Unit 2: Final Accounts of Manufacturing Entities (Part - 2) CA Foundation Notes | EduRev

Principles and Practice of Accounting

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CA Foundation : Unit 2: Final Accounts of Manufacturing Entities (Part - 2) CA Foundation Notes | EduRev

The document Unit 2: Final Accounts of Manufacturing Entities (Part - 2) CA Foundation Notes | EduRev is a part of the CA Foundation Course Principles and Practice of Accounting.
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SUMMARY:- 

  • Direct manufacturing expenses are costs, other than material or wages, which are incurred for a specific product or saleable service. 
  • Indirect Manufacturing expenses these are also called Manufacturing overhead, Production overhead, Works overhead, etc. 
  • Overhead is defined as total cost of indirect material, indirect wages and indirect expenses. 
  • Indirect material means materials which cannot be linked directly with the units produced, for example, stores consumed for repair and maintenance work, small tools, fuel and lubricating oil, etc. In most manufacturing operations, the production of the main product is accompanied by the production of a subsidiary product which has a value on sale. 
  • By-product is a secondary product. This is produced from the same raw materials, which are used for producing the main product and without incurring any additional expenses from the same production process in which the main product is produced.

TEST YOUR KNOWLEDGE:-
Multiple Choice Questions:-
Ques 1: Under-statement of closing work in progress in the period will
(a)  Understate cost of goods manufactured in that period.
(b)  Overstate current assets.
(c)  Understate net income in that period.
(d) None of the three.
Ans: (c)

Ques 2:  Sales is equal to
(a) Cost of goods sold – Gross profit.
(b) Cost of goods sold + Gross profit.
(c) Gross profit – Cost of goods sold.
(d)  Net profit + cost of goods sold.
Ans: (b)

Ques 3: Indirect Manufacturing expenses are also called
(a)  Manufacturing overhead.
(b) Production overhead.
(c) Works overhead.
(d)  All the three.
Ans: (d)

Ques 4: Sale value of the by-product is credited to
(a) Manufacturing account.
(b) Capital account.
(c) Overheads account.
(d) Trading account.
Ans: (a)

Ques 5: Manufacturing account shows
 (a)  Total cost of manufacturing the finished products.
(b) It provides details of factory cost.  
(c) It facilitates reconciliation of financial books with cost records.
(d) All the three.
Ans: (d)

Theory Questions:-
Ques 1: Write short note on By-products.
Ans: By-products generally have insignificant value as compared to the value of main product. They are generally valued at net realisable value, if their costs cannot be separately identified. It is often treated, as “Miscellaneous income” but the correct treatment would be to credit the sale value of the by-product to Manufacturing Account so as to reduce to that extent, the cost of manufacture of main product.

Ques 2: Differentiate between Direct Manufacturing Expenses and Indirect Manufacturing expenses
Ans: 
Direct manufacturing expenses are costs, other than material or wages, which are incurred for a specific product or saleable service.
Indirect Manufacturing expenses are also called Manufacturing overhead, Production overhead, Works overhead, etc. Overhead is defined as total cost of indirect material, indirect wages and indirect expenses. 

Practical Questions:-
Ques 1: Mr. Pankaj runs a factory which produces motor spares of export quality. The following details were obtained about his manufacturing expenses for the year ended on 31.3.2016.
Unit 2: Final Accounts of Manufacturing Entities (Part - 2) CA Foundation Notes | EduRev
Unit 2: Final Accounts of Manufacturing Entities (Part - 2) CA Foundation Notes | EduRev
Ans:
Unit 2: Final Accounts of Manufacturing Entities (Part - 2) CA Foundation Notes | EduRev
Unit 2: Final Accounts of Manufacturing Entities (Part - 2) CA Foundation Notes | EduRev

Ques 2: Following are the Manufacturing A/c, Creditors A/c and Trading A/c provided by Ms. Shivi related to 2016-17. There are certain figures missing from these accounts.
Unit 2: Final Accounts of Manufacturing Entities (Part - 2) CA Foundation Notes | EduRev
Unit 2: Final Accounts of Manufacturing Entities (Part - 2) CA Foundation Notes | EduRev
Additional Information:
1)  Purchase of machinery worth ₹10,00,000 has been omitted. Machinery are chargeable at a depreciation rate of 10%.
2)  Wages include the following
Paid to Factory Workers -  ₹3,00,000  
Paid to labour at office  -  ₹50,000
3) Direct Expenses include following:

  • Electricity charges of ₹80,000 of which 30% pertained to office.
  • Fuel Charges of ₹20,000
  • Freight Inwards of ₹35,000
  • Delivery charges to customers - ₹20,000.

You are required to prepare revised Manufacturing A/c, and Raw Material A/c.
Ans: 

Unit 2: Final Accounts of Manufacturing Entities (Part - 2) CA Foundation Notes | EduRev
Working Notes:
1) Since purchase of Machinery worth ₹10,00,000 has been omitted.    
So, depreciation omitted from being charged = ₹10,00,000 X 10%
=₹1,00,000
Correct total depreciation expense  = ₹(2,00,000 + 1,00,000)
= ₹3,00,000
2)  Wages worth ₹50,000 will be excluded from manufacturing account as they pertain to office and hence will be charged P&L A/c.
3)  Expenses to be excluded from direct expenses:
Unit 2: Final Accounts of Manufacturing Entities (Part - 2) CA Foundation Notes | EduRev
Fuel charges are related to factory expenses and also freight inwards are incurred for bringing goods to factory/ godown so they are part of direct expenses.
Revised Balance to be transferred to Trading A/c:
Unit 2: Final Accounts of Manufacturing Entities (Part - 2) CA Foundation Notes | EduRev
Unit 2: Final Accounts of Manufacturing Entities (Part - 2) CA Foundation Notes | EduRev

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