Manufacturing Account

Question 1

What is the basis of inventory valuation?

Answer 1

Inventory should be valued at the lower of:
- Cost
- Net Realiseable Value

Question 2

What is the formula for NRV?

Answer 2

Estimated selling price in ordinary cost of business - (Estimated costs of completion + estimated selling costs)

Question 3

When might cost of inventories not be recoverable?

Answer 3

• Inventories are damaged
• Inventories are obsolete
• Selling prices have declined
• Costs of completion/ selling have increased

Question 4

What is the formula for Cost of Sales?

Answer 4

= Opening Inventories + Purchases - Closing Inventories

• Opening inventory (or stock)
• Add: Purchases
• Less: Closing Inventory (or stock)

Question 5

What is the primary purpose of the manufacturing account?

Answer 5

Calculate the cost of goods finished in an accounting period. This will be used in calculating cost of sales.

Question 6

In a manufacturing organisation, what 3 forms is inventory likely to be split into?

Answer 6

• Raw materials
• Works in Progress (WIP)
• Finished goods

Question 7

What are included in production costs of goods?

Answer 7

• Direct mats
• Direct labour
• Other direct expenses
• Production overhead expenses

Question 8

How do we set up cost of inventory?

Answer 8

• Direct Costs (e.g. raw mats, direct labour)
  Then
• Production OH Costs (e.g. Rent and rates, depreciation etc)
  Then
• Your totals i.e. total cost of production

Question 9

How do we calculate cost of goods COMPLETED?

Answer 9

Cost of goods completed = Beginning WIP + Cost of Production - Ending WIP

Question 10

How do we apply the cost of finished goods to the income statement (remembering we do put COST OF SALES on the income statement)

Answer 10

We use Cost of Finished Goods to Calculate cost of sales
Cost of Sales = Beginning Inventory + Cost of finished goods - ending inventory