QUESTION 1 PART A
Steps 1&2: Physical flow analysis and equivalent units
In Out Materials Labour Overheads
O/Wip 4 000 4 000 0 2 800 2 800
Started 12 000
C/WIP 3 000 3 000 2 400 2 400
Started and completed 5 000 5 000 5 000 5 000
Normal loss1 1 333 1 333 1 000 1 000
Abnormal loss 2 667 2 667 2 000 2 000
16 000 16 000 12 000 13 200 13 200
1
Output = 4 000 + 5 000 + 3 000 = 12 000
Good input = 12 000 / 90% = 13 333
Normal loss = 13 333 x 10% = 1 333
Step 3: Cost per unit
Current costs Equivalent units Cost per unit
Materials 60 000 12 000 5.00
Labour 75 240 13 200 5.70
Overheads 188 100 13 200 14.25
323 340 24.95
Step 4: Cost allocation
Normal loss 26 615.00
Materials (1 333 x 5.00) 6 665.00
Labour (1 000 x 5.70) 5 700.00
Overheads (1 000 x 14.25) 14 250.00
Completed units 251 489.04
Opening WIP (20 000 + 35 000) 55 000.00
Costs to complete O/WIP
Materials (0 x 5.00) 0.00
Labour (2 800 x 5.70) 15 960.00
Overheads (2 800 x 14.25) 39 900.00
Current production (5 000 x 24.95) 124 750.00
Normal loss
Materials (6 665 x 5 000 / 10 667) 3 124.12
Labour (5 700 x 7 800 / 12 200) 3 644.26
Overheads (14 250 x 7 800 / 12 200) 9 110.66
Closing WIP 68 679.06
Materials (3 000 x 5.00) 15 000.00
Labour (2 400 x 5.70) 13 680.00
Overheads (2 400 x 14.25) 34 200.00
Normal loss
Materials (6 665 x 3 000 / 10 667) 1 874.47
Labour (5 700 x 2 400 / 12 200) 1 121.31
Overheads (14 250 x 2 400 / 12 200) 2 803.28
Abnormal loss 58 171.90
Materials (2 667 x 5.00) 13 335.00
Labour (2 000 x 5.70) 11 400.00
Overheads (2 000 x 14.25) 28 500.00
Normal loss
Materials (6 665 x 2 667 / 10 667) 1 666.40
Labour (5 700 x 2 000 / 12 200) 934.43
Overheads (14 250 x 2 000 / 12 200) 2 336.07
Check
Costs to be allocated 378 340.00
Opening WIP costs
Materials 20 000.00
Labour and overheads 35 000.00
Current period costs
Materials 60 000.00
Labour 75 240.00
Overheads 188 100.00
Costs allocated 373 340.00
Completed units 251 489.04
Closing WIP 68 679.06
Abnormal loss 58 171.90
Difference 0.00
QUESTION 2 PART A
Sales: R1200 000 / 60 000 units = R20
Calculate the purchases for the year:
Sales 60 000
+ Closing stock 10 000 u
- Opening stock -5 000 u
= Purchases 65 000 u
Direct material: R260 000 / 65 000 units = R4 per unit
Direct labour: R195 000 / 65 000 units = R3 per unit
Factory Overheads: Use Hi-low method Difference
Volume 55 000 units 65 000 units 10 000 units
Rands R415 000 R455 000 R40 000
Variable cost = R40 000 / 10 000 units = R4 per unit
For fixed cost…substitute VC into the equation y = mx + c
R415 000 = 4(55 000) + c
R415 000 - 220 000 = c
C = R195 000 = Fixed cost
Selling costs: 40% fixed = R200 000 x 40% = R80 000
60 % variable = R200 000 x 60% = R120 000
R120 000 / 60 000 units = R2 per unit
Summary: price + increases = 2007 prices
Sales: R20 + 10% = R22
Direct material: R4 + R1 = R5
Direct labour: R3 = R3
Variable overheads: R4 =R4
Selling costs: R2 =R2
Total Variable costs for 2007 R14
Fixed costs:
Overheads R195 000 + R45 000 = R240 000
Selling costs R80 000 + R16 000 = R96 000
R336 000
a) Break-even point = Fixed cost
Contribution per unit
= R336 000
R22 - R14
= 42 000 units
b) Margin of safety = Actual sales – Break even sales
Actual sales
= 75 000 units – 42 000 units
75 000 units
= 44%
c) Break-even point = Fixed cost + desired fixed profit
Contribution per unit
= R336 000 + 100 000
R22 - R14
= 54 500 units
d) Break-even point = Fixed cost
Contribution per unit - desired variable profit
= 336 000
R8 – R3
= 67 200 units
e) CVP Assumptions:
1 All other variables remain constant
2 A single product mix or constant sales mix
3 Total Costs and Total Revenue are linear functions of output
4 Profits are calculated on a variable costing basis
5 The analysis applies to the relevant range only
6 Costs can be accurately divided into their fixed and variable elements
7 The analysis applies only to the short term-time horizon
8 Complexity related fixed costs do not change
QUESTION 2 PART B
a) Production budget January February March April
Units Units Units Units
Planned sales 12000 13000 8000 4000
Add: closing stock 7800 4800 2400
Total requirements 19800 17800 10400
Less: opening stock -10000 -7800 -4800
Production 9800 10000 5600
b) Cash budget January February March
Rands Rands Rands
Receipts:
Sales W1 218,400 264,000 205,700
Less: payments
Materials 45,000 49,000 50,000
Labour 29,400 30,000 16,800
Overheads - fixed: W2 16,000 16,000 16,000
Overheads - variable 39,200 40,000 22,400
Selling expenses - fixed: W3 8,000 8,000 8,000
Selling expenses - variable (upon sales) 24,000 26,000 16,000
Cash purchase - new mixer 160,000
161,600 329,000 129,200
Net cash flows 56,800 -65,000 76,500
Opening cash balance -1,000 55,800 -9,200
= Closing cash balance 55,800 -9,200 67,300
Working 1
Sales: units 12000 13000 8000
Selling price per unit R22 R22 R22
Sales revenue 264,000 286,000 176,000
Receipts
December 06 debtors 60,000
January R 264,000 158,400 92,400
February R 286,000 171,600 100,100
March R 176,000 105,600
218,400 264,000 205,700
Working 2
Total annual overheads 240,000
Less: depreciation -48,000
÷ 12 = R16 000 per month
= Cash overheads 192,000
Working 3
Total annual selling expenses 96,000 ÷ 12 = R8 000 per month
c)
1. Planning annual operations
2. Coordinating the activities in various parts of the organisation
3. Communicating plans to various responsibility centre managers
4. Motivating managers to strive to achieve organisational goals
5. Controlling activities
6. Evaluating the performance of managers