Activity 4 (30 marks; 45 minutes)

Jurassic Ltd manufactures plastic dinosaurs which are sold as collectors’ items. There are
currently 15 dinosaur species in the “Dino Defender” collection and all these go through the
same production process and incur the same manufacturing costs.

The following information has been provided to you with regards to the collectable dinosaurs
for the month under review:

Opening inventory 1 500 dinosaurs

Budgeted production 5 000 dinosaurs

Budgeted closing inventory 0 dinosaurs

The value of opening inventory is R55 000. 80% of this balance is considered to be variable
in nature.

The actual number of dinosaurs in closing inventory was 500.

Production information per dinosaur:

Material R20
Labour hours 3
Machine hours 1.5

Variable overheads ?
Fixed overheads ?

Labourers are paid an hourly rate of R25.

The total overheads are budgeted to be R47 000 if 5 000 dinosaurs are produced, R52 000 if
6 000 dinosaurs are produced and R56 000 if 8 000 dinosaurs are produced. The maximum
production capacity of Jurassic is 8 500 dinosaurs per month.

Actual fixed overheads incurred for the month were R37 000. Actual variable overheads were
R4 per dinosaur produced.

Actual dinosaurs sold was 10% more than budgeted. The selling price per dinosaur was as
budgeted, which is R200 per unit.

Variable selling costs were R5 per unit sold. The only non-manufacturing cost incurred during
the month was for advertising and this was R2 000, this is considered a fixed cost.

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REQUIRED: Marks

a) Calculate the actual number of dinosaurs produced as well as the sales volume 3
for the month.

b) Prepare the Profit Statement for the month based on the following costing
systems: 20
i) Variable
ii) Absorption

c) Reconcile the profits of the two costing systems as calculated in (b). 3

d) Discuss the advantages and disadvantages of the variable costing system. 4

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Activity 5 (14 marks; 21 minutes)
Taffel (Pty) Ltd manufactures designer tables for the luxury furniture market. Their top selling
table is the Acasiana table. Taffel allocates overheads using a traditional costing system.

The total number of tables that Taffel estimates to manufacture during the period is 600.
Total budgeted Acasiana units for the period is 250.

The budgeted cost per unit Acasiana is as follows:

Budgeted unit costs: R

Direct Materials 100

Direct Labour 200

Salesmen’s Salaries (note 1) 52

Salesmen’s Commission (note 1) 125

Administrative salaries 10

Factory salaries 20

Factory Rent 15

Additional costs:

Production - variable 13

- fixed 200

Administration and selling

- variable (note 2) 3

- fixed 12

Total 750

Note 1:

All salespersons received a fixed basic salary per month topped with commission for each
table sold.

Note 2:

Variable administration and selling costs vary directly in relation to number of units sold.

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Additional information:

Budgeted selling price per unit is R1 200 per table.

Actual information

The Chief Financial Officer (CFO) of Taffel is concerned about the declining sales of
Acasiana tables. The following figures represent the actual sales and production units for
Acasiana tables:

Period 1 Period 2

Units Units

Sales 570 480

Production 600 500

Actual variable cost per unit was as budgeted.

Actual fixed costs for each period was as follows:

Manufacturing R160 000

Non-manufacturing R70 000

The actual sales price was as budgeted.

There was no opening inventory in the stores at the beginning of period 1.

Required:

a. Calculate the actual net income of Taffel for period 1 and period 2 by applying their
current costing system. (9)
b. For period 1 only, calculate the actual net income for Taffel if they decided to employ
a Variable costing system. (3)
c. Reconcile the net income for period 1 calculated in (a) with the net income calculated
in (b). (2)

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Activity 6 (25 marks; 37.5 minutes)
MS Limited manufactures one product only, which is sold for R100 per unit. Given below is
a budgeted profit and loss statement for one period based on sales and production at a
normal level of activity.

Profit and loss statement

R’000 R’000
Sales 1 000
Costs:
Direct Materials 300
Direct wages: Variable 200
Production overhead: Variable 50
Fixed 200
Administration overhead: fixed 100
Selling overheads (note 1) 50 (900)

Profit R100
Note 1: The behavior of selling overhead in relation to changes in sales volume (units) is as
follows:

90% of normal Normal activity 110% of normal

The organization uses an absorption costing system to value inventory. For this purpose,
the predetermined absorption rates are based on a normal level of activity.

During the first two periods of the financial year, the production and sales, expressed as
percentages of normal activity, were as follows:

Period 1 Period 2

Sales 80% 100%

There was no opening inventory at the beginning of period 1.

Actual selling price and variable cost per unit were as budgeted in the profit and loss
statement above.

Fixed costs incurred each period were as budgeted, except for production overheads, which
exceeded budget by 10%.

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 REQUIRED Marks
(a) Prepare profit and loss statements for periods 1 and 2 on the basis of:
1) Absorption costing
2) Variable costing 19

(b) Explain in what circumstances and why the two costing methods will
give rise to different or equal profit or losses. Use the figures
calculated above o support your explanation. 6

Total Marks 25

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