Bafut Furniture Works: Manufacturing Cost and a Special Order
Bafut Furniture Works makes wooden chairs. For the year ended 31 December 20X4 it produced 4,000 chairs and sold 3,800 at 2,500 FCFA each. Opening raw materials were 450,000 FCFA; raw material purchases 2,150,000 FCFA; closing raw materials 380,000 FCFA; carriage inwards on raw materials 60,000 FCFA. Direct labour was 1,200,000 FCFA. Factory overheads include rent 240,000 FCFA (60% factory, 40% administration), depreciation of machinery 180,000 FCFA, factory power 150,000 FCFA, and indirect materials 90,000 FCFA. Opening work in progress was 210,000 FCFA and closing work in progress 260,000 FCFA. Opening finished goods were 120,000 FCFA. Administration expenses were 320,000 FCFA and selling expenses 180,000 FCFA. The owner has received a special order for 200 extra chairs at 980 FCFA each. The factory has spare capacity and would incur no additional fixed costs, but the owner fears that accepting a price below the full cost per chair will reduce profit.
1. Prepare the manufacturing account for 20X4, showing raw materials consumed, prime cost, factory overhead, and cost of production. Calculate the cost per chair produced.
Read the worked answer
Manufacturing account for year ended 31 December 20X4
| Item | FCFA |
|---|---|
| Opening raw materials | 450,000 |
| Purchases of raw materials | 2,150,000 |
| Carriage inwards | 60,000 |
| Less closing raw materials | (380,000) |
| Raw materials consumed | 2,280,000 |
| Direct labour | 1,200,000 |
| Prime cost | 3,480,000 |
| Factory overhead: rent (60% × 240,000) | 144,000 |
| Depreciation machinery | 180,000 |
| Factory power | 150,000 |
| Indirect materials | 90,000 |
| Total factory overhead | 564,000 |
| Manufacturing cost | 4,044,000 |
| Add opening WIP | 210,000 |
| Less closing WIP | (260,000) |
| Cost of production | 3,994,000 |
Cost per chair = 3,994,000/4,000 = 998.50 FCFA.
2. Prepare the trading section of the income statement to find gross profit for the year. Value closing finished goods at cost per chair.
Read the worked answer
Closing finished goods = 4,000 produced - 3,800 sold = 200 chairs × 998.50 = 199,700 FCFA.
Trading section
| Item | FCFA |
|---|---|
| Sales (3,800 × 2,500) | 9,500,000 |
| Opening finished goods | 120,000 |
| Cost of production | 3,994,000 |
| Less closing finished goods | (199,700) |
| Cost of sales | 3,914,300 |
| Gross profit | 5,585,700 |
Reasoning: only the cost of chairs sold is matched against sales; the 200 unsold chairs remain as inventory at production cost.
3. Advise the owner whether to accept the special order at 980 FCFA per chair. Use relevant costing and show the contribution from the order.
Read the worked answer
Relevant cost per chair for the special order: direct materials 2,280,000/4,000 = 570; direct labour 1,200,000/4,000 = 300; variable factory overhead (power 150,000 + indirect materials 90,000)/4,000 = 60. Total variable cost = 930 FCFA per chair. Fixed factory overhead (rent 144,000 + depreciation 180,000) is not relevant because spare capacity exists and no extra fixed cost is incurred.
Contribution per chair = 980 - 930 = 50 FCFA. Contribution for 200 chairs = 10,000 FCFA. Recommendation: accept the order if it does not displace normal sales at 2,500 FCFA and if the low price will not spoil future customer expectations. The order adds 10,000 FCFA towards fixed costs and profit; rejecting it because 980 is below full cost 998.50 would ignore the relevant costing principle, but the margin is thin, so any extra delivery or packaging cost could make it loss-making.