TUTORIAL QUESTION – IAS 21 AND IAS 2

Hade (Pty) Ltd (hereafter “Hade”) is a company that manufactures dark chocolate.
Hade’s factory and head office are situated in Chatsworth, KwaZulu-Natal and the
company has a 31 March financial year end and has adopted International Financial
Reporting Standards (IFRS) as its financial reporting framework. Hade uses the
perpetual inventory system and measures cost using the weighted average cost
formula.

Below is an explanation of the production of the dark chocolate:

In pursuit of producing the best dark chocolate Hade imports cocoa from one of the
world’s best cocoa producers in Ivory Coast. All other ingredients are sourced from
different suppliers in South Africa.

Below is the composition of the main ingredients in one box (One unit) of Hade’s dark
chocolate.

Ingredient Gram per box of dark chocolate

Cocoa 120
g
Coconut oil 105
g
Honey 85 g

The cost per box of dark chocolate for coconut oil and honey is R 9 and R 13
respectively. The table below illustrates the purchase history of cocoa from the Ivory
Coast supplier. Please note that all purchases were made free on board.

Shipment Date Destinatio Payment Date Kg Price per Kg

n Date (CFA)
2 June 2021 1 July 2021 15 July 2021 500 700

15 Oct 2021 24 Sep 2021 30 Nov 2021 750 685

3 Jan 2022 2 Feb 2022 2 March 2022 880 825

 The following exchange rates applied:

Shipmen 1CFA: Destinatio 1CFA: Payment Date 1CFA:

t Date ?ZAR n Date ?ZAR ?ZAR
2 June 2021 0.027 1 July 2021 0.032 15 July 2021 0.045

15 Oct 2021 0.046 24 Sep 2021 0.050 30 Nov 2021 0.026

3 Jan 2022 0.035 2 Feb 2022 0.040 2 March 2022 0.024

The following costs were also incurred during the 2022 financial year end:

Description Note Amount R

Depreciation 1 85 000
Electricity 2 221 000
Marketing cost 450 000
Salaries and wages 4 ?
Rent 5 750 000

The factory is divided into two labour groups i.e. Group A (Mixers) – Responsible for
mixing the ingredients and Group B (Bakers) – Responsible for baking the dark
chocolates.
Notes:
1. The depreciation cost can be split between the factory and head office using
the 60:40 ratio.
2. Each dark chocolate box requires 2 kilowatts of electricity in group A (Mixers)
and 3 kilowatts of electricity in group B (Bakers). The cost per kilowatts is R
1.70.
3. The dark chocolate is packed into eco-friendly boxes that cost Hade R 3 per box.
4. Group A (Mixers) earn R 45 per hour and Group B (Bakers) earn R 55 per hour.
It takes 1 hour (20 minutes with the mixers and 40 minutes with the bakers) to
produce one box of dark chocolate. Salaries and wages that relate to head office
administration and the sales representatives amounts to R 450 000 and R 500
 000 respectively for the year ended 31 March 2022.
5. Rent expense can be split between the head office and factory at a ratio of 35:65.
6. Normal production levels are estimated to be 24 000 boxes of dark chocolate
per annum. Production is expected to be even over the year. The actual number
of dark chocolate boxes that were produced in the 2022 financial year end were
20 000.

Hade managed to sell 15 000 boxes of dark chocolate and below are the dates of
when the boxes were sold:

Date Quantity (Number of

boxes)
30 July 2021 3 000
30 Oct 2021 5 000
15 Feb 2022 7 000

7. There was no opening and closing stock for the packaging material, coconut oil
and honey. The closing stock for cocoa, finished chocolate boxes and work in
progress still has to be calculated however they all did not have an opening
stock.
8. 24 000g of cocoa, 21 000g of oil and 17 000g of honey (The mixture should be
able to produce 200 boxes of dark chocolate) was mixed and transferred to
group B (Bakers) on the last day of the reporting period. No work was done on
the transferred mixture by Group B (Bakers).

The financial accountant of Hade, Mrs. Kunene has been struggling to finalize the cost
of sales and inventory balance that should be presented on the financial statements of
Hade for the year ended 31 March 2022. Below are her calculations for your perusal.

COST OF SALES
CALCULATION
Description Calculation R
Cocoa Calculation 1 224 069 099
Coconut oil 20 000* R 9 180 000
Honey 20 000 * R 13 260 000
Direct Labour
Group A (Mixers) 20 000* 20 min = 400 000 300 015
min
400 000/60 = 6 667 hrs
6 667* R 45
Group B (Baker) 20 000* 40 min = 800 000 733 315
min
800 000/60 = 13 333 hrs
13 333* R 55
Electricity
Group A (Mixers) 20 000 * 2 * R 1,70 68 000
Group B (Baker) 20 000 * 3 * R 1,70 102 000
Packing Material
Fixed manufacturing Calculation 2 835 000
cost
226 547 429
 CALCULATION 1 - COST OF COCOA (IAS 21)
Date Quantity (Kg) Price per kg Total (CFA) (A) CFA:ZAR (B) Total (ZAR) (A /B) = C Price per kg
(CFA) (ZAR)
02-Jun-21 500 700 350 000,00 0,045 7 777 777,78 15 555,56
15-Oct-21 750 685 513 750,00 0,026 19 759 615,39 26 346,16
03-Jan-22 880 825 726 000,00 0,024 30 250 000,00 34 375,00

Dates Purchase Price Total (A*B)= Inventory Sold Inventory on WACC Value on hand Cost of sales
Quantity per g C hand ( E) (C+D/E) (D)
(g) (A) (ZAR)
(B)

01-Jul-21 500 000 15,56 7 780 000 - 500 000 15,56 7 780 000 -
30-Jul-21 - - - 360 000,00 140 000 55,58 7 781 200 20 008 800
24-Sep-21 750 000 26,35 19 762 500 - 890 000 30,95 27 545 500 -
30-Oct-21 - - - 600 000,00 290 000 94,99 27 547 100 56 994 000
02-Feb-22 880 000 34,38 30 254 400 - 1 170 000 49,41 57 809 700 -
15-Feb-22 - - - 840 000,00 330 000 176,00 58 080 000 147 840 000
WIP - - - 24 000,00 306 000 189,81 58 081 860
224 842 800
CALCULATION 2

Fixed manufacturing cost

Depreciation 85 000

Rent expense 750 000

835 000

Normal capacity 835 000/20 000 41,75

Actual Production 20 000 * 41.75 835 000

Work in progress - Calculation

Description Calculation R
Cocoa 24 000*R 189.81 4 555 440
Coconut oil 200*R 9 1 800
Honey 200*R 13 2 600
Direct Labour
Group A (Mixers) 200* 20 min = 4 000 min 3000
4000/60 = 66,66hrs
66,66* R 45
Group B (Baker) 200* 40 min = 8 000 min 7 315
8 000/60 = 133 hrs
133* R 55
Electricity
Group A (Mixers) 200 * 2 * R 1,70 680
Group B (Baker) 200 * 3 * R 1,70 1 020
Packing Material
4 571 855
 Marks
REQUIRED: QUESTION 1 Sub- Total
total
(a) Draft an email to the Accountant of Hade discussing the concerns that you have identified in the 32
calculations that was provided to you.

Your draft email should also include reasons to justify why the issues identified are concerns and also
provide a revised calculation of the cost of sales amount for the year ended 31 March 2022.

Assume that the cost of sale for cocoa is R48 910.

Please note:
Your calculations should be shown separately from your discussion.

You do not have to test for mathematical accuracy.

Communication skills: logical argument

2
34
TOTAL FOR QUESTION 1 34