COST ACCOUNTING 30 JULY 2015 Section A: Summary Content Notes MANUFACTURING ACCOUNTS: NEW LEDGER ACCOUNTS New Ledger Accounts pertaining to manufacturing concerns are divided into the following categories: Direct / Raw Material Work in Process Finished Goods Consumable stores STOCK ACCOUNTS Direct Material Factory Overheads Direct Labour Selling & Distribution Administration COSTS ACCOUNTS Salaries Depreciation Telephone Rates NOMINAL ACCOUNTS
FORMAT: Production Cost Statements and notes MANUFACTURING BUSINESS PRODUCTION COST STATEMENT Name of Manufacturer Production Cost Statement for the period ended Notes R Direct costs/prime cost Direct material costs 1 Direct labour costs 2 Factory overhead costs 3 Total manufacturing costs Work-in-process at beginning of the year Work-in-process at end of the year Cost of production of finished goods () INCOME STATEMENT INCOME STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2015 Sales Cost of sales Gross Profit Operating expenses Selling and distribution cost Administration costs Net profit for the year 13
MANUFACTURING BUSINESS NOTES TO THE FINANCIAL STATEMENTS 1. Direct material costs Opening stock Net purchases(100+200-50-40) Carriage on purchases Custom duties Closing stock Direct material cost () 2. Direct labour costs Factory wages Pension Fund Contributions Medical Aid Contributions UIF Contributions Direct labour cost 3. Factory overhead costs Indirect material(100+500-50-200 450 Indirect labour(5 000+500 Depreciation: machinery and equipment Maintenance: machinery and equipment Rent for factory buildings (120 000-20 000X 50% 50 000 Factory electricity and water Factory overhead costs
4. Cost of finished goods sold Opening stock of finished goods Cost of finished goods produced during the year Goods returned Closing stock of finished goods Cost of finished goods sold () Section B: Exercises Question 1 COST ACCOUNTING (45 marks; 25 minutes) 1.1 PRINCESS BIN FACTORY Princess Bin Factory manufactures one type of household bin. The financial year ended on 28 February 2015. REQUIRED: 1.1.1 Prepare the Production Cost Statement for the year ended 28 February 2015. (16) 1.1.2 Prepare the Income Statement for the year ended on 28 February 2015. (13) INFORMATION: A. The following information was extracted from the financial records on 28 February 2015: Administration cost R 62 930 Raw/Direct material cost? Factory overhead cost 256 270 Selling and distribution cost 127 100 Direct labour cost: Normal time 452 000 Prime cost 1 308 500 Work-in-process stock (1 March 2014) 58 500 Work-in-process stock (28 February 2015)? Sales 2 180 000 Cost of sales?
B. The following information was not taken into account: The factory employs six workers. Each worker earned R19 000 overtime per year. Unused indirect material, R4 500. Advertising (selling and distribution) includes R3 720 for a threemonth contract which ends on 31 March 2015. Rent expense was omitted from the figures above. Total rent paid amounted to R91 020. The rent for February 2015 has not been paid yet. Rent was increased by R820 per month on 1 January 2015. 75% of this expense must be allocated to the factory and the balance must be transferred to the Administration Cost Account. C. 46 500 bins were manufactured during this financial year at a unit cost of R35. D. The business uses a mark-up percentage of 60% on cost. Trade discounts of R60 000 were offered to cash customers during this financial year. 1.2 ROB'S PENCILS Rob Lambert is the owner of Rob's Pencils, a manufacturing business that produces one type of pencil. The financial year ended on 30 June 2014. Production is based on orders received, therefore there are no work-inprocess balances. REQUIRED: 1.2.1 Comment on the fixed cost per unit. Note that fixed costs increased from R236 800 in 2013 to R238 000 in 2014. (2) 1.2.2 Rob wants to know if the level of production for this financial year was satisfactory. Calculate the break-even point for the year ended 30 June 2014. (4) Do you consider the level of production to be satisfactory or not? Quote and explain figures to support your opinion. (4) 1.2.3 Rob is concerned about the management of the variable costs. Identify ONE problem regarding the variable costs. Quote appropriate figures to support your answer. Provide TWO suggestions that he can use to address the problem identified. (6)
INFORMATION: Financial information extracted from the records of Rob's Pencils: 30 JUNE 2014 30 JUNE 2013 TOTAL (R) UNIT COST (R) TOTAL (R) UNIT COST (R) Fixed costs 238 000 2,80 236 800 3,20 Variable costs: 998 750 11,75 732 600 9,90 Direct material cost 467 500 5,50 296 000 4,00 Direct labour cost 391 000 4,60 318 200 4,30 Selling and distribution cost 140 250 1,65 118 400 1,60 Selling price per unit R14,50 R13,50 Number of units produced and sold 85 000 74 000 Break-even point (units)? 65 778 Section C: Answer Book 45 PRINCESS BIN FACTORY 1.1.1 PRODUCTION COST STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2015 Prime cost Total manufacturing cost Cost of production of finished goods 16
1.1.2 INCOME STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2015 Gross profit Operating expenses Net profit for the year 13 1.2 ROB'S PENCILS 1.2.1 Comment on the fixed cost per unit. Note that fixed costs increased from R236 800 in 2013 to R238 000 in 2014. 2 1.2.2 Calculate the break-even point for the year ended 30 June 2014. 4 Do you consider the level of production to be satisfactory or not? Quote and explain figures to support your opinion. 4
1.2.3 Identify ONE problem regarding the variable costs. Quote appropriate figures to support your answer. Provide TWO suggestions that Rob can use to address the problem identified. 6 Section C: Solutions 1.1 PRINCESS BIN FACTORY 1.1.1 PRODUCTION COST STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2015 Raw/Direct material cost check operation 742 500 Direct labour cost 452 000 + 114 000 one part correct 566 000 Prime cost 1 308 500 Factory overhead cost one part correct (256 270 + 75 030 (rent) 4 500 ) 326 800 Total manufacturing cost check operation 1 635 300 Work in process (1 March 2013) 58 500 Work in process (28 Feb 2014) check operation must be subtracted 1 693 800 (66 300) Cost of production of finished goods 1 627 500 16 46 500 x R35
1.1.2 INCOME STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2015 Sales Cost of sales (2 180 000 + 60 000 ) x 100/160 2 180 000 One part correct (1 400 000) Gross profit check operation 780 000 Operating expenses (213 800) Selling and distribution cost (127 100-1 240 ) Administration costs (62 930 + 25 010 ) if 1/3 of rent above 125 860 87 940 Net profit for the year check operation (subtracted) 566 200 13 1.2 ROBS PENCILS 1.2.1 The fixed cost per unit decreased from R3,20 to R2,80. Economies of scale (more units were produced in 2014) 2 1.2.2 238 000 14,50 11,75 = 86 545,45 or 86 546 units one part correct 4 Not satisfactory Explanation quoting figures (mark according to BEP calculation above) Although the business produced more goods than last year, (85 000 74 000), it failed to break even this year. (86 456 85 000) Low profit last year / loss this year. 4 1.2.3 Identify ONE problem regarding the variable costs. Quote appropriate figures to support your answer. Cost identified figures Raw materials costs increased from R4,00 to R5,50 per unit. Provide TWO suggestions that Rob can use to address the problem identified. Any TWO suggestions: Possible answers: Monitor production techniques to minimise wastage Train workers Buy in bulk to take advantage of discount Look for local suppliers reduce transport cost 6