Bsr3 a unit 1 2016

DEPARTMENT OF FINANCE AND INVESTMENT MANAGEMENT
FINANCIAL MANAGEMENT 3A
UNIT 1
Basic management accounting concepts
Study material:
Chapter 2, 3, 5, 6 – Management Accounting 4th
edition by Seal, Garrison & Noreen
Chapter 2, 3, 4, 6 – Management Accounting 5th
edition by Seal, Garrison & Noreen
After studying this unit you should be able to:
 Identify each of the three basic cost elements involved in the manufacture of a
product.
 Distinguish between product cost and period cost and give examples of each.
 Prepare a schedule of cost of goods manufactured/manufacturing cost
statement.
 Explain the flow of direct material cost, direct labour cost and manufacturing
overhead cost.
 Identify and give examples of variable cost and fixed costs.
 Define and give examples of direct and indirect costs.
 Define cost classifications used in making decisions: differential costs,
opportunity costs and sunk costs.
 Explain the effect of a change in activity on both total variable cost and per
unit variable cost.
 Explain the effect of a change in activity on both total fixed cost and fixed cost
expressed on a per unit basis.
 Use a cost formula to predict cost at a new level of activity.
 Analyse a mixed cost using the high-low method.
 Distinguish between process costing and job-order costing.

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 Identify the documents used in a job-order costing system.
 Compute predetermined overhead rates.
 Apply overhead cost to Work-in-Progress using a predetermined overhead
rate.
 Prepare T-accounts to show the flow of cost in a job-order costing system.
 Compute under-applied or over-applied overhead cost and prepare the journal
entry to close the balance in Manufacturing Overhead to the appropriate
accounts.
 Analyse the allocation of service department costs.
 Explain how variable costing differs from absorption costing and compute the
unit product cost under each method.
 Describe how fixed manufacturing overhead costs are deferred in stock and
released from stock under absorption costing.
 Prepare profit and loss accounts using both variable and absorption costing,
and reconcile the two profit figures.
Activities:
4th
edition:
Chapter 2
Review problems: 1, 2
Questions: 2.1-2.14
Exercises: 2.1-2.6
Problems: 2.7-2.18
Chapter 3
Review problems: 1
Questions: 3.1-3.21
Exercises: 3.1-3.9
Problems: 3.10-3.15
Chapter 5
Questions: 5.1-5.18
Exercises: 5.1, 5.3(1), 5.5, 5.6, 5.9, 5.10
Problems: 5.11-5.15, 5.17
Chapter 6
Review problems: 1
Questions: 6.1-6.11
Exercises: 6.1-6.2
Problems: 6.3-6.6, 6.7(1-3), 6.8(1-4)

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5th
edition:
Chapter 2
Questions: 2.1-2.15
Exercises: 2.1-2.6
Problems: 2.7-2.18
Chapter 3
Questions: 3.1-3.16
Exercises: 3.1, 3.3(1), 3.5, 3.6, 3.9, 3.10
Problems: 3.11-3.15, 3.17
Chapter 4
Review problems: 1
Questions: 4.1-4.21
Exercises: 4.1-4.9
Problems: 4.10-4.15
Chapter 6
Review problems: 1
Questions: 6.1-6.11
Exercises: 6.1-6.4
Problems: 6.5-6.8, 6.9(1-3), 6.10(1-4)
Other activities:
Question bank
Tutorials:
Complete Tutorial 1 via Ulink

4
QUESTION 1.1
The following data are available:
Budgeted output for the year 9 800 units
Standard per unit:
Material 40m @ R5,30 per m
Labour
- Mixing department 48 hours @ R2,50 per hour
- Finishing department 30 hours @ R1,90 per hour
Budgeted overheads and hours per year
- Variable R Hours
Mixing department 375 000 500 000
Finishing department 150 000 300 000
- Fixed
Production 392 000
- Sales and distribution 196 000
- Administration 98 000
REQUIRED:
a) to prepare a report on standard costs per unit and indicate the following in your report:
i) primary costs
ii) variable production costs
iii) total production costs
iv) total costs
b) to calculate the sales price per unit if a profit margin of 15% on the sales price is maintained.

5
QUESTION 1.1 (SUGGESTED SOLUTION)
a)
R
Direct material
(40 x 5,30) 212
Direct labour
Mix (48 x 2,50) 120
Finish (30 x 1,90) 57
i) PRIMARY COSTS 389
Variable overheads 51
Mix (48 x 0,75) C1 36
Finish (30 x 0,5) C1 15
ii) VARIABLE PRODUCTION COSTS 440
Fixed production overheads C2 40
iii) TOTAL PRODUCTION COSTS 480
Sales and distribution C3 20
Admin C3 10
iv) TOTAL COSTS 510
b) Sales price per unit
Cost price Profit Sales price
85 15 100
Cost price = 510
Sales price = 510/85 x 100 = R600/unit
CALCULATIONS
C1 Variable overhead rate
Mix = R375 000/500 000 hours
= R0,75/hour
Finishing = R150 000/300 000 hours
= R0,50/hour
C2 Fixed
overhead rate
per unit
= R392 000/9 800 units
= R40/unit
Remark Calculated per unit since only the costs for 1 product are required.
Alternative: Calculated per hour and allocated to a product on the basis of the
number of hours which the product spends in each department.
C3 = R196 000/9 800 units
= R20/unit
= R98 000/9 800 units
= R10/unit

6
QUESTION 1.2
The following information is supplied to you by the management of EFG Ltd for the year 19x2:
R
Purchasing of material 80 000
Material inventory (1 January) 9 000
Material inventory (31 December) 6 000
Depreciation - factory 24 000
Direct labour 100 000
Electricity - factory 32 000
Maintenance - factory 7 000
Indirect material 4 000
Administrative costs 60 000
Insurance - factory 8 000
Indirect labour 35 000
Work in progress inventory (1 January) 17 000
Work in progress (31 December) 20 000
Completed goods (1 January) 36 000
Completed goods (31 December) 30 000
Sales 500 000
Sales expenditures 90 000
REQUIRED:
a) To prepare a manufacturing cost statement.
b) To prepare an income statement for the year.
c) To calculate, if the company manufactures 10 000 units:
(a)the unit costs per product in relation to direct materials; and
(b)the unit costs per product in relation to factory depreciation.

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a) COSTS OF MANUFACTURED UNITS:
R
Direct material consumption C1 83 000
Manufacturing overheads:
Depreciation: Factory 24 000
Electricity: Factory 32 000
Maintenance: Factory 7 000
Indirect material 4 000
Insurance: Factory 8 000
Indirect labour 35 000
Manufacturing costs 293 000
Add: WIP 1/1 17 000
Less: WIP 31/12 (20 000)
Manufacturing costs 290 000*
b) INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 19x2
Sales 500 000
Costs of sales: (296 000)
Starting inventory completed products 36 000
Manufacturing costs 290 000*
Available for sale 326 000
Closing inventory completed products (30 000)
Gross profit 204 000
Sales expenditure (90 000)
Admin costs (60 000)
Net profit 54 000
c) a) 83 000/10 000
= R8,30
b) 24 000/10 000
= R2,40
CALCULATIONS
C1 Starting inventory 9 000
Purchases 80 000
Available for consumption 89 000
Closing inventory (6 000)
Material consumption 83 000

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QUESTION 1.3
John During (Pty) Ltd manufactures a product which is sold at R10 per unit. The variable
overheads are R6 per unit and the fixed costs are R50 000 within the manufacturer's limits of
20 000 to 30 000 units per annum. Salesmen receive commission of R1,00 per unit sold, while
administrative costs of R22 000 per annum are regarded as fixed. The demand for the product is
50 000 units.
REQUIRED:
To calculate whether the company shows a profit or sustains a loss at the following levels of
production:
a) 20 000 units;
b) 25 000 units;
c) 30 000 units.
(a) (b) (c)
Sales in units 20 000 25 000 30 000
Sales in R @ R10 each 200 000 250 000 300 000
Variable costs
Manufacturing @ R6 each 120 000 150 000 180 000
Commission @ R1 each 20 000 25 000 30 000
140 000 175 000 210 000
Fixed costs:
Manufacturing 50 000 50 000 50 000
Administration 22 000 22 000 22 000
72 000 72 000 72 000
Total manufacturing costs 212 000 247 000 282 000
Profit (Loss) (12 000) 3 000 18 000

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QUESTION 1.4
Delta Ltd supplies you with the following information for the month ended 31 January 19x4:
R
Direct material
- inventory 1/1/19x4 3 700
- purchases during the month 33 000
- inventory 31/1/19x4 6 200
Indirect material
- purchases for the month 2 700
- inventory 31/1/19x4 350
Depreciation
- factory machines 7 000
- office furniture 2 000
Salary of supervisors 20 000
Water and electricity 9 085
Costs of sales 3 000
Transport costs of direct material 4 500
Additional information:
1. Supervisors work in the mixing section of the factory.
2. Water and electricity are regarded as semi-variable costs (mixed costs). The fixed costs plus
70% of the variable costs of water and electricity are regarded as the costs of the factory.
The rest of the costs, namely 30% of variable costs, are apportionable to administrative
activities.
Costs of water and electricity Hours worked
August 6 785 2 000
September 9 797 3 500
October 8 405 2 900
November 9 720 3 400
December 9 985 3 600
REQUIRED:
a) To prepare a schedule of manufacturing cost. The following should be clear from your
answer:
 Total direct material costs
 Primary costs
 Total overheads
 Total costs
(NB: Show all your calculations)
b) To briefly explain the shortcomings of the high-low method. Use the figures supplied in the
question.

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a)
Direct materials
- inventory 3 700
- purchases 33 000
- closing inventory (6 200)
- transport costs 4 500
Costs of materials used 35 000 35 000
Primary costs 52 500
Overheads
Indirect materials
- purchases 2 700
- inventory (350)
2 350
Depreciation - factory 7 000
Salary of supervisors 20 000
Water and electricity (C1) 7 195
36 545 36 545
Manufacturing costs 89 045
Admin:
Depreciation 2 000
Water and electricity (C1) 1 890
Costs of sales 3 000
Total costs 95 935
CALCULATIONS
Independent variables Dependent variables
C1 Hours R
Highest 3 600 9 985
Lowest 2 000 6 785
1 600 3 200
(1)
3 200/1 600
= R2/hour (variable)
Fixed costs:-
y = a + bx
9 985 = a + 2 (3 600)
9 985 = a - 7 200
2 785 = a
or
6 785 = a + 2 (2 000)
6 785 = a + 4 000
2 785 = a
Fixed costs = 2 785

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Variable costs = 9 085 - 2 785 = 6 300
Apportioned to factory:
Variable costs (70% x 6 300) 4 410
Fixed costs 2 785
7 195
Apportioned to administration (30% x 6 300) 1 890
Total water and electricity costs 9 085
b) Only the two extreme levels of activity are used, namely 3 600 and 2 000.
QUESTION 1.5
The manager of a transport company uses the high-low technique to separate fixed and
variable maintenance costs. The following data is available:
2001 Maintenance cost Vehicle working hours
January R16 700 3 800
February R17 100 3 700
March R15 000 3 500
April R18 000 4 000
May R17 600 3 900
June R18 500 4 200
REQUIRED:
Calculate the variable cost per hour.
Hours Costs
Highest activity 4 200 18 500
Lowest activity 3 500 15 000
700 3 500
Change in costs 3 500
Change in activity 700
Variable costs per hour = R5/hour

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QUESTION 1.6
A company manufactures chairs. The manufacturing overheads amount to R422 000 if 65 000
units are manufactured. The manufacturing overheads amount to R494 000 if 85 000 units are
manufactured.
REQUIRED:
Calculate the fixed cost element of the manufacturing overheads expense.
0006500085
000422000494


=
00020
00072
= R3,60
Fixed cost = 494 000 – (85 000) (3,60)
= 494 000 – 306 000
= R188 000

13
QUESTION 1.7
Campbell Company is a metal and wood cutting manufacturer, selling products for the home
construction market. Consider the following data for the year 2001:
R
Sandpaper 2 000
Materials-handling costs 70 000
Lubricants and coolants 5 000
Miscellaneous indirect manufacturing labour 40 000
Direct manufacturing labour 300 000
Direct materials, Jan. 1, 2001 40 000
Direct materials, Dec. 31, 2001 50 000
Finished goods, Jan. 1, 2001 100 000
Finished goods, Dec. 31, 2001 150 000
Work in process, Jan. 1, 2001 10 000
Work in process, Dec. 31, 2001 14 000
Plant-leasing costs 54 000
Depreciation – plant equipment 36 000
Property taxes on plant equipment 4 000
Fire insurance on plant equipment 3 000
Direct materials purchased 460 000
Revenues 1 360 000
Marketing promotions 60 000
Marketing salaries 100 000
Distribution costs 70 000
Customer-service costs 100 000
REQUIRED:
a) Prepare an income statement with a separate supporting schedule of cost of goods
manufactured. For all manufacturing items, indicate by V or F whether each is basically
a variable cost or a fixed cost (where the cost object is a product unit).
b) Suppose that both the direct materials and plant-leasing costs are tied to the production
of 900 000 units. What is the unit cost for the direct materials assigned to each unit
produced? What is the unit cost of the plant-leasing costs? Assume that the plant-
leasing costs are a fixed cost.

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c) Repeat the computation in requirement (b) for direct materials and plant-leasing costs,
assuming that the costs are being predicted for the manufacturing of 1 000 000 units
next year. Assume that the implied cost-behaviour patterns persist.
d) As a management consultant, explain concisely to the managing director why the unit
costs for direct materials did not change in requirements (b) and (c), but the unit costs
for plant-leasing costs did change.
(a)
Campbell Company
Income statement for the year ended 31 December 2001
Revenues R1 360 000
Cost of goods sold:
Beginning finished goods, January 1, 2001 R100 000
Cost of goods manufactured (see schedule below) 960 000
Cost of goods available for sale 1 060 000
Ending finished goods, December 31, 2001 150 000 910 000
Gross margin (or gross profit) 450 000
Marketing, distribution and customer-service costs
Marketing promotions 60 000
Marketing salaries 100 000
Distribution costs 70 000
Customer-service costs 100 000 330 000
Operating income R120 000
Campbell Company
Schedule of cost of goods manufactured for the year ended 31 December 2001
Direct materials:
Beginning inventory, January1, 2001 R40 000
Purchases of direct materials R460 000
Cost of direct materials available for use 500 000
Ending inventory, December 31, 2001 50 000
Direct materials used 450 000 (V)
Direct manufacturing labour 300 000 (V)
Indirect manufacturing costs:
Sandpaper R2 000 (V)
Materials-handling costs 70 000 (V)
Lubricants and coolants 5 000 (V)
Miscellaneous indirect manufacturing labour 40 000 (V)
Plant-leasing costs 54 000 (F)

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Depreciation – plant equipment 36 000 (F)
Property taxes on plant equipment 4 000 (F)
Fire insurance on plant equipment 3 000 214 000 (F)
Manufacturing costs incurred during 2001 964 000
Add beginning work in process
January 1, 2001 10 000
Total manufacturing costs to account for 974 000
Deduct ending work in process
December 31, 2001 14 000
Cost of goods manufactured (to Income Statement) R960 000
b) Direct material unit cost
= Direct materials used ÷ Units produced
= R450 000 ÷ 900 000 = R0,50
Plant-leasing unit cost
= Plant-leasing costs ÷ Units produced
= R54 000 ÷ 900 000 = R0,06
c) The direct material costs are variable, so they would increase in total from R450 000 to
R500 000 (1 000 000 x R0,50). However, their unit costs would be unaffected: R500 000/
1 000 000 units = R0,50.
In contrast, the plant-leasing costs of R54 000 are fixed, so they would not increase in total.
However, the plant-leasing costs per unit would decline from R0,060 to R0,054. R54 000/1
000 000 = R0,054.
d) The explanation would begin with the answer to requirement c. As a consultant, you
should stress that the unitising (averaging) of costs that have different behaviour patterns
can be misleading. A common error is to assume that a total unit cost, which is often a
sum of variable unit costs and fixed unit costs, is an indicator that total costs change in a
wholly variable way as production levels change. There is a necessity for distinguishing
between cost-behaviour patterns. You must be wary especially about average fixed costs
per unit. Too often, unit fixed costs are erroneously regarded as being indistinguishable
from unit variable costs.

16
QUESTION 1.8
A company is considering a contract which will require, among other inputs, 50kg of material M.
Eighty kilograms of material M, which were purchased for R1,60 per kg, are in stock. The
replacement price of M is R1,75 per kg. The material is in stock as a result of a buying error
and the company has no other use for it. If not used on this contract, it could be sold for R1,20
per kg.
REQUIRED:
Determine the relevant cost of the material to be used in this contract.
State you reasons.
Relevant cost of material M = 50 kg x R1,20
= R60
The original cost of R1,60 per kg is sunk and not relevant.
The replacement price is also irrelevant.
The remaining 30 kg can be sold.
QUESTION 1.9
Describe the opportunity cost concept and explain why it is used in decision-making.
Opportunity cost is the contribution to income that is forgone (rejected) by not using a limited
resource in its next-best alternative use. The idea of an opportunity cost arises when there are
multiple uses for recourses and some alternatives are not selected. Opportunity cost is included
in decision-making because it represents the best alternative way in which an organization may
have used its resources if it had not made the decision it did.

17
QUESTION 1.10
PART A (8 Marks)
ABC Advertising uses a job costing system to calculate the cost of client contracts.
The Orbit contract is one of several contracts undertaken in the last accounting period.
Cost associated with this contract consist of: R
Direct materials 2 500
Lease charge for a printer which is needed for the completion of this job
(will be used for other jobs afterwards) 1 500
Other direct expenses 16 500
Design staff worked 1 020 hours on the Orbit contract, of which 120 hours were overtime.
One third of these overtime hours were worked at the request of the client, who wanted the
deadline to be moved earlier. Overtime is paid at a premium of 25% of the basic wage of R24
per hour.
Overheads are absorbed at a rate of 40% of direct materials.
REQUIRED:
Calculate the prime cost of the Orbit contract. (8)
PART B (5 Marks)
The management accountant of Oxford Hotel on the Durban beachfront provides the following
occupancy figures for the holiday period that extends from January to July of each year
Month Number of guests per
month
Total costs
January
February
March
April
May
June
July
475
520
315
215
180
240
172
R24 400
25 580
23 760
23 360
23 220
23 460
23 188
According to contracts with suppliers certain costs (included in total costs) will increase with an
additional R1 000 if the number of guests per month is more than 500.
REQUIRED:
Calculate the total cost for August if 200 guests are expected during this month. (5)

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PART A (8 Marks)
R
Direct materials
Lease charge for printer
Direct expenses
Direct labour:
1 020 hours(2) x R24
Overtime 40(1) hours x R6(1)
PRIME COST
2 500
-
16 500
24 480
240
43 720
(1)
(1)
(1)
Overheads are not part of prime cost as they represent indirect costs and not direct costs. (1)
PART B (5 Marks)
January 475 24 400
July 172 23 188
303 1 212
Variable cost per guest =
303
2121
= R4 (2)
Fixed cost = 24 400 – (475 x 4)
= R22 500* (1)P
Total cost for August = 22 500* + (4 x 200)
= R23 300 (2)P

19
QUESTION 1.11 (35 MARKS)
PART A (6 Marks)
The cafeteria department at Lovell has experienced the following costs and number of meals
served from January through September of 2005:
Month Cafeteria Costs Meals Served
January
February
March
April
May
June
July
August
September
R
35 975
34 400
36 920
38 280
38 615
34 700
36 344
38 516
40 218
8 500
8 000
8 800
9 200
9 458
8 200
8 695
9 313
9 983
REQUIRED:
(a) Using the high-low method of cost estimation, calculate the variable cost per meal served.
(2)
(b) Estimate the fixed costs of running the cafeteria department using the high-low method.
(2)
(c) Write down an equation for the above cost function to estimate the costs of running the
cafeteria. (2)
PART B (16 Marks)
Zuppa Loren operates a large store in Knysna. The store has both a film (video/DVDs) section
and a musical (compact disks and tapes) section. Zuppa Loren reports revenues for the film
section separately from the musical section.
REQUIRED:
Classify each of the following cost items as:
a) Direct or indirect (D or I) costs with respect to the film section.
b) Variable or fixed (V or F) costs with respect to how the total costs of the film section
change as the number of films sold changes.

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QUESTION 1.11 (Continued)
You will have two answers (D or I; V or F) for each of the following items:
Cost items
A Annual retainer paid to a film distributor
B Electricity costs of Zuppa Loren store (single bill covers entire store)
C Costs of films purchased for sale to customers
D Subscription to Video-Novo magazine
E Leasing of computer software used for financial budgeting at Zuppa Loren store
F Cost of popcorn provided free to all customers of Zuppa Loren
G Earthquake insurance policy for Zuppa Loren store
H Freight-in costs of films purchased by Zuppa Loren
PART C (13 Marks)
Augrabies Ltd has the following account balances (in millions):
For specific date R For year 2005 R
Direct materials, 1 January 2005
Work in progress, 1 January 2005
Finished goods, 1 January 2005
Direct materials, 31 December
2005
Work in progress, 31 December
2005
Finished goods, 31 December
2005
15
10
70
20
5
55
Purchases of direct materials
Direct manufacturing labour
Depreciation – plant building and
equipment
Plant supervisory salaries
Miscellaneous plant overhead
Revenues
Marketing, distribution and
customer-
service costs
Plant supplies used
Plant utilities
Indirect manufacturing labour
325
100
80
5
35
950
240
10
30
60
REQUIRED:
Prepare an income statement and a supporting schedule of cost of goods manufactured for the
year ended 31 December 2005.

21
PART A (6 Marks)
(a) Month Cafeteria Costs Meals Served
September
February
Difference (1)
R
40 218
34 400
5 818
9 983
8 000
1 983
Variable cost: 5 818/1 983 = R2.934 per meal (1)P (2)
(b) Fixed Cost: Total Cost = Fixed cost + Variable cost or
40 218 = X + (R2.934 x 9 983) (1)P 34 400 = X + (2.934 x
8 000)
= 40 218 – 29 289.51 = 34 400 –
23 472
= R10 928.49 (1)P = R10 928 (2)
Or R10 960 = fixed cost (rounding)
(c) Running cost = fixed cost + variable cost
Y = 10 928(1)P + R2.934X (1)P (where X = number of meals)
PART B (16 Marks)
(a) (b)
Cost item D or I V or F
A
B
C
D
E
F
G
H
I (1)
I (1)
D (1)
D (1)
I (1)
I (1)
I (1)
D (1)
F (1)
V (1)
V (1)
F (1)
F (1)
V (1)
F (1)
V (1)
8 x 2 = 16

22
PART C (13 Marks)
Augrabies Ltd
Income Statement for the year ended 31 December 2005
(in R millions)
R R
Revenues
Cost of goods sold:
Opening finished goods, 1 January 2005
Cost of goods manufactured (below)
Cost of goods available for sale
Closing finished goods, 31 December
2005
70
645 *
715
(55)
950
660
(1)
(1)P
Gross margin
Marketing, distribution, and customer-service
costs
Operating income
290
240
50
(1)
Augrabies Ltd
Schedule of cost of goods manufactured for the year ended 31 December 2005
(in R millions)
Direct materials costs:
Opening stock, 1 January 2005
Purchases of direct materials
Cost of direct materials available for use
Closing stock, 31 December 2005
Direct materials used
R
15
325
340
20
(1)
R
320 (1)P
Direct manufacturing labour costs
Indirect manufacturing costs:
100 (1)
Indirect manufacturing labour
Plant supplies used
Plant utilities
Depreciation – plant, building and
equipment
Plant supervisory salaries
Miscellaneous plant overhead
Manufacturing costs incurred during 2005
Add opening work in progress stock, 1 Jan
2005
60
10
30
80
5
35
(1)
(1)
(1)
(1)
(1)
(1) 220
640
10
Total manufacturing costs to account for 650
Deduct closing work in progress, 31 Dec 2005 5 (1)
Cost of goods manufactured R645 *

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QUESTION 1.12
DATA
Budgeted labour hours 8 500
Budgeted overheads R148 750
Actual labour hours 7 928
Actual overheads R146 200
REQUIRED:
a) Based on the data given above, what is the labour hour overhead absorption rate?
A R17,50 per hour
B R17,20 per hour
C R18,44 per hour
D R18,76 per hour
b) Based on the data given above, what is the amount of overhead under/over-absorbed?
A R2 550 under-absorbed
B R2 529 over-absorbed
C R2 550 over-absorbed
D R7 460 under absorbed
a) Answer = A
Budgeted overhead rates and not actual overhead rates should be used.
 Overhead rate = R148 750/8500 hours = R17,50 per hour.
b) Answer = D
R
Actual overheads incurred 146 200
Overheads absorbed (7928 x R17,50) 138 740
Under-absorbed overheads 7 460

24
QUESTION 1.13
Grimsell Limited budgeted the following figures for 19x8:
Department
1 2
Direct labour R320 000 R122 500
Factory overheads R504 000 R525 000
Direct labour hours 56 000 21 000
Machine hours 4 000 75 000
Overheads are apportioned to production by using both direct labour hours and machine hours as
basis.
The budgeted factory overheads have to be apportioned equally in relation to each of the two
bases.
At the end of March 19x8 the cost records for Task 24 reflected the following:
Department
1 2
Material R 80 000 R 40 000
Direct labour R 60 000 R 25 000
Machine hours 800 18 000
The task is classified as complete. The profit that was realised from the task amounted to 50% of
the total manufacturing and administration costs (administration costs amounted to R5 000).
At the end of 19x8 the actual hours in respect of the various departments were as follows:
Department
1 2
Machine hours 3 500 76 000
The actual costs for 19x8 were as follows:
Department
1 2
Direct labour 330 000 120 000
Factory overheads 505 000 540 000
YOU ARE REQUIRED TO:
a) calculate the allocation rates;
b) calculate the selling price for Task 24;
c) calculate the over/underapplied overheads for Departments 1 and 2 for 19x8.

25
a)
(i) Labour hours
Department 1 504 000 x 0,5*
56 000
= R4,50
Department 2 525 000 x 0,5*
21 000
= R12,50
* Budgeted overheads must be apportioned equally (i.e. 50%/50%).
(ii) Machine hours
Department 1 504 000 x 0,5
4 000
= R63
Department 2 525 000 x 0,5
75 000
= R3,50
b) Task 24
Departments
1 2 Total
Material 80 000 40 000 120 000
Direct labour 60 000 25 000 85 000
Overheads apportioned 90 900 125 500 216 400
Labour hours (C1) 40 500 62 500 103 000
Machine hours (C2) 50 400 63 000 113 400
Administration costs 5 000
Total costs 426 400
Profit (50% x 426 400) 213 200
Selling price 639 600

26
QUESTION 1.13 (SUGGESTED SOLUTION - CONTINUED)
CALCULATIONS
C1 Labour hours
9 000 x 4.5 = 40 500
5 000 x 12.5 = 62 500
103 000
C2 Machine hours
800 x 63 = 50 400
18 000 x 3.5 = 63 000
113 400
c) Apportioned overheads
Department
1 2 Total
Labour hours (C3) 270 000 250 000 520 000
Machine hours (C4) 220 500 266 000 486 500
490 500 516 000 1 006 500
Actual overheads 505 000 540 000 1 045 000
Underapplied overheads (14 500) (24 000) (38 500)
C3 Labour hours
60 000 x 4.5 = 270 000
20 000 x 12.5 = 250 000
520 000
C4 Machine hours
3 500 x 63 = 220 500
76 000 x 3.5 = 266 000
486 500

27
QUESTION 1.14
XYZ Limited produced the following budgeted costs for the production level of 15 000 units
Total
R
Raw materials 120 000
Fixed manufacturing costs 75 000
300 000
The actual results for the period showed that 17 000 units were produced. The actual costs
incurred were:
Total
R
Raw materials 136 000
Fixed manufacturing costs 97 000
REQUIRED:
Calculate the over or under recovered overhead.
Allocation Rate
= R75 000/15 000
= R5 per unit
Actual overheads 97 000
Allocated overheads (17 000 x 5) 85 000
Under recovered overheads R12 000

28
QUESTION 1.15
CA Ltd is a small engineering factory which manufactures two different products in two production
departments. In addition, a canteen is run as a separate department.
Product A Product B
Selling price per unit R60 R70
Sales volume 1 500 3 000
Increase (decr.) in finished goods (units) 500 (500)
Material costs per unit 8 5
Direct labour hours per unit
Workshop (R3 per hour) 5 6
Ass. department (R2 per hour) 4 4
Machine hours per unit
Workshop 3 8
Assembly department 1 -
Workshop Assembly Canteen Total
Factory overheads R R R R
Variable 26 000 9 000 - 35 000
Fixed 42 000 30 000 16 000 88 000
68 000 39 000 16 000 123 000
Number of employees 15 9 1
Floor area (M2
) 4 000 1 000 1 000
a) determine an appropriate overhead allocation rate for each production department and to
calculate the total budgeted costs per unit for each product; and
b) calculate the impact on the budgeted profit if the following year's actual results are as
predicted, except that the sales and production of product A are 300 units more than what
was budgeted.

29
a)
i) Calculation of total overhead allocation rate for each production department
Departments
Production Service
Workshop Mounting Canteen
Fixed overheads 42 000 30 000 16 000
Allocation – Canteen (15:9) 10 000 6 000 (16 000)
52 000 36 000 -
Basis M/hours Da/hours*
 Hours 26 000 (B1) 18 000 (B2) -
 Budgeted fixed overheads
tariff/department per hour
R2,00 R2,00
Variable overheads
Overheads/Hours 26 000/26 000 9 000/18 000 -
 Budgeted variable overheads
tariff/department per hour
R1,00 R0,50
 Total budgeted tariff/department per
hour (fixed + variable)
R3,00 R2,50
* or % of direct labour costs
Wage tariff is constant in both departments.
CALCULATIONS
Activity base
1. Calculation of machine hours used
Units manufactured A B
Sales 1 500 3 000
Increase/(decrease) in finished goods 500 (500)
Units manufactured 2 000 2 500
Allocation methods
Workshop: machine hours per unit 3 8
 Machine hours 2 000 x 3
= 6 000
2 500 x 8
= 20 000
 Total machine hours = 6 000 + 20 000
= 26 000

30
2. Calculation of direct labour hours used
A B
Assembly department  direct labour
hours per unit
4 4
 Hours used 2 000 x 4
= 8 000
2 500 x 4
= 10 000
 Total direct labour hours = 8 000 + 10 000
= 18 000
ii) Budgeted costs/unit
Calculation 1
A B
Workshop
R3 X 3 hours 9
R3 X 8 hours 24
Assembly
R2,50 X 4 hours 10
R2,50 X 4 hours 10
Overheads/unit 19 34
Labour
- Workshop (R3 x 5/R3 x 6) 15 18
- Assembly (R2 x 4/R2 x 4) 8 8
23 26
Material 8 5
Overheads (B1) 19 34
Total costs per unit 50 65
(b) Impact on budgeted profit
Marginal income/unit: A
Selling price R60
Material (8)
Labour (23)
Variable overheads
(3 x R1) + (4 x R0,5) (5)
R24
Increase in profit: R24 x 300
= R7 200
Relevant costs  only the variable income and variable costs.

31
QUESTION 1.16
A furniture-making business manufactures quality furniture to customers' orders. It has three
production departments and two service departments. Budgeted overhead costs for the coming
year are as follows:
Total
(R)
Rent and Rates 12 800
Machine insurance 6 000
Telephone charges 3 200
Depreciation 18 000
Production Supervisor's salaries 24 000
Heating & Lighting 6 400
70 400
The three production departments – A, B and C, and the two service departments – X and Y,
are housed in the new premises, the details of which, together with other statistics and
information, are given below.
A B C X Y
Floor area occupied (sq metres) 3 000 1 800 600 600 400
Machine value (R'000) 24 10 8 4 2
Direct labour hrs budgeted 3 200 1 800 1 000
Labour rates per hour R3,80 R3,50 R3,40 R3,00 R3,00
Allocated Overheads:
Specific to each department (R'000) 2,8 1,7 1,2 0,8 0,6
Service Department X's cost
apportioned
50% 25% 25%
Service Department Y's cost
apportioned
20% 30% 50%
REQUIRED:
a) Prepare a statement showing the overhead cost budgeted for each department, showing
the basis of apportionment used. Also calculate suitable overhead absorption rates.

32
b) Two pieces of furniture are to be manufactured for customers. Direct costs are as follows:
Job 123 Job 124
Direct Material R154 R108
Direct Labour 20 hours Dept A 16 hours Dept A
12 hours Dept B 10 hours Dept B
10 hours Dept C 14 hours Dept C
Calculate the total costs of each job.
c) If the firm quotes prices to customers that reflect a required profit of 25% on selling price,
calculate the quoted selling price for each job

33
a)
Departments
Total A B C X Y
(R) (R) (R) (R) (R) (R)
Rent and ratesa 12 800 6 000 3 600 1 200 1 200 800
Machine
insuranceb
6 000 3 000 1 250 1 000 500 250
Telephone
chargesc
3 200 1 500 900 300 300 200
Depreciationb 18 000 9 000 3 750 3 000 1 500 750
Supervisors'
salariesd
24 000 12 800 7 200 4 000
Heat and lighta 6 400 3 000 1 800 600 600 400
70 400
Allocated 2 800 1 700 1 200 800 600
38 100 20 200 11 300 4 900 3 000
Reapportionment
of X
2 450 (50%) 1 225 (25%) 1 225 (25%) (4 900)
Reapportionment
of Y
600 (20%) 900 (30%) 1 500 (50%) (3 000)
R41 150 R22 325 R14 025 - -
Budgeted
D.L. hourse
3 200 1 800 1 000
Absorption rates R12,86 R12,40 R14,02
Notes:
a
Apportioned on the basis of floor area.
b
Apportioned on the basis of machine value.
c
Should be apportioned on the basis of the number of telephone points or estimated usage.
This information is not given and an alternative arbitrary method of apportionment should be
chosen. In the above analysis telephone charges have been apportioned on the basis of
floor area.
d
Apportioned on the basis of direct labour hours.
e
Machine hours are not given but direct labour hours are. It is assumed that the examiner
requires absorption to be on the basis of direct labour hours.

34
b)
Job 123 Job 124
(R) (R)
Direct material 154,00 108,00
Direct labour:
Department A 76,00 60,80
Department B 42,00 35,00
Department C 34,00 47,60
Total direct cost 306,00 251,40
Overhead:
Department A 257,20 205,76
Department B 148,80 124,00
Department C 140,20 196,28
Total cost 852,20 777,44
Profit 284,07 259,15
c)
Listed selling price 1 136,17 1 036,59
Let SP represent selling price.
Cost + 0,25SP = SP
Job 123:
R852,20 + 0,25SP = 1SP
0,75SP = R852,20
SP = R1 136,27
Job 124:
0,75SP = R777,44
SP = R1 036,59

35
PART A (11 MARKS)
PTS Limited is a manufacturing company which uses three production departments to make its
product. The following factory costs are expected to be incurred in the year ending 31
December:
R
Direct wages Machining 234 980
Assembly 345 900
Finishing 134 525
R
Indirect wages and salaries Machining 120 354
Assembly 238 970
Finishing 89 700
R
Factory rent 12 685 500
Business rates 3 450 900
Heat and lighting 985 350
Machinery power 2 890 600
Depreciation 600 000
Canteen subsidy 256 000
Other information is available as follows:
Machining Assembly Finishing
Number of employees 50 60 18
Floor space occupied
(m2
)
1 800 1 400 800
Horse power of
machinery
13 000 500 6 500
Value of machinery
(R000)
250 30 120
Number of labour hours 100 000 140 000 35 000
Number of machine
hours
200 000 36 000 90 000
REQUIRED:
a) Prepare the company’s overhead analysis sheet for the year to 31 December. (8)
b) Calculate appropriate overhead absorption rates (to two decimal places) for each
department. (3)

36
QUESTION 1.17 (CONTINUED)
PART B (14 MARKS)
A company makes a range of products with total budgeted manufacturing overheads of
R973 560 incurred in three production departments (A, B and C) and one service department.
Department A has 10 direct employees, who each work 37 hours per week.
Department B has five machines, each or which is operated for 24 hours per week.
Department C is expected to produce 148 000 units of final product in the budget period.
The company will operate for 48 weeks in the budget period.
Budgeted overheads incurred directly by each department are:
Production department A R261 745
Production department B R226 120
Production department C R93 890
Service department R53 305
The balance of budgeted overheads are apportioned to departments as follows:
Production department A 40%
Production department B 35%
Production department C 20%
Service department 5%
Service department overheads are apportioned equally to each production department.
REQUIRED:
a) Calculate an appropriate predetermined overhead absorption rate in each
production department. (10)
b) Calculate the manufacturing overhead cost per unit of finished product in a batch
of 100 units which take 9 direct labour hours in department A and three machine
hours in department B to produce. (4)
PART C (4 MARKS)
Reapportioning service cost centre costs is generally worthwhile and suggests an alternative
treatment for such costs.
REQUIRED:
Comment on the above statement (4)

37
PART D (6 MARKS)
Critically consider the purpose of calculating production overhead absorption rates. State
clearly why actual overhead rates should not be used.
(35 MARKS)
PART A (11 MARKS)
a)
Overhead analysis sheet
Expense Apportionment
basis
Machining
(R)
Assembly
(R)
Finishing
(R)
Total
(R)
Indirect wages/salaries Allocated 120 354 238 970 89 700 449 024
Rent Area 5 708 475 4 439 925 2 537 100 12 685 500
Business rates Area 1 552 905 1 207 815 690 180 3 450 900
Heat/light Area 443 408 344 872 197 070 985 350
Machine power Horsepower 1 878 890 72 265 939 445 2 890 600
Plant depreciation Value of plant 375 000 45 000 180 000 600 000
Canteen subsidy No. of employees 100 000 120 000 36 000 256 000
Total 10 179 032 6 468 847 4 669 495 21 317 374
 = for not using direct wages. (8)
b) Most of the overheads in the machine department are likely to be machine related
and therefore it is appropriate to use a machine hour rate. The machine hour cost
rate is also used for the finishing department, because machine hours are the
predominant activity. Similar arguments can be used to justify the use of a direct
labour hour overhead rate in the assembly department. The overhead rates are as
follows:
Machining
000200
03217910R
= R50,90 per machine hour
Assembly
000140
8474686R
= R46,21 per direct labour hour
Finishing
00090
8476694R
= R51,88 per machine hour
(3)

38
PART B (14 MARKS)
a)
Production department Service
department
Total
A B C
(R) (R) (R) (R) (R)
Direct 261 745 ½ 226 120 ½ 93 890 ½ 53 305 ½ 635 060
Indirect 135 400
(40%) ½
118 475 (35%) ½ 67 700 (20%) ½ 16 925 (5%) ½ 338 500 
Service dept
appointment 23 410 (1/3) ½ 23 410 (1/3) ½ 23 410 (1/3) ½ (70 230) ½
420 555 368 005 185 000 - 973 560
Allocation base
(C1)
17 760  5 760  148 000 
= R23,68 = R63,89 = R1,25
per direct
labour hour
per m/c hour per hour
(10)
Calculations:
C1. Dept. A direct labour hours
= 10 x 37 x 48
= 17 760
Dept. B machine hours
= 5 x 24 x 48
= 5 760
Dept. C units
= 148 000
R
b) Dept A
9 direct labour hours at R23,68 213,12 
Dept B
3 m/c hours at R63,89 191,67 
Dept C
100 units at R1,25 125,00 
529,79
Cost per unit = R5,30 (R529,79/100)
(4)

39
PART C (4 MARKS)
Reapportioning production service department costs is necessary to compute product costs for
stock valuation purposes. However, it is questionable whether arbitrary apportionment of
fixed overhead costs provides useful information for decision making. Such apportionments are
made to meet stock valuation requirements, and they are inappropriate for decision-making,
cost control and performance reporting.
An alternative treatment would be to adopt a variable costing system and treat fixed
overheads as period costs. This would eliminate the need to reapportion service
department fixed costs. A more recent suggestion is to trace support/service department costs
to products using an activity-based costing system.
Any 2 x 2 = (4)
PART D (6 MARKS)
Actual overhead rates are not used because of:
(1) Delay in product costs if actual annual rates are used.
Information on product costs is needed timeously to enable calculation of
 monthly profit
 inventory calculations
 selling prices
(2) Fluctuating overhead rates that will occur if actual monthly rates are used.
An estimated normal product cost based on average long-run activity is required rather
than an actual product cost (which is affected by month-to-month fluctuations in
activity).
Overhead expenditure is fixed in short term but
 monthly activity varies
And thus large fluctuations in overhead rates can occur.
(3) Expenses like repairs, maintenance and heating are not incurred evenly.
If budgeted overheads are not used, but actual overheads are used products produced in
winter will be more expensive.
Production overhead absorption rates are calculated in order to
 ascertain cost per unit of output for
 stock valuation and
 profit measurement purposes
Such costs are inappropriate for
 decision-making and
 cost control

40
PART A (15 Marks)
Dunstan Ltd manufactures tents and sleeping bags in three separate production departments.
The principal manufacturing processes consist of cutting material in the pattern cutting room,
and sewing the material in either the tent or the sleeping bag department. Total manufacturing
overheads of R362 000 were estimated for the year. You have been provided with the following
budgeted costs for the year ending 31 December 2006:
Total Cutting
room
Tents Sleeping
bags
Raw material
Inventory
store
Canteen Main-
tenance
R R R R R R R
Indirect wages 147 200 6 400 19 500 20 100 41 200 15 000 45 000
Consumable
materials
54 600 5 300 4 100 2 300 - 18 700 24 200
Plant
depreciation
84 200 31 200 17 500 24 600 2 500 3 400 5 000
Power 32 900
Rent and rates 10 500
Floor area 30 000 27% 33% 23% 5% 8% 4%
No of
employees
123 7 48 57 3 5 3
Machine usage
(hours)
87 000 2 000 40 000 45 000
Notes:
1. Each employee works on average 1 000 hours.
2. The balance of overheads are apportioned to departments as follows:
Cutting room 40%
Tents 35%
Sleeping bags 20%
Maintenance 5%
3. The raw material store, canteen and maintenance departments are service
departments. An analysis of the service they provide indicates that their costs should be
apportioned as follows:
Maintenance department : Machine hours
Canteen department : No of employees
Raw material inventory store : Cutting room – 70%
Tents – 15%
Sleeping bags – 15%
Note: The Canteen department renders a service to all departments within the
organisation and costs should be apportioned accordingly.

41
REQUIRED:
1. Prepare the company’s overhead analysis sheet for the year ending 31 December 2006.
(10)
2. Calculate an appropriate overhead absorption rate for each department. State the
reasons for your choice. (5)
PART B (5 Marks)
A company has been asked to quote on a job to produce 500 hydraulic industrial hammers.
Their selling price is based on cost plus 20%. They include an appropriate allocation of fixed
overheads in determining their cost price.
They have provided you with the following information:
Direct material R3 400
Direct labour R1 500
Direct expenses R 300
Direct selling cost R 200
Machine hours in Department 1 120
Labour hours in Department 2 230
You have calculated the appropriate absorption rates to be as follows:
Department 1 : R5 per machine hour
Department 2 : R2.50 per labour hour
REQUIRED:
Determine the appropriate price for the job. (5)
PART C (6 Marks)
You have been provided with the following budgeted information for two departments:
Department 1 Department 2
Budgeted overheads R120 000 R340 000
Budgeted absorption rates R12 per labour hour R17 per machine hour
Your manager is busy compiling his yearly financial report and would like to know whether there
was an over/under recovery of overheads in each department. He explained to you that there
will be no over/under recovery in Department 1 because actual overheads and budgeted
overheads were the same.

42
You have collected the following data:
Department 1 Department 2
Actual overheads R120 000 R320 000
Actual labour hours worked 11 000 hrs 2 500 hrs
Actual machine hours worked 1 500 hrs 18 500 hrs
REQUIRED:
Determine the appropriate over/under recovery of overheads per department. Comment on the
statement made by your manager. (6)
PART D (5 Marks)
REQUIRED:
Critically consider the purpose of calculating production overhead absorption rates. State
clearly why actual rates should not be used. (5)
PART E (4 Marks)
REQUIRED:
Contrast the use of blanket as opposed to departmental overhead absorption rates. (4)

43
PART A (15 Marks)
a)
Method of
allocation Total
Cutting
room Tents
Sleeping
bags
Raw
material
inventory
store
Canteen
Main-
tenance
Indirect wages
Consumable materials
Plant depreciation
(given)
Power
Rent and rates
Other (Balance)
Allocated
Allocated
Book value
Floor area
Floor area
Given
147 200
54 600
84 200
32 900
10 500
32 600
6 400
5 300
31 200
8 883
2 835
13 040
19 500
4 100
17 500
10 857
3 465
11 410
20 100
2 300
24 600
7 567
2 415
6 520
41 200
-
2 500
1 645
525
-
15 000
18 700
3 400
2 632
840
-
45 000
24 200
5 000
1 316
420
1 630
(1)
(1)
(1)
(1)
(1)
(1)
Total overheads 362 000 67 658 66 832 63 502 45 870 40 572 77 566
Allocation of service centre
Canteen department 0 2 406 16 504 19 598 1 032 (40 572) 1 032 (2) P
Maintenance department
362 000
0
70 064
1 807
83 336
36 137
83 100
40 654
46 902
-
0 78 598
(78 598) (1) P
Raw materials stores
362 000
0
71 871
32 832
119 473
7 035
123 754
7 035
46 902
(46 902)
0
-
0
- (1) P
Allocated overheads 362 000 104 703 126 508 130 789 0 0 0
(10)
b)
Cutting
Room Tents
Sleeping
Bags
Direct labour hours
Employees
Hours per employee
7
1 000
48
1 000
57
1 000
Total labour hours 7 000 (1) 48 000 (½) 57 000 (½) (2)
Absorption rate per direct labour hour 104 703 126 508 130 789 (2) P
7 000
= R14,96/hr
48 000
= R2,64hr
57 000
= R2,29/hr
Reason for choice: Labour hours are the biggest cause of expenses for each department. (1)
Alternative: Machine hours used for Tents and Sleeping Bags
(5)

44
QUESTION 1.18 (SUGGESTED SOLUTION –CONTINUED)
PART B (5 Marks)
Direct materials
Direct labour
Direct expenses
Allocated overheads
Dept 1
Dept 2
Rate
R5
R2,50
Hours
120
230
R
3 400
1 500
300
600
575
(1)
(1)
(1)
(1)
(1)
Cost
20% Mark up on cost
6 375
1 275 (1) P
Selling price (per unit) 7 650
∴ Total selling price (7 650 x 500) 3 825 000 (1) P
Direct selling cost is not included. Max (5)
PART C (6 Marks)
Dept 1
R
Dept 2
R
Actual overheads
Allocated overheads
Department 1 (R12 x 11 000 hours)
Department 2 (R17 x 18 500 hours)
120 000
132 000
(1) 320 000
314 500
(1)
(12 000) 5 500
Over absorbed
(1)P
Under absorbed
(1)P
The manager’s statement is incorrect. (1)
Overheads are allocated on actual hours which did not correspond to budgeted hours. (1) (6)
PART D (5 Marks)
Actual overhead rates are not used because of:
1. Delay in product costs if actual annual rates are used
- Information on product costs is needed timeously to enable calculation of
- monthly profit
- inventory calculations
- selling prices (2)

QUESTION 1.18 (SUGGESTED SOLUTION – CONTINUED)
2. Fluctuating overhead rates that will occur if actual monthly rates are used.
- an estimated normal product cost based on average long-run activity is required
rather than an actual product cost (which is affect by month-to-month fluctuations
in activity) (2)
OR
- Overhead expenditure is fixed in the short term, but monthly activity varies and
thus large fluctuations in overhead rates can occur.
3. Expenses like repairs, maintenance and heating are not incurred evenly.
- If budgeted overheads are not used, but actual overheads are used products
produced in winter will be more expensive. (2)
Max (5)
PART E (4 Marks)
A blanket overhead rate established a single overhead rate (1) for the organisation as a whole
whereas departmental rates involve indirect costs being accumulated by different departments
and a separate overhead rate being established for each department. (2)
A blanket overhead rate can only be justified when all products or services consume
departmental overheads in approximately the same proportions. (2)
Where products or services consume departmental overheads in different proportions, the use
of a plant wide overhead rate will result in inaccurate assignment of overheads to products. (2)
Max (4)

PART A (15 Marks)
Zeerust Printing has decided that in 2005 it will charge their overheads to all jobs on the basis
of a pre-determined rate. The company has estimated that the year’s overhead is likely to
increase to R40 000 (budgeted cost). It has also estimated the following data for both
production departments:
Budget overheads:
Production departments
Expected activity -
X Y Total
Labour hours
Machine hours
Allocated (budgeted) cost:
Pre-determined recovery rate
10 000
-
R18 000
R1,80
-
20 000
R22 000
R1,10
10 000
20 000
R40 000
Actual results:
The following jobs were completed in 2005:
Jobs D E Total
R R R
Sales value
Direct material
Direct labour
50 000
10 000
7 000
60 000
15 000
8 000
110 000
25 000
15 000
Jobs
Labour hours
Machine hours
D
7 000
10 000
E
5 000
15 000
Total
12 000
25 000
Actual overhead cost incurred R45 000
REQUIRED:
a) Calculate the profit for each job. (7)
b) Produce the actual income statement for 2005. (6)
c) Give reasons for the use of pre-determined overhead allocation rates. (2)

PART B (10 Marks)
Glentana company uses a fully integrated absorption costing system for recording overhead
costs and produced the following budgeted costs for a production level of 20 000 units:
Total
R
Raw material
Direct labour
Fixed manufacturing overheads
160 000
140 000
100 000
400 000
The actual results for the period showed that 24 000 units were produced. The actual costs
incurred were:
Raw material
Direct labour
Fixed manufacturing overheads
R
192 000
168 000
130 000
REQUIRED:
Show the overhead and work-in-progress accounts and explain the reasons for the under or
over recovered overhead. (10)

PART A (15 Marks)
a) Profit calculation:
Job D E
Sales
Direct material
Direct labour
Overhead
Profit
50 000
10 000
7 000
23 600*
9 400
(½)
(½)
(½)
60 000
15 000
8 000
25 500
11 500
(½)
(½)
(½)
o
Overhead allocation:
Job D
Machine hours 10 000 x
1,10 =
Labour hours 7 000 x
1,80 =
Job E
Machine hours 15 000 x
1,10 =
Labour hours 5 000 x
1,80 =
R11 000
R12 600
R23 600
R16 500
R 9 000
R25 500
(1)
(1)
*
(1)
(1)
o
(7)
By allocating the overheads to jobs ‘D’ and ‘E’ at a pre-determined rate we will end up
with an under or over allocated overhead amount. In a job-costing system both direct
and allocated costs are charged to the jobs. The jobs are then transferred to the income
statement. As overhead has been charged to the jobs at a pre-determined rate, the
actual overhead account must be transferred to the overhead account and the difference
charged to the income statement.
Overhead Account
Actual overhead 45 000
Over-recovery (To income statement) 4 100***
49 100
Job D overhead charged 23 600
Job E overhead charged 25 500
49 100
b) 2005 Income Statement:
R
Sales
Cost of sales:
Direct materials
Direct labour
Allocated overheads (23 600* +
25 500o
)
Gross profit
Over-recovered overhead
Actual profit
25 000
15 000
49 100
89 100
(1)
(1)
(1)
110 000
89 100
20 900
+ 4 100
R25 000
(1)
**(2)
(6)

QUESTION 1.19 (SUGGESTED SOLUTION – CONTINUED)
c) The allocation of overhead costs to the manufacturing and service departments and then
to the products is done for the purpose of:
- Calculating the profit on an individual job(1) or
- For the purpose of calculating the value of closing stock in the income statement
where a fully-integrated absorption costing system is used. (1)
PART B
Overhead Account
Actual overhead 130 000 (1)
130 000
WIP )
00020
000100
00024( x 120 000 (1)
Under-recovery 10 000 (1)
130 000
WIP Account
Raw material 192 000 (2)
Direct labour 168 000 (2)
Overheads 120 000 (2)
480 000
Finished goods (1) 480 000
480 000
The under-recovery of R10 000 can be explained as follows:
Volume:
The actual volume was 4 000 units greater than budget resulting in an over-recovery of
4 000 x R5 = R20 000(2)
Expenditure:
The budgeted expenditure was R100 000 as compared to the actual of R130 000. This has
given rise to an under-recovery of R30 000.(1)
Volume
Expenditure
Net
over-recovered
under-recovered
under-recovered
R
20 000
(30 000)
(10 000)

PART A (12 Marks)
Three cost centres are identified in the production of Zena chairs, namely Polishing, Sanding
and Finishing. The following information has been prepared by the cost accountant of Cece
Manufacturers:
Polishing
R
Sanding
R
Finishing
R
Indirect factory salaries and wages
Direct factory salaries and wages
46 290
58 745
119 483
115 300
197 340
26 905
Details of other manufacturing costs are:
Depreciation of machinery
Rates and taxes
Rent of factory
Heat and lighting
Canteen expenses
Power – machine battery
1 250 000
1 725 450
1 409 400
197 070
512 000
361 000
Additional information
Polishing Sanding Finishing
Number of machine hours
Number of employees
Labour hours
Floor area occupied (m2
)
Value of machinery
Kilowatt power of machinery
420 000
120
300 000
1 500
R500 000
420 000
79 200
140
240 000
1 500
R60 000
190 000
415 300
60
210 000
2 000
R240 000
390 000
REQUIRED:
a) Prepare an overhead analysis schedule for Cece Manufacturers. (6)
b) Calculate suitable overhead recovery rates (to two decimal places, if applicable) for each
cost centre. Give reasons for your choice of allocation base. (6)
PART B (8 Marks)
a) Explain why indirect costs are not directly traced to cost objects in the same way as direct
costs. (4)
b) Give two reasons for the under- or over-recovery of overheads at the end of the
accounting period. (4)

PART C (10 Marks)
The budgeted production costs of Spiceworld for 20.7 were as follows:
R
Direct material 800 000
Production overheads 240 000
Actuals compared to budget for 20.7 were as follows:
1. Production and the efficiency thereof remained unchanged.
2. Labour hours increased by 10%, but the labour rate decreased from R16 per hour to R14
per hour.
3. The purchase price of direct materials increased by 15% and all other factors in the
business stayed as is.
REQUIRED:
a) Calculate the factory overhead rate for 20.7 on the basis of direct labour hours. (3)
b) Calculate actual total cost of production for 20.7. (4)
c) Calculate the total cost of Job 15 if direct material used was R8 000 and direct labours
paid was R5 600. (3)
PART D (5 Marks)
Amakhosi Ltd absorbs production overheads on the basis of standard machine hours.
The following budgeted and actual information applied in its last accounting period:
Budget Actual
Production overhead
Machine hours
Units produced
R180 000
50 000
40 000
R178 080
48 260
38 760
REQUIRED:
Prepare the production overhead account for the accounting period just ended. (5)

PART A (12 Marks)
a) Polishing Sanding Finishing
Indirect salaries and wages
Depreciation
Rates and Taxes
Rent**
Heat and lighting
Canteen
Power
46 290
781 250
517 635
422 820
59 121
192 000
151 620
119 483
93 750
517 635
422 820
59 121
224 000
68 590
197 340
375 000
690 180
563 760
78 828
96 000
140 790
(1)*
(1)
(1)
(1)
(1)
(1)
2 170 736 1 505 399 2 141 898
* Get mark only if amounts are correct AND also left out direct factory salaries and
wages out of analysis sheet
** Rent will be included in allocation rate if company uses absorption costing. However if
they use variable costing, it will not affect allocation rate
b) Machine hrs(1)
420 000
= R5,17
Labour hrs(1)
240 000
= R6,27
Machine hrs
211 500
= R5,16
(1)
(2) P
The dominant factor was chosen as allocation base for each cost centre.(Reason for
choice of base) (1)P
PART B (8 Marks)
a) Direct costs can be accurately traced to cost objects because they can be specifically and
exclusively linked to a particular cost object whereas indirect costs cannot. (2)
Indirect costs cannot be traced directly to a cost object because they are usually common
to several cost objects. Indirect costs are therefore assigned to cost objects using cost
allocations.
(2)
4
b) There will be an under-/over-recovery of overheads whenever actual activity(2) or
overhead expenditure(2) is different from the budgeted overheads and activity used to
estimate the budgeted overhead rate.
(4)

PART C (10 Marks)
a) Direct labour hours per budget= R480 000
÷ R16 per hour
= 30 000* labour hours (2)
Budgeted factory overhead rate
=
*00030
000240
(1)P
= R8
b) Total cost of production 20.7:
Direct materials (800 000 x 1,15) 920 000 (1)
Direct labour [(30 000* x 1,10(1)P) x R14(1)] 462 000
Overheads absorbed (33 000 x R8)(1)P 264 000
1 646 000
c) Job 15:
Direct materials 8 000 (1)
Direct labour 5 600 (1)
Overheads absorbed 





8
14
6005
x 3 200 (1)P
16 800
PART D (5 Marks)
PRODUCTION OVERHEAD
Bank 178 080 (1)
178 080
* or R3,60(2) =
00050
000180
WIP (48 260(1) x 





*
)1(00050
)1(000180
173 736
Under-absorption 4 344 (1)P
178 080

QUESTION 1.21
The following information relates to Prospek Limited who manufactures and markets Product X:
Manufacturing:
Material: opening inventory 40 000 kg
Value R100 000
Purchases during the year 180 000 kg @ R2,70 per kg
Material: closing inventory 20 000 kg
Direct labour:
Hours worked during the year 80 000
Rate per hour R10,00
Manufacturing overheads: allocated at R6 per direct labour hour
Incomplete goods
Opening inventory R100 000
Closing inventory R80 000
Completed goods (units:)
Manufacturing 20 000
Sales 18 400
Opening inventory 4 000
Selling price per unit R250
The following information is also available:
1. Actual manufacturing overheads R464 000
2. Prospek Limited uses the first-in first-out method of inventory valuation.
3. Under- and over-applied manufacturing overheads are brought into account against cost of
sales.
4. Opening inventory in respect of finished goods R95 per unit
5. Administrative and marketing costs R1 120 000
REQUIRED:
a) Prepare a cost statement of goods manufactured and sold for the year ended
28 February 19x1;
b) Prepare an income statement for the year ended 28 February 19x1.

a) Statement of costs for goods manufactured and sold for the year ended 28 February 19x1
Calculations Costs Work in
progress
Finished
goods
Opening inventory
Finished goods
(4 000 units x R95) 380 000
Work in progress 100 000
Material (40 000 kg) 100 000
Material purchases (180 000 kg) 486 000
586 000
Less: Closing inventory
(20 000 kg x R2,70) 54 000
Material consumed 532 000
Direct labour
(80 000 hours x R10) 800 000
Allocated overheads
(80 000 x R6) 480 000
Production costs @ normal 1 812 000
1 912 000
Less: Closing inventory 80 000
Cost of goods manufactured @
normal 1 832 000
Available for sales
(24 000 units) 2 212 000
Less: Closing inventory
(5 600 units) 512 960
Cost of sales @ normal 1 699 040
Overapplied overheads
(R480 000 - R464 000) 16 000
Cost of sales @ actual 1 683 040
b) Income statement for the year ended 28 February 19x1
Sales (18 400 x R250) 4 600 000
Less: Cost of sales 1 683 040
Gross profit 2 916 960
Less: Administrative and marketing
costs 1 120 000
Net profit 1 796 960

QUESTION 1.21
XYZ Ltd operates a job costing system fully integrated with the financial accounts. The
following data relates to May 19X2.
R
Balances at the beginning of the month
Stores ledger control account 8 000
Work in progress control account 15 000
Finished goods control account 22 000
Prepayments of production overheads, brought forward from April 19X2 1 000
Transactions during the month R
Materials purchased 75 000
Materials issued to production 34 000
Materials issued to factory maintenance 4 000
Materials transferred between jobs 3 500
Total wages of direct workers 23 000
Recorded non-productive time of direct workers 2 500
Direct wages incurred on installation of new manufacturing equipment 5 000
Wages of indirect production workers (total) 11 000
Other production overheads incurred 16 000
Selling and distribution overheads incurred 12 000
Sales 110 000
Cost of finished goods sold 65 000
Cost of finished goods damaged and scrapped in the month 2 000
Value of work in progress at 31 May 19X2 18 000
Production overhead absorption rate is 200% of direct wages. It is company policy to include a
share of production overheads in the cost of capital equipment installed in the factory.
REQUIRED:
a) The closing balance at 31 May 19X2 in the stores ledger control account was
A R37 000
B R45 000
C R48 500
D R49 000
b) If there was no stock loss in production, the recorded transfer of finished goods from the
work in progress control account to the finished goods control account would be
A R77 500
B R81 000
C R83 500
D R85 000

QUESTION 1.21 (CONTINUED)
c) The under-or over-absorbed production overhead in the month was
A R6 500 under-absorbed
B R3 500 under-absorbed
C R6 500 over-absorbed
D R9 000 over-absorbed
d) The closing balance on the finished goods control account at 31 May 19X2 was
A R32 500
B R34 500
C R44 500
D R46 500
e) The profit reported in the profit and loss account for May 19X2 was
A R31 000
B R37 500
C R39 500
D R49 500
a) B R45 000
STORES LEDGER CONTROL ACCOUNT
R R
Opening balance b/f 8 000 Work in progress a/c 34 000
Cash/creditors 75 000 Production overhead a/c 4 000
Closing balance b/f 45 000
83 000 83 000
The transfer of materials between jobs does not affect any control account, only individual job
accounts.
b) A R77 500
WORK IN PROGRESS CONTROL ACCOUNT
R R
Opening balance b/f 15 000 Finished goods control a/c
Stores ledger control a/c 34 000 (balancing figure) 77 500
Wages control account
(23 000 – 2 500 – 5000)
15 500 Closing balance b/f 18 000
Production overhead account
(200% of R15 500)
31 000
95 500 95 500

c) C R6 500 over-absorbed production overhead
PRODUCTION OVERHEAD CONTROL ACCOUNT
R R
Prepayments b/f 1 000 Capital equipment
Stores ledger control a/c 4 000 (Fixed asset a/c 5 000 x 200%) 10 000
Wages control a/c Work in progress control 31 000
Direct workers 2 500
Indirect workers 11 000
Cash/creditors 16 000
Over-absorbed overhead a/c
(balancing figure)
6 500
41 000 41 000
d) A R32 500
FINISHED GOODS CONTROL ACCOUNT
R R
Opening stock b/ f 22 000 Cost of goods sold a/c 65 000
Work in progress control a/c 77 500 Scrap – P/L a/c 2 000
Closing stock c/f 32 500
99 500 99 500
e) B R37 500
PROFIT AND LOSS ACCOUNT
R R
Cost of goods sold a/c 65 000 Sales 110 000
Selling and dist'n overhead 12 000 Over-absorbed overhead 6 500
Finished goods a/c – scrap 2 000
Profit (c/fwd) 37 500
116 500 116 500

QUESTION 1.22
a) Explain why an actual overhead rate is rarely used for product costing.
b) Explain the differences between job-order costing and process costing.
c) What is an overhead variance? Explain the difference between an underapplied and an
overapplied overhead variance.
d) Explain why multiple overhead rates are often preferred to a plantwide overhead rate.
e) Explain the role of activity drivers in assigning overhead costs to product.
a) Actual overhead rates are rarely used because managers cannot wait until the end of the
year to obtain product costs. Information on product costs is needed as the year unfolds
for planning, control and decision making.
b) Job-order costing accumulates costs by jobs, and process costing accumulates costs by
processes. Job-order costing is suitable for operations that produce custom-made
products that receive different doses of manufacturing costs. Process costing, on the
other hand, is suitable for operations that produce homogeneous products that receive
equal doses of manufacturing costs in each process.
c) An overhead variance is the difference between actual overhead and applied overhead.
Underapplied overhead means that the applied overhead is less than the actual overhead.
Overapplied overhead means that applied overhead is greater than the actual overhead.
d) Multiple overhead rates often produce a more accurate assignment of overhead costs to
jobs. For example, if jobs do not pass through all departments, departmental overhead
rates give a better picture of job costs.
e) Activity drivers are those factors that drive or cause the consumption of overhead.
Knowing what drives overhead costs allows a more accurate assignment of overhead
costs to products.

PART A (18 Marks)
Super Enterprises uses a job-costing system at the Tzaneen plant. The plant has a Machining
Department and a Finishing Department. Its job-costing system has two direct cost categories
(direct materials and direct manufacturing labour) and two manufacturing overhead cost pools.
The Machining department allocated manufacturing overhead using actual machine hours and
the Finishing department allocated manufacturing overhead using actual labour cost. The 2007
budget for the plant is as follows:
Machining
Department
R
Finishing
Department
R
Manufacturing overhead
Direct manufacturing labour cost
Direct manufacturing labour hours
Machine hours
10 000 000
900 000
30 000
200 000
8 000 000
4 000 000
160 000
33 000
REQUIRED:
a) Calculate the budgeted overhead rate that should be used in the (i) Machining
department and (ii) Finishing department. (4)
b) During the month of January, the cost record for Job 431 shows the following:
Machining
Department
R
Finishing
Department
R
Direct material used
Direct manufacturing labour costs
Direct manufacturing labour hours
Machine hours
14 000
600
30
130
3 000
1 250
50
10
Calculate the total manufacturing overhead allocated to Job
431.
(3)
c) Assuming that Job 431 consisted of 200 units of product, calculate the unit product cost
of Job 431. (6)
d) Balances at the end of 2007 are as follows:
Machining
Department
R
Finishing
Department
R
Manufacturing overhead incurred
Direct manufacturing labour cost
Machine hours
11 200 000
950 000
220 000
7 900 000
4 100 000
32 000
Compute the under- or over allocated manufacturing overhead for each department and
for Super Enterprises plant as a whole. (5)

PART A (18 Marks)
a)
(i) Machining Department
000200
00000010R
= R50 per machine hour (2)
(ii) Finishing Department
)1(
0000004
0000008
R
R
= 200% of direct labour cost (1) (4)
R
b) Machining overhead [R50 x 130 hours]
Finishing overhead [200%(1)P x R1 250(1)P]
6 500
2 500
(1)
9 000
c) Total cost Job 431 R
(3)
Direct costs 18 850
Direct materials – Machining Department
Direct materials – Finishing Department
Direct manufacturing labour – Machining
Department
Direct manufacturing labour – Finishing
Department
14 000
3 000
600
1 250
(1)
(1)
(1)
(1)
Indirect cost (as above in b) 9 000
Machining overhead [R50 x 130]
Finishing overhead [200% x R1 250]
6 500
2 500
(1)P
(1)P
Total cost 27 850
R
The unit product cost Job 431 = [27 850/200] 139,25 (1)P
(7; Max 6)
d) Machining
R
Finishing
R
Actual manufacturing overhead incurred
Allocated manufacturing overhead
[220 000 hours x R50]
[200% x R4 100 000]
11 200 000
11 000 000
(1)
(1)P
7 900 000
8 200 000
(1)
(1)P
200 000 (300 000)
Net result
Over allocation of manufacturing overhead- 100 000 (1)
QUESTION 1.24

Year ended 31 December 19x6 19x5
Units manufactured (actual) 1 000 1 000
Units manufactured (actual) 900 1 000
Units sold 1 000 900
Variable manufacturing cost per unit R5 R5
Fixed manufacturing costs for the year (budgeted) R6 000 R6 000
Fixed manufacturing costs for the year (actual) R6 000 R6 000
There was no inventory on hand on 1 January 19x5.
Fixed manufacturing overheads are recovered on the basis of units manufactured.
(a) prepare income statements for 19x6 and 19x5 according to the
 variable cost and
 absorption cost approaches;
(b) explain the difference in profit between the two methods.

a) VARIABLE COSTING:
19x6 19x5
Sales (1 000 x 15) (900 x 15) 15 000 13 500
Less Variable cost of sales 5 000 4 500
Opening stock (100 x 5) (0)
Manufacturing cost (900 x 5) (1 000 x 5)
Closing stock (0) (100 x 5)
500
4 500
0
0
5 000
500
Contribution 10 000 9 000
Less Fixed cost 6 000 6 000
Net profit 4 000 3 000
b) ABSORPTION COSTING:
Absorption rate = 6 000 / 1 000 = R6 per unit
19x6 19x5
Sales (1 000 x 15) (900 x 15) 15 000 13 500
Less Cost of sales 11 000 9 900
Opening stock (100 x 11) (0)
Manufacturing cost (900 x 11) (1 000 x 11)
Closing stock (0) (100 x 11)
1 100
9 900
0
0
11 000
1 100
Under / (over) recovery (5 400 – 6 000) (6 000 – 6 000) 600 0
Gross profit 3 400 3 600
Less Non-manufacturing cost 0 0
Net profit 3 400 3 600
(b) Reconciliation of profits 19x6 19x5
Variable costs profit 4 000 3 000
Plus: Fixed costs deferred in inventory
6 000 x 100 600
1 000
Less: Fixed costs exempted from inventory
6 000 x 100 (600)
1 000
Absorption costs profit 3 400 3 600

Auckland Company manufactures and sells a single product. Cost data for the product follow:
Variable costs per unit:
R
Direct materials 6
Direct labour 12
Variable factory overhead 4
Variable selling and administrative cost 3
Total variable costs per unit R25
Fixed costs per month (budgeted and actual):
R
Factory overhead R240 000
Selling and administrative 180 000
Total fixed costs per month R420 000
Fixed manufacturing overheads are absorbed on the basis of units manufactured. Production is
budgeted at 360 000 units per year.
The product sells for R40 per unit. Production and sales data for May and June, the first two
months of operations, are as follows:
Units
Produced
Units
Sold
May 30 000 26 000
June 30 000 34 000
Income statements prepared by the accounting department, using absorption costing, are
presented below:
May June
R R
Sales 1 040 000 1 360 000
Less: Cost of goods sold: 780 000 1 020 000
Beginning inventory -0- 120 000
Cost of goods manufactured 900 000 900 000
Goods available for sale 900 000 1 020 000
Less: Ending inventory 120 000 -0-
Gross margin 260 000 340 000
Less: Selling and administrative expenses 258 000 282 000
Net income 2 000 58 000
REQUIRED:
(a) Determine the unit product cost under:
(i) Absorption costing
(ii) Variable costing (5)
(b) Prepare income statements for May and June using the contribution approach with
variable costing. (10)
(c) Reconcile the variable costing and absorption costing net income figures. (5)

(a) i) & ii) Absorption
Costing
Direct
Costing
R R
Direct materials 6 (½) 6 (½)
Direct labour 12 (½) 12 (½)
Variable factory overhead 4 (½) 4 (½)
Fixed factory overhead
(R2 880 000  360 000 units) 8  -
Unit product cost R30 (½) R22 (½)
(b) May June
R R
Sales 1 040 000 (½) 1 360 000 (½)
Less variable expenses: 650 000 850 000
Variable production costs @ R22 572 000  748 000 
Variable selling and administrative
(26 000 @ R3) (34 000 @ R3) 78 000  102 000 
________ _________
Contribution margin 390 000 (½) 510 000 (½)
Less fixed expenses: 420 000 420 000
Factory overhead 240 000 (½) 240 000
Selling and administrative 180 000 (½) 180 000
________ ________
Net income (loss) (30 000)  90 000 
(c) May June
R R
Variable costing net income (loss) (30 000) (½) 90 000 (½)
Add: Fixed factory overhead cost
deferred in inventory under absorption
costing (4 000 units x R8) 32 000 
Deduct: Fixed factory overhead cost
released from inventory under
absorption costing (4 000 units x R8) _____ (32 000) 
Absorption costing net income 2 000 (½) 58 000 (½)

QUESTION 1.26
MI Manufacturing Ltd is a company that commenced operations in 2001. There are two
manufacturing plants, one in Ermelo and the other in Hoopstad. Both plants transfer goods at a
fixed selling price to a central warehouse in Johannesburg. The manager at the Ermelo plant
follows company instructions very carefully, whilst the manager in Hoopstad tends to act
independently.
The accounting results, prepared on an absorption costing basis, for the year ended
30 April 2002 are as follow:
Ermelo Hoopstad
Units produced 10 000 30 000
Units transferred 10 000 10 000
Manufacturing cost schedule R R
Materials (R4/unit) 40 000 120 000
Labour (R3/unit) 30 000 90 000
Variable overhead (R2/unit) 20 000 60 000
Fixed overhead 50 000 50 000
Total manufacturing costs 140 000 320 000
Profit and loss statement R R
Sales revenue 120 000 120 000
Manufacturing cost of sales 140 000 106 700
Profit/(loss) (20 000) 13 300
The manufacturing director of the company is concerned at the difference between the two sets
of results bearing in mind they both transferred similar quantities to the central warehouse. He
has asked you to examine the figures in order to help provide an explanation.
The opening stock on the commencement of the business was nil.
REQUIRED:
(a) Calculate the fixed overhead recovery rate used by each plant. (4)
(b) Calculate the stock values implicit in the profit and loss statement given. (2)
(c) Redraft the results of both plants using a variable costing approach. (6)
(d) From your workings, explain why the plants were able to show the different
results given in the question. (4)
(e) Discuss the arguments supporting:
(i) an absorption costing approach (8)
(ii) a variable costing approach. (6)

(a)
Ermelo Hoopstad
Variable overhead costs 20 000 60 000
Variable overhead rate R2 R2
Units = 20 000/2
= 10 000
= 60 000/2
= 30 000
Fixed overhead costs 50 000 50 000
Fixed overhead recovery
rate
= 50 000/10 000
= R5/unit
= 50 000/30 000
= R1.67/unit
(4)
(b)
Ermelo Hoopstad
Units produced 10 000 30 000
Units transferred 10 000 10 000
 Closing stock (units) -½ 20 000½
Total manufacturing cost
per unit
= 320 000/30 000
= R10.67½
Value of closing stock = R10.67 * 20 000
= R213 400½
(2)
(c)
Ermelo Hoopstad
Sales 120 000 120 000
Variable cost of
production
90 000 270 000
Closing stock - 180 000
Cost of sales 90 000 90 000
Contribution 30 000 30 000
Fixed overhead 50 000 50 000
(Loss) (20 000) (20 000)

(d) The statements provided to the manufacturing director are drawn up on an absorption
costing basis. This requires that the value of any closing stock include fixed
manufacturing overhead costs. The difference in the results between the two plants is
caused by the higher production in the Hoopstad plant that influenced the level of closing
stock.
There is no stock change at Ermelo, but at the Hoopstad plant closing stock has
increased by 20 000 units. This stock increase has resulted in fixed overhead applicable
to 20 000 units not being charged against sales to calculate profit. Instead this overhead
burden is recorded as part of the closing stock value. The difference between the two
statements of R33 300 is equivalent to 20 000 units at the fixed overhead rate of R1.67.
Total (5)
Max (4)
(e) i) Absorption costing approach
 Absorption costing does not understate the importance of fixed costs:
Under a variable costing system attention is focused only on sales revenue
and variable costs and the fact that fixed costs must be met in the long run is
ignored.
 Absorption costing avoids fictitious losses being reported: In a
business that relies on seasonal sales and in which production is built up
outside the sales season to meet demand the full amount of fixed overheads
incurred will be charged, in a variable costing system, against sales. The
result is that losses will be reported during off-season periods, and large
profits will be reported in periods when goods are sold.
 Fixed overheads are essential for production: The production of goods is
not possible if fixed manufacturing costs are not incurred. Consequently, fixed
manufacturing overheads should be allocated to units produced and included
in the inventory valuation.
 Consistency with external reporting: Management may prefer their
internal profit reporting systems to be consistent with external financial
accounting absorption costing systems so that they will be congruent with the
measures used by markets to appraise overall company performance.
(8)

ii) Variable costing approach.
 Variable costing provides more useful information for decision-
making: The separation of fixed and variable costs helps to provide relevant
information about costs for making decisions. The estimation of costs for
different levels of activities requires that costs be split into their fixed and
variable components.
 Variable costing removes from profit the effect of inventory changes:
With variable costing, profit is a function of sales volume, whereas, with
absorption costing, profit is a function of both sales and production. Where
stock levels are likely to fluctuate significantly, profits may be distorted when
they are calculated on an absorption costing basis, since the stock changes
will significantly affect the amount of fixed overheads allocated to an
accounting period.
 Variable costing avoids fixed overheads being capitalised in unsaleable
stocks: With an absorption costing system, only apportion of the fixed
overheads incurred during the period will be allocated as an expense because
the remainder of the fixed overhead will be included in the valuation of the
surplus stock. If the surplus stock cannot be disposed of, the profit calculation
for the current period will be misleading, since fixed overheads have been
deferred to later accounting periods.
(6)

A company manufactures a single product with the following variable costs per unit
Direct materials R7,00
Direct labour R5,50
Manufacturing overhead R2,00
The selling price of the product is R36,00 per unit. Fixed manufacturing costs are expected to
be R1 340 000 for the financial period. Fixed non-manufacturing costs are expected to be
R875 000. Fixed manufacturing costs can be analysed as follows:
Production
department
1
Production
department
2
Service
department
General
factory
R380 000 R465 000 R265 000 R230 000
“General factory” costs represent space costs, for example rates, lighting and heating. Space
utilization is as follows:
Production department 1 40%
Production department 2 50%
Service department 10%
60% of service department costs are labour related and the remaining 40% machine related.
Normal production department activity is:
Direct labour hours Machine hours Production units
Department 1 80 000 2 400 120 000
Department 2 100 000 2 400 120 000
Fixed manufacturing overheads are absorbed at a predetermined rate per unit of production for
each production department, based upon normal activity.
REQUIRED:
a) Prepare a profit statement for the financial period using the full absorption costing
system described above and showing each element of cost separately. Costs for
the period were as per expectation, except for additional expenditure of R20 000
on fixed manufacturing overhead in Production Department 1. Production and
sales were 116 000 and 114 000 units respectively for the period. (13)
b) Prepare a profit statement for the period using variable costing principles instead. (5)
c) Explain why the profit under the direct and absorption costing approach differs. (2)

(20 MARKS)
a) Calculation of fixed manufacturing overhead rate (R000)
Prodn
dept 1
Prodn
dept 2
Service
dept
General
factory Total
Allocated 380,0 465,0 265 230 1 340
Allocation of general factory 92,0 (40%) 115,0 (50%) 23 (10%) (230)
Share of service department: 288
Labour related costs (60%) 76,8 (8/18) 96,0 (10/18) (172,8)
Machine related costs (40%) 57,6 57,6 (115,2)
606,4 733,6 1 340
Units of output (000) 120 120
Overhead rate per unit (R) 5,0533 6,1133
Calculation of total manufacturing cost per unit
(R)
Direct materials 7,00
Direct labour 5,50
Variable overhead 2,00
Variable manufacturing cost 14,50 
Fixed overhead: department 1 5,0533 
department 2 6,1133 
Total manufacturing cost 25,6666
Absorption costing profit statement
(R000)
Sales (114 000 x R36) 4 104,00 
Less Cost of sales 2 990,66
Production cost (116 000 x R25,6666) 2 977,33
Less closing stock (2 000 x R25,6666) 51,33
Under absorption of overhead:
Department 1 (R20 000 + (4 000 x R5,0533)) 40,21 
Department 2 (4 000 units x R6,1133) 24,45 
Gross profit
Less Non-manufacturing costs
1 113.34
875,00
Net profit 238,34
b) Variable costing profit statement
(R000)
Sales 4 104 
Less Variable cost of sales 1 653
Variable production cost (116 000 x R14,50) 1 682 
Less Closing stock (2 000 x R14,50) 29 
Contribution 2 451 
Less Fixed manufacturing overhead (1 340 + 20) 1 360 
Non-manufacturing overhead 875
Net profit 216

c)
Net profit (absorption costing) 238 340
Net profit (direct costing) 216 000
Difference 22 340
Fixed overheads absorbed in closing stock
= 2 000 x (5,0533 + 6,1133) = 22 340
Thus the difference is due to the fixed overheads absorbed in the closing stock,
because under variable costing only variable costs form the total product cost. However,
under absorption costing, both variable costs and fixed overheads form the product cost.
QUESTION 1.28
The following data were taken from the records of a company.
Period 1 Period 2
Kg Kg
Production 3 800 3 000
Sales 2 700 3 800
There was no opening stock at the beginning of period 1.
The firm makes a single product, the financial details of which are as follows (based on a
normal activity level of 3 000 kgs):
Cost per Kg.
R
Direct material 15
Direct labour 10
Production overheads (300% of labour cost) 30
55
Selling price per kg is R90.
Administrative overheads are fixed at R25 000 and one third of the production overheads are
fixed. Budgeted fixed production overheads agreed to actual fixed production overheads for
both periods.
REQUIRED:
(a) Prepare separate operating statements on variable costing and absorption costing
principles for both periods. (20)
(b) Reconcile the variable costing profit to the absorption costing profit for period 1 only. (2)

QUESTION 1.28
(a) Absorption costing Max (10)
Period 1 Period 2
R R R R
Sales
Cost of Sales
Opening stock
Material
Direct labour
Overheads applied
(Closing stock)
0
57 000
38 000
114 000
(60 500)
243 000
(1)
148 500 (2) 60 500
45 000
30 000
90 000
(16 500)
342 000
209 000
(1)
(2)
Gross profit
Administration overheads
Over absorption of overheads
Net profit
94 500
(25 000)(1)
8 000(2)
77 500
133 000
(25 000)
0
108 000
(1)P
(1)
Variable costing Max (10) Period 1 Period 2
R R R R
Sales
Cost of sales
Opening stock
Material (3 800/3 000xR15)
Direct labour (3 800/3 000xR10)
Variable overheads
(Closing stock)
0
57 000
38 000
76 000
(49 500)
(2
)
243 000
121 500
(1)
49 500
45 000
30 000
60 000
(13 500)
342 000
171 000
(1)
(2)
Contribution
Administration overheads
Fixed production overheads
Net profit
121 500
(25 000)
(30 000)
66 500
(1)
(1)
171 000
(25 000)
(30 000)
116 000
(1)P
(1)
(1)

Workings:
Variable Absorption
Cost per unit
Material R15.00 R15.00
Labour R10.00 R10.00
Variable overheads R20.00 R30.00
R45.00 R55.00 (given)
Ending inventory: Period 1 Period 2
Opening stock 0 1 100
Produced 3 800 3 000
Sales (2 700) (3 800)
Closing stock 1 100 300
Value of inventory
- Absorption costing 60 500 (1 100 x R55) 16 500 (300 x R55)
- Marginal costing 49 500 (1 100 x R45) 13 500 (300 x R45)
Under/ over absorption of overheads
Budgeted overheads R30.00 x 3 000kgs = R90 000
Fixed portion = R90 000 /3 = R30 000
Absorption rate = R30 000/3 000 = R10 per unit
Period 1
Actual overheads = R30 000
Applied overheads = R38 000 (R10 x 3 800)
Over absorption R 8 000*
Period 2
Actual overheads = R30 000
Applied overheads = R30 000 (R10 x 3 000)
0
(b) Reconciliation: Max (2)
R
Absorption costing profit 77 500 (1)P
Fixed overheads included in opening stock -
Fixed overheads included in closing stock (11 000) (1)P
Variable costing profit 66 500 (1)P

(a) Discuss arguments in favour of using an absorption costing system. (2)
(b) Discuss arguments in favour of a variable costing system. (2)
(c) Discuss the differences between variable and absorption costing. (4)
(a) Arguments in favour of absorption costing
- Absorption costing does not understate the importance of fixed costs (1)
- Absorption costing avoids fictitious losses being reported (1)
- Fixed overheads are essential for production (1)
- Consistency with external reporting (1)
Any 2 x 1 = 2
(b) Arguments in favour of variable costing
- Variable costing provides more useful information for decision-making (1)
- Variable costing removes from profit the effect of inventory changes (1)
- Variable costing avoids fixed overheads being capitalized in unsaleable stocks (1)
Any 2 x 1 = 2
(c) Differences between variable and absorption costing:
 Product cost is a cost that is traceable to a product. (1)
 A product cost can either be an expense or an asset. A product cost will be an
expense if the specific product to which it relates is sold and an asset if the specific
product to which it relates is not sold and forms part of inventory. (1)
 A period cost is a cost that is not included in the stock valuation and as a result
always treated as an expense in the period in which it occurs. (1)
 There is only one difference in the treatment of cost between variable costing and
absorption costing. Variable costing treats fixed manufacturing overheads as a
period cost and absorption costing treats fixed manufacturing overheads as a
product cost. (1)
 The difference between the two systems will therefore always be due to the portion
of fixed cost capitalised in opening and closing stock under the absorption costing
method. (1)
Any 4 x 1 = (4)

Bsr3 a unit 1 2016

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Bsr3 a unit 1 2016