MODULE 13 COST ACCOUNTING (MANUFACTURING)

New Era Accounting: Grade 12 1 Teacher’s Guide

MODULE 13

COST ACCOUNTING (MANUFACTURING) Note to the Teacher: In Grade 10 learners were exposed to cost concepts and then in Grade 11 they drew up manufacturing ledger accounts, calculated costs of manufacturing and were exposed to some ethical and internal control

measures. In Grade 12 the focus falls on the Production Cost Statement, costing and ethical and control measures. If you wish to revise the General Ledger accounts then we suggest you refer to the Grade 11 textbook. How-ever, it is not necessary. At this stage you would be better off revising the different cost components and then lead them into the Production Cost Statement. Most learners find this statement a lot easier than the ledger accounts. It is important to note that it has become the norm in examinations to test the two aspects, i.e. the Produc-

tion Cost Statement and the costing in two different parts of a question. This is because of work-in-progress. If costing includes work-in-progress then the calculations are far more complicated as they are bringing in costs from the previous year. In the examination guideline document it states that for costing calculations there must be no work-in-progress at school level. Further assumptions are also made around factory overheads and administration and selling and distribution costs. In terms of the school curriculum Factory overheads and Administration costs are regarded as fixed costs – in other words the costs remains the same irrespective of the number of units produced. However, Factory overheads will include some items that could be seen as variable, for example electricity. While

electricity does have a fixed amount each month the balance will be variable – if you double your production then this will affect the electricity charges. The same can be said for other costs, e.g. consumable stores. At school level we regard Factory overheads and Administration costs as fixed – the majority of the costs will be fixed. However, make learners aware of the fact that this is a bit of an assumption and that at tertiary level they will be involved in more complicated calculations when they will have to split these costs further in to what is fixed and what is variable.

TASK 13.1 Matching columns

COLUMN A COLUMN B

COST CONCEPTS DEFINITION

1. Direct materials J Material that forms a part of the item produced.

2. Indirect materials F Materials that are used in the manufacturing process but do not form part of the item produced.

3. Direct labour L Labour directly involved in the manufacture of the goods.

4. Indirect labour A Labour used in the factory but are not involved in the manufacture of the goods.

5. Prime cost H Total direct costs (raw materials + direct labour).

6. Factory overheads B Other expenses incurred by the factory other than direct expenses.

7. Fixed costs K Costs that remain constant irrespective of the amount produced.

8. Variable costs D Costs that vary in proportion to the amount of goods produced.

9. Total cost of production I Includes all costs involved in the production.

10. Unit cost C Cost of one item produced.

11. Mark-up G The profit made on the goods produced.

12. Selling price E The price that the items are sold for.


TASK 13.2 Ralley Bike Manufacturers: Production Cost

Statement

13.2.1 NAME OF MANUFACTURER: RALLEY BIKE MANUFACTURERS PRODUCTION COST STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8

Note Direct / Prime costs 430 000

Direct material costs 1 330 000

Direct labour costs 2 100 000

Factory overhead costs 3 354 000

Total manufacturing costs 784 000

Work-in-process at beginning of the year 40 000

824 000

Work-in-process at end of the year (44 000)

Cost of production of finished goods 780 000

13.2.2 NOTES TO THE FINANCIAL STATEMENTS

1. Direct material costs Opening stock 80 000

Net purchases (200 000 + 60 000) 260 000

Carriage on purchases 30 000

370 000

Closing stock *(40 000)

Direct material cost 330 000

*Balancing figure

2. Direct labour costs Factory wages (210 000 – 110 000) 100 000

Direct labour cost 100 000

3. Factory overhead costs Consumable stores (24 000 – 6 000) 18 000

Salaries and wages/indirect labour 60 000

Depreciation 16 000

Rent (200 000 x 3/5) 120 000

Electricity 120 000

Sundry expenses (25 000 x 80%) 20 000

Factory overhead costs 354 000

4. Selling and distribution costs Depreciation 7 000

Rent (200 000 x 1/5) 40 000

Electricity 8 000


Commission 84 000

Selling and distribution costs 142 750


5. Administration costs Salaries & wages (210 000 – 100 000 – 60 000) 50 000

Depreciation 3 000

Rent (200 000 x 1/5) 40 000

Electricity 8 000


Administration costs 102 250

TASK 13.3 Kwa-Mabula Manufacturers: Production Cost

Statement, Income Statement 13.3.1 NAME OF MANUFACTURER: KWA-MABULA MANUFACTURERS PRODUCTION COST STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8

Note Direct / Prime costs 1 482 000

Direct material costs 1 1 302 000



Total manufacturing costs 2 405 200


2 485 200

Work-in-process at end of the year[2] (75 200)

Cost of production of finished goods[1] 2 410 000 [1] Refer to the finished goods stock note below to get this figure. [2] Work-in-process is the balancing figure.

INCOME STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8

Note Sales 3 600 000

Cost of finished goods sold / Cost of sales 6 (2 400 000)

Gross profit 1 200 000

Other costs (599 500)

Administration costs 4 (182 500)

Selling & distribution costs 5 (417 000)

Net profit 600 500

13.3.3 NOTES TO THE FINANCIAL STATEMENTS


Net purchases (600 000 + 460 000 – 24 000) 1 036 000


1 366 000

Closing stock (64 000)

Direct material cost 1 302 000

2. Direct labour costs Factory wages 180 000



3. Factory overhead costs Consumables stores (14 000 + 44 000 – 6 000) 52 000

Salaries and wages (indirect labour) (360 000 – 180 000 – 80 000)

100 000

Depreciation [(1 000 000 – 240 000) x 12%] 91 200

Rent (500 000 x 60%) 300 000

Electricity 320 000

Sundry expenses (90 000 x 4/6) 60 000


4. Selling and distribution costs Depreciation – sales vehicles 11 000

Rent (500 000 x 25%) 125 000

Electricity (344 000 – 320 000 – 10 000) 14 000

Sales vehicle running expenses 72 000

Sundry expenses (90 000 x 1/6) 15 000 Commission (3 600 000 x 5%) 180 000


5. Administration costs Salaries 80 000

Depreciation – office equipment 2 500

Rent (500 000 x 15%) 75 000

Electricity 10 000

Sundry expenses (90 000 x 1/6) 15 000


6. Cost of finished goods sold / Finished Goods Opening stock of finished goods 70 000

Cost of finished goods produced during the year 2 410 000

2 480 000 Closing stock of finished goods (80 000)

Cost of finished goods sold / Cost of sales 2 400 000

Note: Procedure to complete the Finished goods note: The opening balance of R70 000 was given. The closing balance of R80 000 was given. The cost of sales can be calculated as you have the sales figure and the mark-up:

3 600 000 x 100/150 = R2 400 000 The cost of finished goods produced becomes the balancing figure.


TASK 13.4 Centipede Manufacturers: Production Cost

Statement, Income Statement, Calculations

13.4.1 NAME OF MANUFACTURER: CENTIPEDE MANUFACTURERS PRODUCTION COST STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8







834 600



13.4.2 INCOME STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8


Cost of finished goods sold / Cost of sales 4 (1 049 840)

Gross profit 450 160


Administration costs (82 040)

Selling & distribution costs (125 120)

Net profit 243 000

NOTES TO THE FINANCIAL STATEMENTS

1. Direct material costs

Opening stock 60 000 Net purchases (210 000 + 62 000)[1] 272 000

Carriage on purchases (19 500 + 9 920)[2] 29 420

Import duties[3] 6 200

367 620


Direct material cost 246 000 [1]£5 000 x 12.40 [2]£800 x 12.40 [3]62 000 x 10% 2. Direct labour costs Factory wages (198 000 + 19 800) 217 800

Medical Aid contributions (39 000 + 3 600) 42 600


3. Factory overhead costs Consumables stores (15 000 + 45 000 – 6 000) 54 000

Factory electricity (9 000 + 3 000) 12 000

Maintenance on factory equipment 24 000

Factory rent [72 000 + 1 200 (600 x 2)] 73 200

Depreciation 45 000




Cost of finished goods produced during the year 793 600

1 101 640

Closing stock of finished goods (51 800)

Cost of finished goods sold / Cost of sales 1 049 840

13.4.3 Calculate the following:

(a) (a) The unit cost of production of each pool filter.

793 600 ÷ 3 280 = R241.95

(b) (b) The selling price of each pool filter.

1 500 000 ÷ 4 000 = R375

(c) (c) The mark-up % on each pool filter. 133.05/241.95 x 100 = 55%

TASK 13.5 Vilakazi Shoe Factory: Production Cost State-

ment, Income Statement, Calculations

13.5.1 NAME OF MANUFACTURER: VILAKAZI SHOE FACTORY PRODUCTION COST STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8







1 057 650



13.5.2 INCOME STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8


Cost of finished goods sold / Cost of sales 6 (720 000)

Gross profit 360 000


Selling & distribution costs 4 (125 383)

Administration costs 5 (127 272)

Net profit 107 345




Net purchases (280 000 + 70 000) 350 000


514 700

Closing stock (balancing figure) (87 550)




3. Factory overhead costs Consumable stores [(9 400 + 19 800 – 3 900) x 75%] 18 975

Indirect labour 39 600

Salary: Foreman (96 240 + 5 000 + 400 + 50) 101 690

Depreciation 6 000

Maintenance 12 155

Insurance 12 480

Rent (21 800 – 2 000 + 1 800) 21 600


4. Selling and distribution costs Salaries 76 000

Depreciation 34 300

Bad debts 1 120

Commission on sales (1 122 + 9 678) (1 080 000 x 1%) 10 800

Consumable stores 3 163


5. Administration costs Salaries 56 100

Depreciation 4 800

Insurance: Administration offices (22 440 – 4 000) 18 440

Sundry administration expenses 33 110

Rent 11 660

Consumable stores (6 325 ÷ 2) 3 162



Cost of finished goods produced during the year 932 950

988 750


Cost of finished goods sold (1 080 000 x 100/150) 720 000

13.5.3 Calculate the unit cost of producing the shoes.

932 950 ÷ 23 324 = R40

13.5.4 Calculate how many shoes were sold.

40 + 50% = R60 1 080 000 ÷ R60 = 18 000 pairs


TASK 13.6 Tugela Water Bottle Manufacturers: Production

Cost Statement, Income Statement, Unit costs

13.6.1/3 NAME OF MANUFACTURER: TUGELA WATER BOTTLE MANUFACTURERS PRODUCTION COST STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8

Note Total Unit cost

Direct / Prime costs 1 038 000 R12.81

Direct material costs 1 708 000 R8.74

Direct labour costs 2 330 000 R4.07

Factory overhead costs 3 582 000 R7.19

Total manufacturing costs 1 620 000 R20.00

Work-in-process at beginning of the year 0

1 620 000

Work-in-process at end of the year 0

Cost of production of finished goods 1 620 000 R20.00

13.6.2/3 INCOME STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8

Note Total Unit cost

Sales [1 620 000 x 180/100] 2 916 000 R36.00

Cost of finished goods sold / Cost of sales 6 (1 620 000) R20.00

Gross profit 1 296 000 R16.00

Other costs (660 700) (R8.16)

Selling & distribution costs 4 (465 500) (R2.41)

Administration costs 5 (195 200) (R5.75)

Operating profit 635 300

Interest income [66 000 – 60 000] 6 000

Operating profit before interest expense 641 300

Interest expense [200 000 x 18%] (36 000)

Net profit 605 300



Purchases [240 000 + 370 000] 610 000


750 000





3. Factory overhead costs Wages: Cleaner [42 000 x 4/6] 28 000

Salary: Foreman 129 000

Cleaning materials [(3 000 + 38 000 – 5 000) x 4/6] 24 000

Rent expense [432 000 x 800/1 200] 288 000

Insurance [36 000 x 800/1 200] 24 000

Electricity & water [31 000 + 4 000 – 10 000] 25 000

Depreciation [(500 000 – 180 000) x 20%] 64 000



4. Selling and distribution costs Wages: Cleaner [42 000 x 1/6] 7 000

Sales commission [(2 916 000 – 78 000) x 5%] 141 900


Rent expense [432 000 x 220/1 200] 79 200

Insurance [36 000 x 220/1 200] 6 600

Electricity & water [(31 000 + 4 000 - 25 000) ÷ 2] 5 000

Packing materials [52 000 x 80%] 41 600

Bad debts 78 000

Cell-phone allowances 12 000

Sales vehicle expenses 30 000

Depreciation [240 000 x 25%] 60 000


5. Administration costs Wages: Cleaner [42 000 x 1/6] 7 000

Salary: Office workers 84 000


Rent expense [432 000 x 180/1 200] 64 800

Insurance [36 000 x 180/1 200] 5 400

Electricity & water [(31 000 + 4 000 - 25 000) ÷ 2] 5 000

Bank charges 9 000

Sundry administration expenses 10 000

Depreciation [(50 000 – 30 000) x 20%] 4 000


TASK 13.7 Break-even point: Calculations

Selling price per item

Variable cost per item

Profit per item Fixed costs (in

total)

Break-even point (no. of

items)

R10 R8 R2 R60 30

R24 R16 R8 R160 20

R50 R30 R20 R1 000 50

R75 R45 R30 R900 30

R40 R25 R15 R750 50

R80 R68 R12 R144 12

R80 R54 R26 R624 24

TASK 13.8 Tau Factory: Calculations

1. Direct material cost per unit.

100 000 ÷ 10 000 = R10

2. Direct labour cost per unit.

150 000 ÷ 10 000 = R15

3. Total direct cost per unit.

250 000 ÷ 10 000 = R25

4. Factory overhead cost per unit.

200 000 ÷ 10 000 = R20


5. Cost of production of finished goods per unit.

450 000 ÷ 10 000 = R45

6. Selling & distribution costs per unit.

50 000 ÷ 10 000 = R5

7. Administration costs per unit.

70 000 ÷ 10 000 = R7

8. Variable costs per unit.

Direct material cost (DMC) per unit + Direct labour cost (DLC) per unit + Selling & distribution cost (SDC) per unit

R10 + R15 + R5 = R30

9. Fixed costs per unit.

Factory overhead cost per unit (FOHC) + Administration cost (AC) per unit R20 + R7 = R27

10. Contribution per unit.

Selling price per unit less Variable costs per unit R60 – R30 = R30

11. Break-even point (i.e. the point at which no profit or loss is earned).

Fixed costs ÷ Contribution per unit 270 000 ÷ 30 = 9 000 units

Proof of break-even point: 9 000 units sold at R60 each = R540 000

Variable costs [9 000 x R30] = R270 000 Fixed costs R270 000 Profit / Loss = NIL

TASK 13.9 Icicles Factory: Production Cost Statement,

Income Statement

NAME OF MANUFACTURER: ICICLES FACTORY PRODUCTION COST STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8

Note R Per unit

Direct / Prime costs 60 000 R0.50

Direct material costs 36 000 R0.30

Direct labour costs 24 000 R0.20

Factory overhead costs 96 000 R0.80

Total manufacturing costs 156 000 R1.30

Work-in-process at beginning of the year 0

156 000

Work-in-process at end of the year 0

Cost of production of finished goods 156 000 R1.30


INCOME STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8

Note R Per unit

Sales 360 000 R3.00

Cost of finished goods sold / Cost of sales (156 000) R1.30

Gross profit 204 000 R1.70

Other costs (114 000) (R0.95)

Selling & distribution costs (36 000) (R0.30)

Administration costs (78 000) (R0.65)

Net profit 90 000 R0.75

TASK 13.10 Ground Leather Manufacturers: Analysis and in-

terpretation

13.10.1 Give 2 reasons why the direct material cost has decreased.

Cheaper quality material being used. They may have found a cheaper supplier. May have found a supplier that was closer so transport costs are reduced.

13.10.2 Give 2 reasons why the direct labour cost has increased.

Employed more labour without increasing production, workers were given an increase in salaries /wages, labour is not as productive.

13.10.3 Discuss the increase in the cost of production and explain what effect this will have on the profits of the business.

The costs of production have increased from R42 to R50 (R8 increase) but the selling price has remained the

same which means less profits for the business.

13.10.4 Explain why selling and distribution expenses have increased by R7 but admin costs only by R1.

Various reasons: Perhaps they did more advertising and employed more sales people plus the normal increase for inflation while admin expenses have only increased due to inflation – increased costs.

13.10.5 What does the increase in the break-even point mean to the business? Explain fully.

The business has to make an extra 30 items before they make a profit.

13.10.6 Do you think Groundcover made the correct decision in not increasing the selling price of the belts? Why?

Learners to debate – costs have increased so they need to increase the sales price to make the same profit but sales have already decreased so maybe the demand for the product has decreased. If there was more advertising (increased selling and distribution expenses) this has not really paid off.

13.10.7 Give the owners advice on what they need to do to improve the situation for the next year.

Learners to give their own opinions.

Possible answers: Look for another supplier. Cut back on labour. Reduce overhead costs. Do more advertising. Reward increased productivity, etc.


TASK 13.11 Tick-Tock Lollies: Calculations, Analysis and

interpretation

13.11.1 Complete the unit cost table by calculating the missing figures marked with (a) – (e).

No. Working Answer

(a) 200 000 ÷ 40 000 R5

(b) 40 000 ÷ 40 000 R1

(c) R5 + R1 R6

(d) 40 000 x R6 (or R200 000 + R40 000) R240 000

(e) 40 000 x R1.50 R60 000

13.11.2 Calculate the unit cost of each lolly made during the year.

R5 + R1 + R2 = R8 OR (200 000 + 40 000 + 80 000) ÷ 40 000 = R8

13.11.3 Calculate the mark-up achieved by the business.

Gross profit: 12 – 8 = R4 4/8 x 100 = 50%

13.11.4 What is the difference between a fixed and a variable cost? Give one explain of each.

Fixed cost: The costs remain the same within a period of time irrespective of the number of units produced, e.g. Factory overheads, rent, etc. Variable cost: The costs vary in direct proportion to the number of units produced, e.g. raw materials, direct labour.

13.11.5 Calculate the break-even point in 20.8.

80 000 + 160 000 12 – (5 + 1 + 1.50)

240 000 4.50 53 334 units

13.11.6 Should the owner be happy with the performance of the business in terms of the break-even? Take into account that the break-even last year was 25 000.

No. He is selling 40 000 and the break-even is 53 334 which means he is making a loss on 13 334 units. His break-even has increased from 25 000 to 53 334.

13.11.7 (a) Give two possible reasons why the direct material cost per unit has increased.

Increase in the price of the goods. Increase in transport of the goods.

More wastage. Any other viable reason.

(b) What effect has this increase had on the profits of the business?

Decreased the profits.

(c) Briefly discuss two suggestions the owner could consider to reduce this cost.

Find an alternative supplier. Find a closer source so that the transport costs are reduced. Control the wastage. Any other viable reason.


13.11.8 Factory overheads have decreased as a result of “economies of scale”. Briefly explain what is meant by this term.

Factory overheads are fixed so the more you produce the total amount of the costs is divided by a larger

number so the costs per unit come down.

13.11.9 Do you agree with the owner keeping the selling price of the lollies the same for 20.7 and 20.8? Why? Explain briefly.

No. The cost of manufacturing each lolly in 20.7 was R6.30 but in 20.8 this increased to R8, therefore they are making less profit. OR Yes. Their sales have increased from 25 000 to 40 000 and in view of the economic climate if they increase the selling price they might not sell as much.

TASK 13.12 Barney’s Toy Manufacturers (1): Internal control The purpose of this Task is for the learners to engage with the figures and real-life scenarios. There is no right or wrong answer but the discussion is what is important. However, it is important that the students can substantiate any statements made. Suggested marking rubric:

Criteria Level 1 Level 2 Level 3 Level 4

Possible rea-sons for the stock being used up

Fails to identify pos-sible reasons why the stock has been used up.

Identifies some rea-sons why the stock has been used up.

A good discussion on possibilities.

An excellent discus-sion showing great insight.

Control measures

Poor suggestions made for control measures.

Some control measures discussed.

Good discussion on control measures that are feasible.

Excellent discussion on control measures to take.

Advice Poor advice that does not address the issue.

Aspects of the ad-vice are feasible.

Good advice given that is feasible.

Excellent advice that shows great under-standing.

Possible answers:

Possible reasons for the stock being used up

Staff stealing material, wastage, cutting out wrong pieces that need to be re-cut, errors, etc.

Control measures Material issued must be strictly controlled, make people answerable, people to check up on each other, make people responsible for damages and losses, reward for targets met, etc.

Advice Various answers: Yes – so that there is no stoppage in production, needs strict control No – as this puts temptation in people’s way.

TASK 13.13 Barney’s Toy Manufacturers (2): Ethics

The focus of this Task is the ethical issues at stake. Learners need to realise that there are consequences to

all actions and that they cannot take decisions into your own hand. Even though Annie has got a problem just taking the off-cuts is not ethically correct. She should rather talk to the management in an attempt to solve her problem. If Barney is to just forget the issue he is opening himself up to further issues in future but he cannot discriminate and take action against some and not others. Give the learners time to discuss this Task. You might decide that they do not need to write a report on the Task. Often assessment stunts people from expressing their views so it could therefore be done as a discus-sion or a debate.


Suggested marking rubric:

Criteria Level 1 Level 2 Level 3 Level 4

Ethical issues Poor discussion on the ethical issues at stake.

Some ethical issues raised.

Good discussion on the ethical issues.

Excellent discussion on the ethical is-sues.

Reasons for and against just ‘forget-ting it’

Poor discussion. Some valid reasons posed.

Good discussion for and against why to just ‘forget it’.

Excellent discussion for and against why to just ‘forget it’.

Advice Poor advice given. Some advice is ac-ceptable.

Good advice based on prior discussions.

Excellent advice based on discussion.

Note to the Teacher: Many of the Tasks that follow are integrated with inventory valuations. These two topics can very easily be integrated in a final examination, so you are urged to allow the learners to do some of these tasks.

TASK 13.14 Hopkins Manufacturers: Production Cost State-

ment, Analysis and interpretation

13.14.1 NAME OF MANUFACTURER: HOPKINS MANUFACTURERS PRODUCTION COST STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.2

Note

Direct / Prime costs 678 384


Direct labour costs [450 000 + 4 500] 454 500


Total manufacturing costs 1 090 000


1 200 000


Cost of production of finished goods 1 050 000

NOTES


Purchases plus carriage 226 340

241 740

Closing stock* (17 856)

Raw materials issued to production 223 884


Goods from manufacturing department (balancing figure) 1 050 000

1 162 000


Cost of sales (1 760 000 x 100/160) 1 100 000

*CALCULATION OF CLOSING STOCK 15 400 + 226 340 = R241 740

= (96 x 241 740) ÷ (100 + 1 200) = 23 207 040 ÷ 1 300 = R17 852 Due to rounding off the learners can get different amounts. Take this into consideration in the Production Cost Statement.


13.14.2 Briefly explain why you think Hopkins Manufacturers chose the weighted average method to value the bags of polystyrene. Discuss two reasons.

Cannot separate different bags of polystyrene.

Value is low.

13.14.3 Discuss two possible reasons for the change in direct material cost per unit in 20.2.

Found cheaper material. Found a supplier that is closer so reduced transport costs. Found alternative supplier.

13.14.4 Discuss two possible reasons for the change in direct labour cost per unit in 20.2.

Increase in wage rate. Staff are not as productive.

Staff worked overtime. Do not accept increased labour force as this is a unit cost.

13.14.5 Should the owners be happy with the break-even for 20.2? Why? Explain briefly quoting figures to substantiate your answer.

Yes / No. They have sold 3 520 units and break-even point is 3 240 so they are making a profit. The break-even has increased from last year.

TASK 13.15 Maria: Calculations, Production Cost Statement,

Analysis and interpretation

13.15.1 Raw material / Direct material issued to the production process.

Opening stock 20 992

Purchases 436 300 Carriage on purchases [755 x R6] 4 530

461 822

Closing stock [62 x R578]* (35 836)

Raw materials issued to production R425 986

*Working: (461 822 ÷ 755) - 44 = R578 13.15.2 NAME OF MANUFACTURER: MARIA PRODUCTION COST STATEMENT FOR THE PERIOD ENDED 31 AUGUST 20.1

Note


Direct material costs 425 986

Direct labour costs (1 500 x 216) 324 000

Factory overhead costs (1 500 x 166.67) 250 005



1 050 000




13.15.3 Calculate the unit cost of production for the year ended 31 August 20.1.

990 000 ÷ 1 500 = R660

13.15.4 (a) Give a possible reason, other than price changes, for the change in each of the unit costs provided above.

Raw materials: More wastage.

Direct labour: Better productivity. Factory overheads: Economies of scale.

(b) Explain whether Maria should be concerned about the break-even point. Quote figures to support your answer.

No. The break-even point has reduced from last year and she is producing more. Her sales are 1 464 so she is making a profit.

(c) Maria sells most of her travel bags to overseas tourists. In view of this she has decided to increase her mark-up to 150%. Do you agree with her? Discuss with full explanation.

Yes / No. No as the mark-up is too high and it is unethical to exploit overseas visitors.

Yes if people are prepared to pay there is no reason why she cannot increase the cost.

TASK 13.16 Clay Potters and Cwele Ltd: Production Cost

Statement, Stock valuations, Analysis and

interpretation

PART A: CLAY POTTERS

13.16.1 NAME OF MANUFACTURER: CLAY POTTERS PRODUCTION COST STATEMENT FOR THE PERIOD ENDED 31 JULY 20.1

Note


Direct material costs [(240 000 + 40 000) x 80%] 303 880

Direct labour costs 224 000




858 000



13.16.2 CALCULATION OF DIRECT OR (RAW) MATERIALS COST


Purchases 269 350


326 600

Closing stock* (22 720)


*Calculation of Closing stock: 326 600 ÷ 230 = 1 420

1 420 x 16 = R22 720


CALCULATION OF FACTORY OVERHEAD COST

Consumable stores 40 000

Rent [180 000 x 60/100] 108 000

Water and electricity 50 000

Depreciation 26 000

Indirect labour [280 000 – 224 000] 56 000

Sundry expenses 22 120

Factory overhead cost 302 120

CALCULATION OF FINISHED GOODS STOCK


Cost of goods manufactured (balancing figure) 837 000

889 000

Less Closing stock (29 000)

Cost of sales [1 376 000 x 100/160] 860 000

13.16.3 The owners of Clay Potters have instructed the accountant to switch between the

Weighted average and FIFO method when valuing the raw materials.

Why do you think the owners would give this instruction?

To show higher or lower profits depending on what he is trying to achieve.

Do you agree with the owners? Why?

No. It is unethical to switch – businesses have to stick to one method in the interest of comparison.

PART B: CWELE LTD UNIT COSTS: (Note that this is a separate question to Part A) 13.16.4

COSTS TOTAL UNIT COST

20.10 UNIT COST

20.9

Direct / raw materials R250 000 R10 R12 Direct labour cost 375 000 R15 R11

Prime cost 625 000 R25 R23

Factory overheads R200 000 R8 R10

Administration costs R75 000 R3 R3

Selling & distribution costs R100 000 R4 R2

13.16.5 Define the following concepts and give an example of each:

Fixed costs

Remains constant irrespective of the number of goods produced. Example: Rent, etc.

Variable costs

Varies in direct proportion to the number of units produced. Example: Raw materials.

13.16.6 Calculate the unit cost of production for 20.10.

825 000 ÷ 25 000 = R33

13.16.7 Discuss 2 possible reasons for the change in the following costs from 20.9 to 20.10:

Direct / raw materials cost

Cheaper source of material / supplier. Less wastage.


Direct labour cost

Increase in wage rate. Employed more labourers.

Factory overheads

Economies of scale. Costs, e.g. rent, have decreased.

13.16.8 Calculate the break-even point for 20.10.

200 000 + 75 000 60 – 29 = 275 000 31 = 8 871 units

13.16.9 The owner of Cwele Ltd is very pleased regarding the trend in the break-even point from 2.09 to 20.10. Do you agree? Why?

Yes. Because the break-even is less than 20.9 so more profit is being made.

TASK 13.17 Rani Manufacturers: Calculations, Stock

valuations, Analysis and interpretation

13.17.1 The owner (Rani) is of the opinion that the FIFO method is the best method to use in the manufacturing of raincoats. Briefly explain why you think he is of this opinion.

The stock is valued at the current prices and in times when prices are increasing (as it has during the past year) this will give a more realistic value of the stock.

13.17.2 Calculate the following: (Refer to information note no. 2 below.)

(a) The value of the raw (direct) materials on hand on 28 February 20.9 using the FIFO method of stock valuation.

(2 200 x 48) + (4 300 – 2 200 x 42) = 105 600 + 88 200 = R193 800

(b) Calculate the value of the raw (direct) material cost that would appear in the Production Cost Statement for the year ended 28 February 20.9.

(700 x 30) + 490 600 – 193 800 = 21 000 + 490 600 – 193 800 = R317 800

13.17.3 Rani has asked you to investigate the control over the raw materials:

(a) Calculate the number of metres of raw material fabric that appears to be miss-ing.

9 100 (issued to factory) – 4 000 x 1.8 (no. of raincoats x 1.8 metres each) = 9 100 – 7 200 = 1 900 metres missing

(b) Apart from theft state one possible reason for this shortage. Briefly offer Rani advice on what she could do to prevent this shortage. Discuss one point.

Wastage of material. Unskilled labour that are not cutting the material properly.

Any other valid reason. Proper supervision. Training of staff. Any other valid reason.


13.17.4

(a) Calculate the value of the direct labour cost (including contributions) that would appear in the Production Cost Statement for the year ended 28 February 20.9

(Refer to information 3 below).

Basic: 5 x R5 000 x 12 = R300 000 (note the R5 000 is monthly but you are working for a year) Overtime: 180 x 5 x 70 = R63 000 Pension: R300 000 x 10% = R30 000 UIF: R300 000 x 1% = R3 000 Total = 300 000 + 63 000 + 30 000 + 3 000 = R296 000

(b) Rani is concerned about the number of hours that the workers have worked overtime. She has had the same number of employees in the factory this year as last and the overtime has increased by double.

Why do you think she should be concerned?

Last year they produced 4 500 raincoats and this year this number was reduced to 4 000 but the same num-ber of workers that worked double the time.

This will increase the costs of manufacturing and thus result in lower profits.

Suggest two measures that Rani could introduce to try and cut back on the overtime.

The norm time to make a raincoat must be worked out so that staff will know what is expected of them in normal working hours.

There needs to be constant supervision. Staff needs to be given extra training. Any other feasible suggestion.

13.17.5 Calculate the following:

(a) The total cost of production of finished goods. R317 800 + R396 000 + (4 000 x 67.55)

= 317 800 + 396 000 + 270 200 = R984 000

(b) The unit cost of production of each raincoat.

R984 000 ÷ 4 000 = R246

(c) Calculate the break-even point for the year ended 28 February 20.9.

350 200 350 – 215.95 350 200 134.05 2 613 raincoats (2 612.5) (Remember break-even must always be rounded up)

(d) The break-even point for the year ended 28 February 20.8 was 2 273 units. Should Rani be happy with the break-even point for 20.9? Explain briefly.

Yes. The business has produced 4 000 raincoats which is above the break-even point (they are making a profit on

1 387 units). OR No. The break-even point is higher than it was in 20.8 (340 units). Therefore they have to manufacture more in 20.9 before they can make a profit.


13.17.6 Discuss two possible reasons why the selling and distribution costs per unit have de-creased. In your opinion has this been beneficial to the business? Discuss briefly.

Two possible reasons:

The salesman’s commission on sales has been reduced as they have sold fewer raincoats. Less advertising. Deliveries have been reduced. Any other feasible reason. Has this been beneficial to the business? No. The number of raincoats sold has decreased and therefore less profit will be made.

TASK 13.18 BB Bakery: Production Cost Statement, Stock

valuations, Analysis and interpretation 13.18.1 NAME OF MANUFACTURER: BB BAKERY PRODUCTION COST STATEMENT FOR MARCH 20.8.

APRIL 20.8 MARCH 20.8

Direct / Prime costs 120 000 *

Direct material costs 78 000 57 600

Direct labour costs [30 000 x 1.40] 42 000 33 600

Factory overhead costs 48 000 *

Total manufacturing costs of finished loaves of bread 168 000 120 000

Raw material / Direct material cost

Opening stock 7 000

Purchases [52 000 + 25 000] 77 000


Raw materials available for production 86 000 Closing stock (8 000)

Raw materials issued to the manufacturing process 78 000

13.18.2 Calculate the unit cost of each loaf of bread in April 20.8.

168 000 ÷ 30 000 = R5.60

13.18.3 Give 2 possible reasons why the raw materials cost have increased.

Due to inflation. Increase in transport costs. Different supplier. Any other reasonable reason.

13.18.4 Name 2 items that could possibly be included in factory overhead costs.

Rent. Electricity. Factory manager / supervisor. Cleaning and / or maintenance staff. Etc.

13.18.5 Calculate the break-even point in April 20.8. 48 000 + 10 500

7 – (2.60 + 1.40 + 0.50) 58 500 2.50 23 400 units


13.18.6 The owner of BB Bakery is very happy that the number of loaves of bread has in-creased by 6 000 since last month. He has therefore decided to take a holiday over-

seas in view of the increased profit he believes he is making. Is the owner correct in his assumption? Explain using figures to substantiate your answer.

Calculation of profit:

MARCH APRIL

Sales (24 000 x R7) (30 000 x R7) 168 000 210 000 Cost of manufacturing (120 000) (168 000)

Administration cost (10 000) (10 500)

Selling and distribution costs (10 000) (15 000)

Net profit R28 000 R16 500

No. Although the number of loaves has increased he has made less profit in April than March due to increased costs.

13.18.7 On investigation the owner has discovered that the sales figure for the month of April 20.8 was actually R8 000 less than what was expected but no bread has been left over.

Give 2 reasons why the sales are lower than budgeted.

Loaves of bread have been stolen. There has been wastage of bread.

Any other feasible reason.

Discuss 2 measures that the owner could take to prevent this situation in future.

Introduce security measures to prevent theft. Division of duties – somebody needs to be checking up so that there isn’t wastage or bread been badly

made that cannot be sold. Any other feasible reason.

13.18.8 In order to improve the profitability the owner has made the following proposal and

has requested your comment. The standard loaf of bread weighs 700g. He is propos-ing reducing each loaf of bread to 680g although it will still be marked on the packet as 700g. He does not, however, intend reducing the selling price of each loaf of bread. Do you agree with his suggestion? Why? Discuss at least 2 points in your dis-cussion to qualify your decision.

No. This is unethical – he needs to tell the customers if he is reducing the weight of the bread. The business will get a bad reputation and they will lose customers and this will have more of an effect

on the profit of the business.

13.18.9 The stock controller has recently left the bakery and the owner is not sure what method he was using in the calculation of the value of the closing stock. The owner is aware that there are two basic methods used in business, i.e. the FIFO and weighted average method. He has come to you for assistance as to which method he should use. Briefly explain which method you believe will be the most appropriate for a bak-ery business.

Weighted average method: The ingredients used in baking bread cannot be separated from each other – e.g. it would be impossible

to separate a bin of flour in to separate purchases.

The amount of ingredients would also be large (R78 000 of raw materials were used in April). Therefore the weighted average method would be the most appropriate. OR FIFO (This method would not be the most appropriate): FIFO makes use of the most current prices Therefore the stock valuation is the most realistic value.


TASK 13.19 Article

13.19.1 A friend of yours has read the article but does not understand certain terms. Explain to her what the terms in bold in the text mean.

Rising input costs – cost incurred in the manufacturing process, i.e. raw materials, labour and factor over-heads. As these are increasing it is pushing the cost price of the articles up.

13.19.2 Explain to your friend, why in terms of the article, food prices are expected to in-crease.

Costs have increased. Shortages of raw materials through droughts. Crop failures.

13.19.3 Why do you think it is cheaper to import some products than manufacture them local-ly?

South Africa’s input costs are often high. For example our labour costs are much higher than in many other countries of the world. Electricity tariffs have increased considerably over the last few years. Shortages of raw materials produced locally.

13.19.4 Why is the poultry industry expected to be hard hit? Explain briefly.

The poultry are fed on maize and related feeds.

13.19.5 You have been tasked by the board of a mill to make a presentation at the next board meeting around strategies that the business should be adopting in the new year to ensure the sustainability of the mill. Give a brief report in which you discuss at least five possible strategies that the board could look at.

Economise on costs, e.g. overheads.

Source cheaper supplier of raw materials. Introduce incentive schemes so that labour becomes more productive. Set up the mills near the source of labour and / or raw materials to cut down on transport. Seek alternative products to manufacture.

TASK 13.20 Ethics and Internal control

NO. PROBLEM INTERNAL CON-TROL / ETHICAL

PROBLEM

SUGGESTIONS

13.20.1 Yes Ethical problem If the company is going to reduce the quantity they need to inform the customers.

13.20.2 Yes Ethical problem If products are used that could be potentially dangerous then they must be clearly stated on the packaging.

13.20.3 Yes / No Ethical problem Depends on their contracts. If this was a condition of ser-vice then management cannot just take it away. However,

if it has been a privilege then they can remove it. It could have a very demotivating effect on the workers.

13.20.4 Yes Ethical Internal control

Under the regulations of the country all workers working more than the prescribed minimum have to be paid over-time. If management is of the opinion that staff is wasting time in order to earn overtime, then this is an internal control prob-lem.


NO. PROBLEM INTERNAL CON-TROL / ETHICAL PROBLEM

SUGGESTIONS

13.20.5 Yes or No Ethical Ethically if the costs are reduced these should be passed on to the customer. However, according or market forces, if customers are prepared to pay a price the seller can charge what he wants.

13.20.6 Yes Ethical This is breaking the law.

13.20.7 Yes Internal control Management are not controlling the packaging and the quality that is been produced. Needs stricter control measures.

13.20.8 Yes Internal control The matter needs to be investigated and the relevant peo-ple who have made up the ghost employees need to face

a disciplinary meeting. 13.20.9 Yes Internal control Staff must be eating more than their allowance or they are

taking cereal home.

13.20.10 Yes Unethical If individuals are been paid to say something it must be true. Playing on the physiological impact of advertising.

CHECKLIST:

Skills Yes –

proficient Requires more

attention Complete

Define and explain concepts relating to a manufac-turing enterprise.

Prepare a Production Cost Statement together with relevant notes.

Prepare a short form Income Statement together with relevant notes.

Calculation of relevant costs. Comment on costs.

Discuss ethical issues relating to Cost Accounting. Discuss internal audit and control measures relat-

ing to a manufacturing business.

Documents

MODULE 13 COST ACCOUNTING (MANUFACTURING)