Question

Calculate the total Cost of sales amount shown in the published statement of comprehensive income for the year ended 30 September 2020, based on the following information:

Extract from Trial balance at 30 September 2020	£'000	£'000
Buildings: Cost	2,000
Factory Plant and machinery: Cost	1,100
Factory Plant and machinery: Accumulated depreciation		110
Furniture and equipment: Cost	960
Furniture and equipment: Accumulated depreciation		192
Motor Vehicles: Cost	720
Motor Vehicles: Accumulated depreciation		180
Advertising	240
Other administration expenses	370
Cost of sales (adjusted for closing inventory)	1,400
Wages and salaries, rent and electricity	620

Notes:
1.    Depreciation has not been provided for on any of the non-current assets. Policies are:

• Plant and machinery, all used in production, is depreciated at 10% per annum on a reducing balance basis.
• Buildings are depreciated at 2% per annum on a straight-line basis.
• Furniture and Equipment, all relating to administration activities is depreciated on a 20% on a straight-line basis.
• Motor Vehicles, all delivery vehicles, are depreciated on a 25% reducing balance basis.

2.    The Finance Director has determined that the following expenses should be allocated according to these ratios:       

	Factory	Selling & Distribution	Administrative
Wages and salaries, rent and electricity	60%	25%	15%
Depreciation of buildings	50%	30%	20%

Note: in this question you ONLY need to work out (to the nearest £100) the total Cost of sales. Select the closest to your answer from the following choices:

	a.	1,519,000
	b.	1,891,000
	c.	1,420,000
	d.	1,772,000

Answer 1

1. Building depreciation: 2% p.a. on a straight line basis = 2% of 2000,000 = 40,000
2. Factory plant and machinery depreciation = 10% p.a. on a reducing balance basis on (1100-110) = 990,000, i.e. 10% of 990,000 = 99,000
3. Allocation of building depreciation expense to factory = 50% of 40,000 = 20,000
4. Allocation of Wages and salaries, rent and electricity costs to factory = 60% of 620,000 = 372,000
5. Total factory costs = cost of sales = 1400,000 + 20,000 + 372,000 + 99,000= 1891,000

Hence option "b"