Hilary owns a manufacturing business. She has provided the following information. Inventory at 1 August 2022 Raw materials $9100 Work in progress $21357 Finished goods $24235 For the year ended 31 July 2023 Revenue $457250 Purchases of raw materials $110000 Purchases returns of raw materials $2200 Purchases of finished goods $23500 Purchases returns of finished goods $4700 Wages of factory operatives $91665 Wages of factory supervisor $29000 Wages of office supervisor $28000 Heat, light and power $11600 Rates and insurance $8250 Factory repairs and renewals $5125 Factory equipment – at cost $124000 Factory equipment – provision for depreciation $35500 Additional information 1 Inventory at 31 July 2023 Raw material $9980 Work in progress $22446 Finished goods $25110 2 Heat, light and power is to be apportioned 4/5 to the factory and 1/5 to the office. 3 Rates and insurance is to be apportioned 3/5 to the factory and 2/5 to the office. Insurance of $4440 has been paid for the year to 31 December 2023. 4 At 31 July 2023, a factory repair, $644, was unpaid and no adjustment had been made. 5 Factory equipment is depreciated at 25% per annum using the reducing balance method.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2023). The mark or mark type is shown in brackets.

1. [1] Opening inventory of raw material $9100
2. [1] Purchases of raw material $110000 less Purchases returns $2200 = $107800
3. [1] Less Closing inventory of raw material $9980 = Cost of material consumed $106920
4. [1] Add Direct wages (Wages of factory operatives) $91665 = Prime cost $198585 (own figure rule applies)
5. [1] Wages of factory supervisor $29000
6. [1] Heat, light and power (11600 × 4/5) = $9280
7. [1] Rates and insurance (8250 – [5/12 × 4440] (1)) × 3/5 (1) = $3840
8. [1] Factory repairs and renewals (5125 + 644) = $5769
9. [1] Depreciation of factory equipment (124000 - 35500) × 25% = $22125
10. [1] Total Factory overheads = $70014; Total production cost $268599 (own figure rule applies)
11. [1] Add opening work-in-progress $21357 less closing work-in-progress $22446 (1); Cost of production $267510 (own figure rule applies)
12. [1] Revenue $457250
13. [1] Opening inventory of finished goods $24235
14. [1] Cost of production $267510 (own figure rule applies)
15. [1] Purchases of finished goods $23500 less Purchases returns $4700 = $18800; Total Cost of goods available for sale $310545
16. [1] Less Closing inventory of finished goods $25110; Cost of sales $285435 (own figure rule applies); Gross profit $171815 (own figure rule applies)
17. [1] Advantage: Not dependent on supplier for ensuring continuity of supplies of goods / more control if produce own goods / more control over quality of goods produced in own factory / more control over cost / may be more profitable / cheaper to produce and sell own goods / not all manufacturing costs will increase in proportion to any increase in production / currently a high proportion of purchases of finished goods are returned (Max 3)
18. [1] Disadvantage: Increase in factory running costs / cost of production / may need to purchase additional machinery / may not be able to increase factory capacity by enough to meet demand / may not be able to meet increase in demand / if demand falls may have surplus capacity and increased inventory / quality of goods purchased may be inferior (Max 3)
19. [1] Recommendation (1 mark for a justified conclusion based on the arguments provided)