Prepare the Actual Statement of Comprehensive Income using direct costing principles (part a)
To prepare the statement, we need to calculate various costs and revenues.
- Sales:
- 6000 litres in 20-litre containers = 300 units (6000/20)
- 600 litres in 5-litre containers = 120 units (600/5)
- Revenue = (300 units * R850) + (120 units * R300) = R255 000 + R36 000 = R291 000
- Variable costs:
- Raw materials = R105 000
- Labour costs for mixing:
- Supervisor salary = R1300 * 12 = R15 600
- Non-supervising employees normal pay = 2 * R250 * 52 * 2 = R52 000
- Overtime = 2 * 4 * 2 * R250 = R4 000 (twice normal rate)
- Total labour = R15 600 + R52 000 + R4 000 = R71 600
- Packaging costs = (300 units * R20) + (120 units * R5) = R6 000 + R600 = R6 600
- Total variable costs = R105 000 + R71 600 + R6 600 = R183 200
- Contribution margin = R291 000 - R183 200 = R107 800
- Fixed costs:
- Electricity and factory rental = R1 050 * 12 = R12 600
- Depreciation = R900 * 12 = R10 800
- Admin salaries = 2 * R1 500 * 12 = R36 000
- Total fixed costs = R12 600 + R10 800 + R36 000 = R59 400
- Net profit = R107 800 - R59 400 = R48 400
Calculate over/under recovered fixed manufacturing overheads (part b(i))
Applied fixed manufacturing overheads = R74 000.
Actual fixed manufacturing overheads = R12 600 + R10 800 = R23 400.
Over-recovered = R74 000 - R23 400 = R50 600.
, Prepare journal entry for over/under recovered fixed manufacturing overheads (part b(ii))
Debit: Fixed Manufacturing Overhead Control R23 400
Debit: Cost of Goods Sold R50 600
Credit: Fixed Manufacturing Overhead Applied R74 000
Calculate absorption costing gross profit (part b(iii))*
Absorption costing considers fixed manufacturing overheads as part of product cost.
Fixed manufacturing overhead per unit = R74 000 / ((6000/20)+(600/5)) = R74 units = R176.19
per unit
Cost per unit (absorption) = (R105 000 + R71 600 + R6 600)/420 + R176.19 = R435 + R176.19 = R611.19
for variable + fixed mfg costs per unit
Gross profit = R291 000 - (420 * R611.19) = R291 000 - R256 700 = R34 300
Discuss preference for direct costing vs absorption costing (part c)
From a management accounting perspective, direct costing is preferred for decision-making because it
separates fixed and variable costs, aiding in understanding contribution margins and making decisions
like pricing or production volume changes. Absorption costing includes fixed costs in product costs,
which can distort profitability analysis per unit.
Question 2
Calculate the standard quantity of material, labour hours, and variable overhead for 10,000 units.*
- Standard material per unit = 2 kg (since R80 / R40 per kg = 2 kg)
- Standard labour hours per unit = 0.80 hours
- Standard variable overhead per unit based on 0.25 hours * R40 = R10
For 10,000 units:
- Standard material = 10,000 units * 2 kg = 20,000 kg
- Standard labour hours = 10,000 units * 0.80 hours = 8,000 hours
- Standard variable overhead hours = 10,000 units * 0.25 hours = 2,500 hours
To prepare the statement, we need to calculate various costs and revenues.
- Sales:
- 6000 litres in 20-litre containers = 300 units (6000/20)
- 600 litres in 5-litre containers = 120 units (600/5)
- Revenue = (300 units * R850) + (120 units * R300) = R255 000 + R36 000 = R291 000
- Variable costs:
- Raw materials = R105 000
- Labour costs for mixing:
- Supervisor salary = R1300 * 12 = R15 600
- Non-supervising employees normal pay = 2 * R250 * 52 * 2 = R52 000
- Overtime = 2 * 4 * 2 * R250 = R4 000 (twice normal rate)
- Total labour = R15 600 + R52 000 + R4 000 = R71 600
- Packaging costs = (300 units * R20) + (120 units * R5) = R6 000 + R600 = R6 600
- Total variable costs = R105 000 + R71 600 + R6 600 = R183 200
- Contribution margin = R291 000 - R183 200 = R107 800
- Fixed costs:
- Electricity and factory rental = R1 050 * 12 = R12 600
- Depreciation = R900 * 12 = R10 800
- Admin salaries = 2 * R1 500 * 12 = R36 000
- Total fixed costs = R12 600 + R10 800 + R36 000 = R59 400
- Net profit = R107 800 - R59 400 = R48 400
Calculate over/under recovered fixed manufacturing overheads (part b(i))
Applied fixed manufacturing overheads = R74 000.
Actual fixed manufacturing overheads = R12 600 + R10 800 = R23 400.
Over-recovered = R74 000 - R23 400 = R50 600.
, Prepare journal entry for over/under recovered fixed manufacturing overheads (part b(ii))
Debit: Fixed Manufacturing Overhead Control R23 400
Debit: Cost of Goods Sold R50 600
Credit: Fixed Manufacturing Overhead Applied R74 000
Calculate absorption costing gross profit (part b(iii))*
Absorption costing considers fixed manufacturing overheads as part of product cost.
Fixed manufacturing overhead per unit = R74 000 / ((6000/20)+(600/5)) = R74 units = R176.19
per unit
Cost per unit (absorption) = (R105 000 + R71 600 + R6 600)/420 + R176.19 = R435 + R176.19 = R611.19
for variable + fixed mfg costs per unit
Gross profit = R291 000 - (420 * R611.19) = R291 000 - R256 700 = R34 300
Discuss preference for direct costing vs absorption costing (part c)
From a management accounting perspective, direct costing is preferred for decision-making because it
separates fixed and variable costs, aiding in understanding contribution margins and making decisions
like pricing or production volume changes. Absorption costing includes fixed costs in product costs,
which can distort profitability analysis per unit.
Question 2
Calculate the standard quantity of material, labour hours, and variable overhead for 10,000 units.*
- Standard material per unit = 2 kg (since R80 / R40 per kg = 2 kg)
- Standard labour hours per unit = 0.80 hours
- Standard variable overhead per unit based on 0.25 hours * R40 = R10
For 10,000 units:
- Standard material = 10,000 units * 2 kg = 20,000 kg
- Standard labour hours = 10,000 units * 0.80 hours = 8,000 hours
- Standard variable overhead hours = 10,000 units * 0.25 hours = 2,500 hours
