Grace owns a shoe factory. She also buys handbags from a supplier and sells both the shoes and the handbags.
Grace draws up her financial statements to 31 March each year. At 31 March 2025, the balances in her ledger accounts included the following:
Inventory at 1 April 2024:
Raw materials $5 345
Work in progress $13 820
Finished goods (shoes) $27 540
Purchases of raw materials $72 870
Carriage inwards of raw materials $1 220
Wages:
Factory operatives $29 175
Factory supervisor $24 000
Office staff $26 170
Rent and insurance $12 000
Factory power $14 120
Factory equipment at cost $180 000
Factory equipment - provision for depreciation $64 800
Additional information:
1. Inventory at 31 March 2025:
Raw materials $7 100
Work in progress $14 390
Finished goods (shoes) $27 985
2. Rent and insurance is to be split 65% to the factory and 35% to the office.
3. At 31 March 2025, Grace owed $1315 for factory power and $2000 for the factory supervisor’s wages.
4. Factory equipment is depreciated at 20% per annum using the reducing balance method.
(a)[10]
Draw up Grace’s manufacturing account for the year ended 31 March 2025.
(b)[4]
Calculate the value of Grace’s inventory of handbags at 31 March 2025.
(c)[1]
State how Grace applies the historic cost accounting principle when preparing her financial statements.
(d)[5]
Advise Grace whether she ought to begin producing handbags in her factory or not. Support your answer with arguments for and against Grace producing handbags in her factory.
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