost of Production=0.25×N310,000=N77,500\text{Manufacturing Profit} = 25\% \times \text{Cost of Production} = 0.25 \times \text{N}310,000 = \text{N}77,500
Manufacturing profit is the mark-up percentage applied directly to the cost of production.

Key Concept

Transfer of Finished Goods at Market Value and Manufacturing Profit
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Topics

Transfer of Finished Goods at Market Value and Manufacturing Profit

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