MODULE 13 COST ACCOUNTING (MANUFACTURING)

Transcription

1 Note to the Teacher: MODULE 13 COST ACCOUNTING (MANUFACTURING) 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. However, 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 Production Cost Statement and the costing in two different parts of a question. This is because of work-inprogress. 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. New Era Accounting: Grade 12 1 Teacher s Guide

2 TASK 13.2 Ralley Bike Manufacturers: Production Cost Statement NAME OF MANUFACTURER: RALLEY BIKE MANUFACTURERS PRODUCTION COST STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8 Note Direct / Prime costs Direct material costs Direct labour costs Factory overhead costs Total manufacturing costs Work-in-process at beginning of the year Work-in-process at end of the year (44 000) Cost of production of finished goods NOTES TO THE FINANCIAL STATEMENTS 1. Direct material costs Opening stock Net purchases ( ) Carriage on purchases Closing stock *(40 000) Direct material cost *Balancing figure 2. Direct labour costs Factory wages ( ) Direct labour cost Factory overhead costs Consumable stores ( ) Salaries and wages/indirect labour Depreciation Rent ( x 3 / 5 ) Electricity Sundry expenses ( x 80%) Factory overhead costs Selling and distribution costs Depreciation Rent ( x 1 / 5 ) Electricity Sundry expenses ( x 15%) Commission Selling and distribution costs New Era Accounting: Grade 12 2 Teacher s Guide

3 5. Administration costs Salaries & wages ( ) Depreciation Rent ( x 1 / 5 ) Electricity Sundry expenses ( x 5%) Administration costs TASK 13.3 Kwa-Mabula Manufacturers: Production Cost Statement, Income Statement NAME OF MANUFACTURER: KWA-MABULA MANUFACTURERS PRODUCTION COST STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8 Note Direct / Prime costs Direct material costs Direct labour costs Factory overhead costs Total manufacturing costs Work-in-process at beginning of the year Work-in-process at end of the year [2] (75 200) Cost of production of finished goods [1] [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 Cost of finished goods sold / Cost of sales 6 ( ) Gross profit Other costs ( ) Administration costs 4 ( ) Selling & distribution costs 5 ( ) Net profit NOTES TO THE FINANCIAL STATEMENTS 1. Direct material costs Opening stock Net purchases ( ) Carriage on purchases Closing stock (64 000) Direct material cost Direct labour costs Factory wages Direct labour cost New Era Accounting: Grade 12 3 Teacher s Guide

4 3. Factory overhead costs Consumables stores ( ) Salaries and wages (indirect labour) ( ) Depreciation [( ) x 12%] Rent ( x 60%) Electricity Sundry expenses ( x 4 / 6 ) Factory overhead costs Selling and distribution costs Depreciation sales vehicles Rent ( x 25%) Electricity ( ) Sales vehicle running expenses Sundry expenses ( x 1 / 6 ) Commission ( x 5%) Selling and distribution costs Administration costs Salaries Depreciation office equipment Rent ( x 15%) Electricity Sundry expenses ( x 1 / 6 ) Administration costs Cost of finished goods sold / Finished Goods Opening stock of finished goods Cost of finished goods produced during the year Closing stock of finished goods (80 000) Cost of finished goods sold / Cost of sales Note: Procedure to complete the Finished goods note: The opening balance of R was given. The closing balance of R was given. The cost of sales can be calculated as you have the sales figure and the mark-up: x 100 / 150 = R The cost of finished goods produced becomes the balancing figure. New Era Accounting: Grade 12 4 Teacher s Guide

5 TASK 13.4 Centipede Manufacturers: Production Cost Statement, Income Statement, Calculations NAME OF MANUFACTURER: CENTIPEDE MANUFACTURERS PRODUCTION COST STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8 Note Direct / Prime costs Direct material costs Direct labour costs Factory overhead costs Total manufacturing costs Work-in-process at beginning of the year Work-in-process at end of the year (41 000) Cost of production of finished goods INCOME STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8 Note Sales Cost of finished goods sold / Cost of sales 4 ( ) Gross profit Other costs ( ) Administration costs (82 040) Selling & distribution costs ( ) Net profit NOTES TO THE FINANCIAL STATEMENTS 1. Direct material costs Opening stock Net purchases ( ) [1] Carriage on purchases ( ) [2] Import duties [3] Closing stock ( ) Direct material cost [1] x [2] 800 x [3] x 10% 2. Direct labour costs Factory wages ( ) Medical Aid contributions ( ) Direct labour cost Factory overhead costs Consumables stores ( ) Factory electricity ( ) Maintenance on factory equipment Factory rent [ (600 x 2)] Depreciation Factory overhead costs New Era Accounting: Grade 12 5 Teacher s Guide

6 4. Cost of finished goods sold / Finished Goods Opening stock of finished goods Cost of finished goods produced during the year Closing stock of finished goods (51 800) Cost of finished goods sold / Cost of sales Calculate the following: ( (a) The unit cost of production of each pool filter = R ( (b) The selling price of each pool filter = R375 ( (c) The mark-up % on each pool filter / x 100 = 55% TASK 13.5 Vilakazi Shoe Factory: Production Cost Statement, Income Statement, Calculations NAME OF MANUFACTURER: VILAKAZI SHOE FACTORY PRODUCTION COST STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8 Note Direct / Prime costs Direct material costs Direct labour costs Factory overhead costs 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 FOR THE PERIOD ENDED 28 FEBRUARY 20.8 Note Sales Cost of finished goods sold / Cost of sales 6 ( ) Gross profit Other costs ( ) Selling & distribution costs 4 ( ) Administration costs 5 ( ) Net profit New Era Accounting: Grade 12 6 Teacher s Guide

7 NOTES TO THE FINANCIAL STATEMENTS 1. Direct material costs Opening stock Net purchases ( ) Carriage on purchases Closing stock (balancing figure) (87 550) Direct material cost Direct labour costs Factory wages Direct labour cost Factory overhead costs Consumable stores [( ) x 75%] Indirect labour Salary: Foreman ( ) Depreciation Maintenance Insurance Rent ( ) Factory overhead costs Selling and distribution costs Salaries Depreciation Bad debts Commission on sales ( ) ( x 1%) Consumable stores Selling and distribution costs Administration costs Salaries Depreciation Insurance: Administration offices ( ) Sundry administration expenses Rent Consumable stores ( ) Administration costs Cost of finished goods sold / Finished Goods Opening stock of finished goods Cost of finished goods produced during the year Closing stock of finished goods ( ) Cost of finished goods sold ( x 100 / 150 ) Calculate the unit cost of producing the shoes = R Calculate how many shoes were sold % = R R60 = pairs New Era Accounting: Grade 12 7 Teacher s Guide

8 TASK 13.6 Tugela Water Bottle Manufacturers: Production Cost Statement, Income Statement, Unit costs /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 R12.81 Direct material costs R8.74 Direct labour costs R4.07 Factory overhead costs R7.19 Total manufacturing costs R20.00 Work-in-process at beginning of the year Work-in-process at end of the year 0 Cost of production of finished goods R /3 INCOME STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8 Note Total Unit cost Sales [ x 180 / 100 ] R36.00 Cost of finished goods sold / Cost of sales 6 ( ) R20.00 Gross profit R16.00 Other costs ( ) (R8.16) Selling & distribution costs 4 ( ) (R2.41) Administration costs 5 ( ) (R5.75) Operating profit Interest income [ ] Operating profit before interest expense Interest expense [ x 18%] (36 000) Net profit NOTES TO THE FINANCIAL STATEMENTS 1. Direct material costs Opening stock Purchases [ ] Carriage on purchases Closing stock (42 000) Direct material cost Direct labour costs Factory wages Direct labour cost Factory overhead costs Wages: Cleaner [ x 4 / 6 ] Salary: Foreman Cleaning materials [( ) x 4 / 6 ] Rent expense [ x 800 / ] Insurance [ x 800 / ] Electricity & water [ ] Depreciation [( ) x 20%] Factory overhead costs New Era Accounting: Grade 12 8 Teacher s Guide

9 4. Selling and distribution costs Wages: Cleaner [ x 1 / 6 ] Sales commission [( ) x 5%] Cleaning materials [( ) x 1 / 6 ] Rent expense [ x 220 / ] Insurance [ x 220 / ] Electricity & water [( ) 2] Packing materials [ x 80%] Bad debts Cell-phone allowances Sales vehicle expenses Depreciation [ x 25%] Selling and distribution costs Administration costs Wages: Cleaner [ x 1 / 6 ] Salary: Office workers Cleaning materials [( ) x 1 / 6 ] Rent expense [ x 180 / ] Insurance [ x 180 / ] Electricity & water [( ) 2] Bank charges Sundry administration expenses Depreciation [( ) x 20%] Administration costs 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 R R50 R30 R20 R R75 R45 R30 R R40 R25 R15 R R80 R68 R12 R R80 R54 R26 R TASK 13.8 Tau Factory: Calculations 1. Direct material cost per unit = R10 2. Direct labour cost per unit = R15 3. Total direct cost per unit = R25 4. Factory overhead cost per unit = R20 New Era Accounting: Grade 12 9 Teacher s Guide

10 5. Cost of production of finished goods per unit = R45 6. Selling & distribution costs per unit = R5 7. Administration costs per unit = 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 = R Contribution per unit. Selling price per unit less Variable costs per unit R60 R30 = R Break-even point (i.e. the point at which no profit or loss is earned). Fixed costs Contribution per unit = units Proof of break-even point: units sold at R60 each = R Variable costs [9 000 x R30] = R Fixed costs R 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 R0.50 Direct material costs R0.30 Direct labour costs R0.20 Factory overhead costs R0.80 Total manufacturing costs R1.30 Work-in-process at beginning of the year Work-in-process at end of the year 0 Cost of production of finished goods R1.30 New Era Accounting: Grade Teacher s Guide

11 INCOME STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8 Note R Per unit Sales R3.00 Cost of finished goods sold / Cost of sales ( ) R1.30 Gross profit R1.70 Other costs ( ) (R0.95) Selling & distribution costs (36 000) (R0.30) Administration costs (78 000) (R0.65) Net profit R0.75 TASK Ground Leather Manufacturers: Analysis and interpretation 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 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 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 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 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 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 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. New Era Accounting: Grade Teacher s Guide

12 TASK Tick-Tock Lollies: Calculations, Analysis and interpretation Complete the unit cost table by calculating the missing figures marked with (a) (e). No. Working Answer (a) R5 (b) R1 (c) R5 + R1 R6 (d) x R6 (or R R40 000) R (e) x R1.50 R Calculate the unit cost of each lolly made during the year. R5 + R1 + R2 = R8 OR ( ) = R Calculate the mark-up achieved by the business. Gross profit: 12 8 = R4 4 / 8 x 100 = 50% 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 Calculate the break-even point in ( ) units 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 No. He is selling and the break-even is which means he is making a loss on units. His break-even has increased from to (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. New Era Accounting: Grade Teacher s Guide

13 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 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 to and in view of the economic climate if they increase the selling price they might not sell as much. TASK 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 reasons for the sible reasons why A good discussion Fails to identify pos- Identifies some reasons why the stock stock being the stock has been on possibilities. has been used up. used up used up. Control measures Advice Poor suggestions made for control measures. Poor advice that does not address the issue. Some control measures discussed. Aspects of the advice are feasible. Good discussion on control measures that are feasible. Good advice given that is feasible. An excellent discussion showing great insight. Excellent discussion on control measures to take. Excellent advice that shows great understanding. Possible answers: Possible reasons for the stock being used up Control measures Advice TASK Staff stealing material, wastage, cutting out wrong pieces that need to be recut, errors, etc. 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. Various answers: Yes so that there is no stoppage in production, needs strict control No as this puts temptation in people s way. 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 discussion or a debate. New Era Accounting: Grade Teacher s Guide

14 Suggested marking rubric: Criteria Level 1 Level 2 Level 3 Level 4 Poor discussion on Excellent discussion Some ethical issues Good discussion on Ethical issues the ethical issues at on the ethical issues. raised. the ethical issues. stake. Reasons for and against just forgetting it Advice Poor discussion. Poor advice given. Some valid reasons posed. Some advice is acceptable. Good discussion for and against why to just forget it. Good advice based on prior discussions. Excellent discussion for and against why to just forget it. 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 Hopkins Manufacturers: Production Cost Statement, Analysis and interpretation NAME OF MANUFACTURER: HOPKINS MANUFACTURERS PRODUCTION COST STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.2 Note Direct / Prime costs Direct material costs Direct labour costs [ ] Factory overhead costs 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 NOTES 1. Direct material costs Opening stock Purchases plus carriage Closing stock* (17 856) Raw materials issued to production Cost of finished goods sold / Finished Goods Opening stock of finished goods Goods from manufacturing department (balancing figure) Closing stock of finished goods (62 000) Cost of sales ( x 100 / 160 ) *CALCULATION OF CLOSING STOCK = R = (96 x ) ( ) = = R Due to rounding off the learners can get different amounts. Take this into consideration in the Production Cost Statement. New Era Accounting: Grade Teacher s Guide

15 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 Discuss two possible reasons for the change in direct material cost per unit in Found cheaper material. Found a supplier that is closer so reduced transport costs. Found alternative supplier Discuss two possible reasons for the change in direct labour cost per unit in Increase in wage rate. Staff are not as productive. Staff worked overtime. Do not accept increased labour force as this is a unit cost 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 units and break-even point is so they are making a profit. The break-even has increased from last year. TASK Maria: Calculations, Production Cost Statement, Analysis and interpretation Raw material / Direct material issued to the production process. Opening stock Purchases Carriage on purchases [755 x R6] Closing stock [62 x R578]* (35 836) Raw materials issued to production R *Working: ( ) - 44 = R NAME OF MANUFACTURER: MARIA PRODUCTION COST STATEMENT FOR THE PERIOD ENDED 31 AUGUST 20.1 Note Direct / Prime costs Direct material costs Direct labour costs (1 500 x 216) Factory overhead costs (1 500 x ) Total manufacturing costs Work-in-process at beginning of the year Work-in-process at end of the year (60 000) Cost of production of finished goods New Era Accounting: Grade Teacher s Guide

16 Calculate the unit cost of production for the year ended 31 August = R (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 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 Clay Potters and Cwele Ltd: Production Cost Statement, Stock valuations, Analysis and interpretation PART A: CLAY POTTERS NAME OF MANUFACTURER: CLAY POTTERS PRODUCTION COST STATEMENT FOR THE PERIOD ENDED 31 JULY 20.1 Note Direct / Prime costs Direct material costs [( ) x 80%] Direct labour costs Factory overhead costs Total manufacturing costs Work-in-process at beginning of the year Work-in-process at end of the year (21 000) Cost of production of finished goods CALCULATION OF DIRECT OR (RAW) MATERIALS COST Opening stock Purchases Carriage on purchases Closing stock* (22 720) Direct material cost *Calculation of Closing stock: = x 16 = R New Era Accounting: Grade Teacher s Guide

17 CALCULATION OF FACTORY OVERHEAD COST Consumable stores Rent [ x 60 / 100 ] Water and electricity Depreciation Indirect labour [ ] Sundry expenses Factory overhead cost CALCULATION OF FINISHED GOODS STOCK Opening stock Cost of goods manufactured (balancing figure) Less Closing stock (29 000) Cost of sales [ x 100 / 160 ] 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) COSTS TOTAL UNIT COST UNIT COST Direct / raw materials R R10 R12 Direct labour cost R15 R11 Prime cost R25 R23 Factory overheads R R8 R10 Administration costs R R3 R3 Selling & distribution costs R R4 R 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 Calculate the unit cost of production for = R 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. New Era Accounting: Grade Teacher s Guide

18 Direct labour cost Increase in wage rate. Employed more labourers. Factory overheads Economies of scale. Costs, e.g. rent, have decreased Calculate the break-even point for = = units The owner of Cwele Ltd is very pleased regarding the trend in the break-even point from 2.09 to Do you agree? Why? Yes. Because the break-even is less than 20.9 so more profit is being made. TASK Rani Manufacturers: Calculations, Stock valuations, Analysis and interpretation 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 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) + ( x 42) = = R (b) Calculate the value of the raw (direct) material cost that would appear in the Production Cost Statement for the year ended 28 February (700 x 30) = = R 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 missing (issued to factory) x 1.8 (no. of raincoats x 1.8 metres each) = = 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. New Era Accounting: Grade Teacher s Guide

19 (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 = R (note the R5 000 is monthly but you are working for a year) Overtime: 180 x 5 x 70 = R Pension: R x 10% = R UIF: R x 1% = R3 000 Total = = R (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 raincoats and this year this number was reduced to but the same number 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 Calculate the following: (a) The total cost of production of finished goods. R R (4 000 x 67.55) = = R (b) The unit cost of production of each raincoat. R = R246 (c) Calculate the break-even point for the year ended 28 February raincoats ( ) (Remember break-even must always be rounded up) (d) The break-even point for the year ended 28 February 20.8 was units. Should Rani be happy with the break-even point for 20.9? Explain briefly. Yes. The business has produced raincoats which is above the break-even point (they are making a profit on 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. New Era Accounting: Grade Teacher s Guide

20 Discuss two possible reasons why the selling and distribution costs per unit have d e- 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 BB Bakery: Production Cost Statement, Stock valuations, Analysis and interpretation NAME OF MANUFACTURER: BB BAKERY PRODUCTION COST STATEMENT FOR MARCH APRIL 20.8 MARCH 20.8 Direct / Prime costs * Direct material costs Direct labour costs [ x 1.40] Factory overhead costs * Total manufacturing costs of finished loaves of bread Raw material / Direct material cost Opening stock Purchases [ ] Carriage on purchases Raw materials available for production Closing stock (8 000) Raw materials issued to the manufacturing process Calculate the unit cost of each loaf of bread in April = R Give 2 possible reasons why the raw materials cost have increased. Due to inflation. Increase in transport costs. Different supplier. Any other reasonable reason Name 2 items that could possibly be included in factory overhead costs. Rent. Electricity. Factory manager / supervisor. Cleaning and / or maintenance staff. Etc Calculate the break-even point in April ( ) units New Era Accounting: Grade Teacher s Guide

21 The owner of BB Bakery is very happy that the number of loaves of bread has increased by since last month. He has therefore decided to take a holiday overseas 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 ( x R7) ( x R7) Cost of manufacturing ( ) ( ) Administration cost (10 000) (10 500) Selling and distribution costs (10 000) (15 000) Net profit R R No. Although the number of loaves has increased he has made less profit in April than March due to increased costs 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 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 proposing 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 discussion 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 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 bakery 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 (R 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. New Era Accounting: Grade Teacher s Guide

22 TASK Article 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 overheads. As these are increasing it is pushing the cost price of the articles up Explain to your friend, why in terms of the article, food prices are expected to increase. Costs have increased. Shortages of raw materials through droughts. Crop failures Why do you think it is cheaper to import some products than manufacture them locally? 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 Why is the poultry industry expected to be hard hit? Explain briefly. The poultry are fed on maize and related feeds 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 Ethics and Internal control NO. PROBLEM INTERNAL CON- TROL / ETHICAL SUGGESTIONS PROBLEM Yes Ethical problem If the company is going to reduce the quantity they need to inform the customers Yes Ethical problem If products are used that could be potentially dangerous then they must be clearly stated on the packaging Yes / No Ethical problem Depends on their contracts. If this was a condition of service 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 Yes Ethical Internal control Under the regulations of the country all workers working more than the prescribed minimum have to be paid overtime. If management is of the opinion that staff is wasting time in order to earn overtime, then this is an internal control problem. New Era Accounting: Grade Teacher s Guide

23 NO. PROBLEM INTERNAL CON- TROL / ETHICAL SUGGESTIONS PROBLEM 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 Yes Ethical This is breaking the law Yes Internal control Management are not controlling the packaging and the quality that is been produced. Needs stricter control measures Yes Internal control The matter needs to be investigated and the relevant people who have made up the ghost employees need to face a disciplinary meeting Yes Internal control Staff must be eating more than their allowance or they are taking cereal home Yes Unethical If individuals are been paid to say something it must be true. Playing on the physiological impact of advertising. CHECKLIST: Skills Define and explain concepts relating to a manufacturing 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 relating to a manufacturing business. Yes proficient Requires more attention Complete New Era Accounting: Grade Teacher s Guide