QUESTION 1 30 Marks
HEAT & CO. (PTY) LTD
Heat & Co. (Pty) Ltd ( ‘Heat & Co.’ ) has been in business for five years and manufactures high
quality gas heaters. As electricity tariffs have increased significantly over the last five years, there
has been an increase in the demand for the two types of gas heaters manufactured by the company,
namely the Premier gas heater and the higher-end Deluxe gas heater.
Manufacturing takes place in terms of strict technical and safety specifications and great care is
taken to ensure that every product meets the safety and quality requirements.
The company uses a variable costing system to calculate the net profit before tax which is reported
in the Annual Internal Management Report. An absorption costing system is used when preparing
the Statement of Comprehensive Income which forms part of the Annual Financial Statements.
The following is an extract of the actual financial results presented in the Annual Internal
Management Report for the year ended 31 March 2013:
Inventory information for the year ended 31 March 2013:
Premier Deluxe
(units) (units)
Opening inventory 10 000 9 000
Production 33 750 30 000
Sales 40 000 35 000
Closing inventory 3 750 4 000
Calculation of net profit before tax for the year ended 31 March 2013:
Premier Deluxe Total
R R R
Revenue 30 000 000 49 000 000 79 000 000
Cost of sales (22 000 000) (32 900 000) (54 900 000)
Direct material 16 800 000 27 650 000 45 450 000
Variable manufacturing
overheads 5 200 000 5 250 000 10 450 000
Variable sales costs (1 400 000) (1 225 000) (2 625 000)
Contribution 6 600 000 14 875 000 21 475 000
Fixed manufacturing overheads (9 000 000)
Fixed selling and administration expenses (3 500 000)
Net profit before tax 8 975 000
There was an unfavourable fixed manufacturing overhead expenditure variance for the 2013
year of R500 000. The production volume variance for the 2013 year was zero (R0.00) as
budgeted production quantities for the two respective products were the same as actual
production quantities.
The budgeted fixed manufacturing overhead recovery rate for the year ended 31 March 2012
was R120 per unit.
The actual direct material cost per unit and actual variable manufacturing overhead cost per
unit remained the same for both 2012 and 2013.
2
, The company uses the first-in-first-out (FIFO) method for inventory valuation purposes.
Marks
QUESTION 1 REQUIRED Sub-
Total
total
(a) Calculate the actual net profit before tax reported in the Annual Financial
Statements for the year ended 31 March 2013 and discuss why (by
making use of appropriate calculations) this amount is different from the
net profit before tax presented in the Annual Internal Management Report
for the year ended 31 March 2013.
Calculation of actual net profit before tax 4
Discussion of difference 4 8
Round your calculations to two decimals throughout and your final answer
to two decimals.
Total 8
The financial manager of Heat & Co. recently returned from an accounting seminar where the
benefits of using an activity based costing (ABC) method were presented. The financial manager is
interested in calculating the budgeted product cost of product Premier and product Deluxe for the
year ending 31 March 2014 by making use of the ABC method to allocate the fixed manufacturing
overhead expenses to the products.
After a thorough investigation of the production activities of the company, the following activity
centres were identified and the following budgeted activity data was compiled by the financial
manager for the year ending 31 March 2014.
Allocation of fixed manufacturing overheads to each
activity centre
Materials
Production handling
set-up and and
Fixed cost Total cost Production maintenance storage Inspection
expense (R) (R) (R) (R) (R)
Salaries of
permanent 4 050 000.00 810 000.00 1 215 000.00 810 000.00 1 215 000.00
employees
Depreciation on
machinery and 2 520 000.00 2 520 000.00 Nill Nill Nill
equipment
Rental expense
and insurance
1 800 000.00 720 000.00 180 000.00 450 000.00 450 000.00
premium for the
property
Other fixed
630 000.00 63 000.00 378 000.00 189 000.00 Nill
expenses
9 000 000.00
The company plans to permanently increase production to 35 000 units of product Premier
and 32 000 units of product Deluxe during 2014.
3
HEAT & CO. (PTY) LTD
Heat & Co. (Pty) Ltd ( ‘Heat & Co.’ ) has been in business for five years and manufactures high
quality gas heaters. As electricity tariffs have increased significantly over the last five years, there
has been an increase in the demand for the two types of gas heaters manufactured by the company,
namely the Premier gas heater and the higher-end Deluxe gas heater.
Manufacturing takes place in terms of strict technical and safety specifications and great care is
taken to ensure that every product meets the safety and quality requirements.
The company uses a variable costing system to calculate the net profit before tax which is reported
in the Annual Internal Management Report. An absorption costing system is used when preparing
the Statement of Comprehensive Income which forms part of the Annual Financial Statements.
The following is an extract of the actual financial results presented in the Annual Internal
Management Report for the year ended 31 March 2013:
Inventory information for the year ended 31 March 2013:
Premier Deluxe
(units) (units)
Opening inventory 10 000 9 000
Production 33 750 30 000
Sales 40 000 35 000
Closing inventory 3 750 4 000
Calculation of net profit before tax for the year ended 31 March 2013:
Premier Deluxe Total
R R R
Revenue 30 000 000 49 000 000 79 000 000
Cost of sales (22 000 000) (32 900 000) (54 900 000)
Direct material 16 800 000 27 650 000 45 450 000
Variable manufacturing
overheads 5 200 000 5 250 000 10 450 000
Variable sales costs (1 400 000) (1 225 000) (2 625 000)
Contribution 6 600 000 14 875 000 21 475 000
Fixed manufacturing overheads (9 000 000)
Fixed selling and administration expenses (3 500 000)
Net profit before tax 8 975 000
There was an unfavourable fixed manufacturing overhead expenditure variance for the 2013
year of R500 000. The production volume variance for the 2013 year was zero (R0.00) as
budgeted production quantities for the two respective products were the same as actual
production quantities.
The budgeted fixed manufacturing overhead recovery rate for the year ended 31 March 2012
was R120 per unit.
The actual direct material cost per unit and actual variable manufacturing overhead cost per
unit remained the same for both 2012 and 2013.
2
, The company uses the first-in-first-out (FIFO) method for inventory valuation purposes.
Marks
QUESTION 1 REQUIRED Sub-
Total
total
(a) Calculate the actual net profit before tax reported in the Annual Financial
Statements for the year ended 31 March 2013 and discuss why (by
making use of appropriate calculations) this amount is different from the
net profit before tax presented in the Annual Internal Management Report
for the year ended 31 March 2013.
Calculation of actual net profit before tax 4
Discussion of difference 4 8
Round your calculations to two decimals throughout and your final answer
to two decimals.
Total 8
The financial manager of Heat & Co. recently returned from an accounting seminar where the
benefits of using an activity based costing (ABC) method were presented. The financial manager is
interested in calculating the budgeted product cost of product Premier and product Deluxe for the
year ending 31 March 2014 by making use of the ABC method to allocate the fixed manufacturing
overhead expenses to the products.
After a thorough investigation of the production activities of the company, the following activity
centres were identified and the following budgeted activity data was compiled by the financial
manager for the year ending 31 March 2014.
Allocation of fixed manufacturing overheads to each
activity centre
Materials
Production handling
set-up and and
Fixed cost Total cost Production maintenance storage Inspection
expense (R) (R) (R) (R) (R)
Salaries of
permanent 4 050 000.00 810 000.00 1 215 000.00 810 000.00 1 215 000.00
employees
Depreciation on
machinery and 2 520 000.00 2 520 000.00 Nill Nill Nill
equipment
Rental expense
and insurance
1 800 000.00 720 000.00 180 000.00 450 000.00 450 000.00
premium for the
property
Other fixed
630 000.00 63 000.00 378 000.00 189 000.00 Nill
expenses
9 000 000.00
The company plans to permanently increase production to 35 000 units of product Premier
and 32 000 units of product Deluxe during 2014.
3
