Chippo owns a manufacturing business which produces product S. She provided the following information for the year ended 30 April 2020. Revenue $ 254000 Purchases of raw materials $ 46 500 Purchases of finished goods $ 59000 Wages of factory operatives $ 38250 Royalties paid to the inventor of product S $ 7690 Factory general expenses $ 4500 Factory fuel and power $ 5325 Rent and insurance $ 28000 Factory machinery at cost $ 60000 Provision for depreciation of factory machinery $ 21600 Inventory at 1 May 2019: raw materials $ 3120 work in progress $ 5400 finished goods $ 8220 Additional information 1 Factory machinery is depreciated at 20% per annum using the reducing balance method. 2 Rent and insurance is to be split equally between the factory and the office. 3 The annual salary of the factory supervisor is $28500. 4 Closing inventory at 30 April 2020 was: raw materials $ 3000 work in progress $ 5590 finished goods $ 7885

Mark scheme

Marking points from the official mark scheme (May/June 2020). The mark or mark type is shown in brackets.

1. [1] Cost of material consumed: Opening inventory of raw material 3120 + Purchases of raw material 46500 - Less Closing inventory of raw material 3000 = 46620
2. [1] Direct wages 38250
3. [1] Direct expenses – royalties 7690
4. [1] Prime cost 92560 (OF)
5. [1] Factory overheads: Wages - factory supervisor 28500
6. [1] Factory overheads: Rent and insurance (28000 × 50%) 14000
7. [1] Factory overheads: Depreciation of machinery (60000 – 21600) × 20% 7680
8. [1] Total factory overheads 60005 (OF)
9. [1] Total manufacturing cost (sub-total before WIP) 152565 (OF)
10. [1] Cost of production: Add opening work in progress 5400 - Less closing work in progress 5590 = 152375 (OF)
11. [1] Revenue 254000
12. [1] Cost of production 152375 (OF)
13. [1] Purchases of finished goods 59000
14. [1] Cost of sales 211710 (OF)
15. [1] Gross profit 42290 (OF)
16. [1] Increase wages of factory supervisor (Decrease gross margin ✔)
17. [1] Reduce trade discount allowed to customers (Increase gross margin ✔)
18. [1] Advantage: A manufacturing business such as Chippo's, which requires machinery as well as premises, would usually operate as a limited company
19. [1] Advantage: Chippo would be able to raise some money by issuing shares
20. [1] Advantage: It may be easier for Chippo to obtain finance for the proposed expansion if the business is a limited company
21. [1] Advantage: If Chippo converts the business to a limited company, her personal assets will be safer
22. [1] Advantage: If Chippo continues to manufacture as a sole trader, the lender could take her personal assets if the assets of the business were insufficient to cover any loans
23. [1] Disadvantage: The lender is likely to require security over the company's assets
24. [1] Disadvantage: The lender could take possession of the assets of the business if payments were not made in accordance with the agreed terms
25. [1] Disadvantage: There will be costs involved in setting up and running a limited company
26. [1] Recommendation