A LevelAccountingCambridge (CIE)Revision NotesFinancial AccountingPreparation of Financial Statements for Manufacturing BusinessesStatement of Profit or Loss

Statement of Profit or Loss (Cambridge (CIE) A Level Accounting): Revision Note

Exam code: 9706

Written by: Donna Simpson

Reviewed by: Dan Finlay

Updated on 26 March 2026

Statements of profit or loss for manufacturing businesses

What is the layout of the statement of profit or loss of a manufacturing business?

The statement of profit or loss for a manufacturing business is prepared in a similar way to the other types of trading businesses
The statement of profit or loss is prepared after the manufacturing account
For the trading section:
- Use the inventory for finished goods
- Use the goods at transfer value in place of purchases
  - The business might have also purchased extra finished goods
  - Add this in the calculation of the cost of sales
Make adjustments after the gross profit for the factory profit and the change in the provision for unrealised profit
- Add the factory profit
- If the provision for unrealised profit has increased, then subtract the change
- If the provision for unrealised profit has decreased, then add the change
For the profit and loss section:
- Only include expenses that relate to the non-production aspects of the business
  - Such as advertising, carriage outwards, etc
- The expenses related to manufacturing are included in the cost of production
- A business might use a factory and an office
  - The factory expenses are included in the cost of production
  - The office expenses are included in the profit and loss section

**Layout of a statement of profit or loss for a manufacturing business**

Worked Example

Pablo owns a small carpet and rug factory, making bespoke carpets for local furniture businesses. He applies a rate of factory profit of 20%.

The following balances are provided at 31 December 2023.

	$
Revenue	280 050
Inventory at 1 January 2023
Raw materials	7 100
Work in progress	10 420
Finished goods	12 450
Purchases of raw materials	96 200
Wages of factory workers	38 000
Wages of factory supervisors	28 500
Wages of office and sales staff	48 000
Insurance and rates	15 000
General factory expenses	13 180
General office expenses	25 750
Factory equipment at cost	120 000
Provision for depreciation of factory equipment at 1 January 2023	40 000
Provision for unrealised profit at 1 January 2023	2 075

Additional Information

Inventory at 31 December 2023
- Raw materials $6 860
- Work in progress $10 885
- Finished goods $14 640
Insurance and rates are to be apportioned ⅓ to the office and ⅔ to the factory
Factory equipment is to be depreciated at 15% using the reducing balance method

(a) Prepare the manufacturing account for the year ended 31 December 2023.

(b) Prepare the statement of profit or loss for the year ended 31 December 2023.

Answer:

Deal with the additional information

Inventory at 31 December 2023
- These appear as current assets on the statement of financial position
- The raw materials and work in progress appear on the manufacturing account
- The finished goods appear on the statement of profit or loss
Insurance and rates are to be apportioned ⅓ to the office and ⅔ to the factory
- Find the amount for the office
  - ⅓ × $15 000 = $5 000
  - This appears in the profit and loss section of the statement of profit or loss
- Find the amount for the factory
  - ⅔ × $15 000 = $10 000
  - This appears on the manufacturing account as a factory overhead
Factory equipment is to be depreciated at 15% using the reducing balance method
- Find the net book value of the factory equipment
  - $120 000 - $40 000 = $80 000
- Calculate the year's depreciation charge
  - 15% × $80 000 = $12 000
  - This appears on the manufacturing account as a factory overhead
Multiply the cost of production by 20% to find the factory profit

$197 655 × 20% = $39 531

(a)

Prepare the manufacturing account

Pablo Manufacturing Account for the year ended 31 December 2023
	$	$
Cost of material consumed
Opening inventory of raw materials		7 100
Purchases of raw materials		96 200
		103 300
Less: Closing inventory of raw materials		(6 860)
		96 440
Direct wages - factory workers		38 000
Prime cost		134 440
Factory overheads
Wages - Supervisors	28 500
Insurance and rates	10 000
General expenses	13 180
Depreciation of factory equipment	12 000	63 680
		198 120
Add: Opening work in progress		10 420
		208 540
Less: Closing work in progress		(10 885)
Cost of production		197 655
Factory profit		39 531
Transfer value		237 186

(b)

Calculate the balance of the provision for unrealised profit account

$\frac{20}{120} \times $ 14 640 = $ 2 440$

Calculate the increase in the provision

$2 440 - $2 075 = $365

Prepare the trading section of the statement of profit or loss

Pablo Statement of Profit or Loss (trading section) for the year ended 31 December 2023
	$	$
Revenue		280 050
Less: Cost of sales
Opening inventory of finished goods	12 450
Goods at transfer value	237 186
	249 636
Less: Closing inventory of finished goods	(14 640)	(234 996)
Gross Profit		45 054
Factory profit		39 531
Increase in provision for unrealised profit		(365)
		84 220
Insurance and rates	5 000
Wages of office and sales staff	48 000
General office expenses	25 750	(78 750)
Profit for the year		5 470

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