14.

LEARNING UNIT GUIDE:

INVENTORIES

14.1.1. UNIT OVERVIEW

Inventory (IAS 2) is an important part of any trading or manufacturing organisation. It

is important to note that this section links to Cost and Management accounting
(EMAC2714). During your previous year of financial accounting a part of inventory
was already covered. It is important that you refer back to the unit on inventory and
manufacturing enterprises.

The objective of IAS 2 is to prescribe:

 how the cost of inventories is determined; and
 which useful and understandable information is provided in the financial
statements.
 Inventories

NATURE OF INVENTORIES

 Inventory as an asset. COST ALLOCATION AND COST

What is included? MEASUREMENT AND COST FORMULAS
 What to remember:
Consumables only used in Cost allocation techniques and
Initial measurement of inventory. cost formulas
the production of saleable
goods and services is What to remember: All costs to What to remember: Allocation of
included in inventory and bring inventory to current cost to inventory and cost sales
not used in administrative location and condition. using different formulas.
processes
 Refer to the relevant Refer to the relevant chapter of
chapter of Introduction to Introduction to IFRS
IFRS Refer to the relevant chapter of
Introduction to IFRS

NRV EXPENSE RECOGNITION

Lower of cost or NRV DISCLOSURE

What to remember: What is

NRV?
Refer to the relevant
Refer to the relevant chapter of chapter of
Introduction to IFRS Introduction to IFRS
 14.1.2. UNIT-SPECIFIC LEARNING OUTCOMES

At the end of this learning unit, a student should be able to:

 Understand the basic principles of inventory.
 Understand what is included in the cost price of inventory (purchase and
conversions costs)
 Be able to discern what expenditure in respect of inventory should be expensed
in the income statement.
 Recognise and measure the cost of inventory using, FIFO and weighted average
cost formulas.
 Recognise and measure the allocation of fixed and variable overheads.
 Recognise and measure the write down to net realisable value - raw materials,
work-in progress and finished goods.
 Know what the disclosure requirements are and be able to apply your knowledge
to practical examples.
 Apply the theory in discussion questions.
 Prepare financial statements in accordance with International Financial
Accounting Standards (IFRS’s).

14.1.3. UNIT-SPECIFIC STUDY MATERIAL

Inventories consists of specific preparation material and content material that will
assist each student in understanding the key concepts of this unit. It is the
responsibility of each student to ensure that he/she familiarises him/herself with unit-
specific study material.

[Link]. CONTENT MATERIAL

 Please refer to the relevant chapter in the prescribed textbook: Introduction to

IFRS. This book must be purchased.

 In addition to the textbook, there is additional study material to study: A guide

through IFRS: IAS 2 Inventories (This material has been included in your
reader, available on Blackboard.)

Page 3 of 22
 [Link]. LECTURER GUIDANCE

 During the previous year all of the overheads were closed off to the work in
progress account. During this year, a distinction between fixed and variable
overheads are made. Fixed overheads are allocated to production using the
actual units x rate based on normal capacity.
Remember:
 During this year, a distinction between fixed and variable overheads are
made. Fixed overheads are allocated to production using the actual units x
fixed overhead rate based on normal capacity.
 Any fixed overheads not allocated (under recovered) to production (work-in-
progress) will be transferred to Cost of Sales.
 If the production levels are high in a specific period, the recovery rate should
be adjusted to a rate based on actual capacity. (This means that all of the
fixed overheads will be allocated to production, but there will not be an over-
allocation.

Inventory has been covered in your previous year of study. Revision questions have
been included in this module guide and should be done before coming to your first
class on this topic.
The approach followed for this unit will be a combination of recorded material and a
face to face session. You will be required to:

1.) In preparation of the unit, complete and submit (on Blackboard) the following two
revision questions:
 Elisa Manufacturers
 Excitement Stores Ltd
These questions needs to be submitted (as one document) on Blackboard before
09:00 am on Tuesday 2 September 2024.

3.) The relevant homework question will be discussed in class.

Page 4 of 22
Revision question 1
The following information for the year ended 28 February 2014 is presented to you
by Elisa Manufacturers:
Balances at 28 February according to the ledger:
28 February 2013 28 February 2014
Raw materials 65 000 ?
Semi-finished products 18 500 ?
Finished products 145 500 162 600
Factory plant and machinery 170 000 365 000
Vehicles 220 000 220 000
Accumulated depreciation on 68 000
factory plant and machinery
Accumulated depreciation on 70 000
vehicles
Indirect materials 0 800

Information from the general ledger on 28 February 2014

Raw materials purchased 365 800
Import cost on raw material purchases 29 400
Raw materials returned 14 100
Sales of raw materials 7 150
Salaries and wages 590 000
Freight paid 45 200
Insurance paid 74 200
Indirect materials purchased 4 500
Water and electricity 56 100
Rent expense 96 000
Interest on loan 13 800
Maintenance factory equipment 85 400
Raw materials issued to the factory 348 200
Value of finished goods transferred from the factory to the 1 072 000
finished
Sales of goods storeroom
finished goods 1 534 900
Stationery 7 600

Additional information;
1. The raw materials were sold at a mark-up of 10% on the cost.
2. Salaries and wages consist of:

Page 5 of 22
 Wages of office staff – administration dept. R135 000
Wages of factory cleaners R36 000
Wages of office cleaners – administration dept. R18 400
Salaries of factory workers on the production line R255 600
Salaries of the supervisors in the factory R145 000

On 28 February 2014, salaries owing to a factory worker on the production

line, amounted to R2 400.
3. 75 % of the insurance cost is for the factory and the rest for the administration
department.
4. Water and electricity of R5 472 (including VAT) for February 2014 is still
outstanding. Water and electricity must be allocated in the ratio 4:1 between
the factory and administration department.
5. Freight was for:
Delivery of raw materials purchased R18 600
Delivery of finished goods R26 600
6. Land and buildings are rented. The rent for March 2014, R8 436 (including
VAT) has already been paid. The factory covers 600m 2 and the offices
200 m2. The rent must be allocated accordingly.
7. Depreciation should be recognised for the year as follows:
7.1 R44 750 on factory plant and machinery.
7.2 On motor vehicles at 20 % per annum on the reducing balance method. The
motor vehicle is used to deliver completed products.
8. Stationery is used in the administrative department only.
9. During the year 67 000 units were manufactured.

The business is registered for VAT. The VAT rate is 15%.

REQUIRED:
(a) Prepare the following accounts in the general ledger of Elisa
Manufacturers:
 Raw materials 8
 Semi-finished products (Work in progress) 6
 Finished products 3
 Manufacturing overheads 12
(b) Calculate the cost per unit manufactured. 1
(c) Calculate the Gross Profit Percentage on sales. 1

Page 6 of 22
Revision question 2 (9 marks; 14 minutes)
The inventory of Excitement Stores Ltd includes the following items at
31 March 20.15:
Inventory Unit Price
item Quantity Cost Net realisable value
R R
Group 1
Item 1.1 300 18 17
Item 1.2 200 15 18
Item 1.3 400 23 22,50
Group 2
Item 2.1 150 15 14
Item 2.2 180 16 17
Item 2.3 200 19 20
Group 3
Item 3.1 160 35 34
Item 3.2 240 31 35,50
Item 3.3 100 29,50 30,50

REQUIRED: Marks
Calculate the value of the above-mentioned inventories at 31 March 9
20.15 as to comply with International financial reporting standards
(IFRS’s) by using an item per item basis.
NB: Ignore VAT.

14.1.4. LEARNING AND ASSESSMENT OPPORTUNITIES

The following learning and assessment opportunities will be completed in this unit:

DESCRIPTION OF LEARNING OPPORTUNITIES

THEME

Inventories Lectures

Tutorials

Revision and self-study

Homework

Page 7 of 22
 14.1.5. QUESTIONS TO CONSIDER IN THIS UNIT

The following questions should be completed for this unit:

The relevant questions are provided in this module guide.

1. Gemsbok Ltd
2. Greentools (Pty) Ltd
3. Crox Ltd
4. Cakelite Ltd – Please note that it is advised that you only attempt this question
after completion of IAS 8, IAS 16 and IAS 36.
5. Sando Shoes Ltd
6. Drone Delight Ltd – Please note that it is advised that you only attempt this
question after completion of IAS 21.

QUESTION 1
Gemsbok Ltd produces biltong products. The following information relates to the
financial year ending on 31 December 20.8:

R
Raw materials - meat (18 800 kg) purchased 1 786 000
Wages incurred in the production process 500 000
Fixed overheads 377 000
Variable overheads 598 000
Transport costs (variable)
- inwards (relates to the purchase of raw materials) 89 000
- outwards (relates to the sale of goods) 74 000
Storage (fixed)
- drying of biltong 35 000
- storage of biltong products after packaging 49 800
Cost of packaging purchased 117 000

On 31 December 20.7:
Raw materials 3000 kg meat @ R95/kg
Finished products 450 units @ R196/unit

Page 8 of 22
Additional information:
1. Management estimates normal capacity at 15 500 units per year. During the year
14 000 units were actually produced.
2. The first-in-first-out formula of inventory valuation is applied to all categories of
inventory.
3. During the year Gemsbok Ltd incurred abnormal losses amounting to R75 900
during the production process from meat rotting as a result of power outages.
4. Management estimates that approximately 5% meat is lost during the production
process. This loss is classified as normal.
5. At year-end biltong products to the value of R184 000 was still in work-in-proses.
The cost to complete the biltong products (including packaging) amounts to
R35 000. 1 000 units of finished products will be produced from biltong
currently in work-in-progress.
6. Closing stock of raw materials amounts to 2 800 kg meat @ R95/kg.
7. During the year 11 500 units were sold.
8. At 31 December 20.8 there were 2 950 units of finished products in closing
inventory.
9. At 31 December 20.8 there was no packing material in inventory.
10. A unit of the finished biltong product is sold for R217 and selling expenses
amount to a further R4 per unit.

REQUIRED:
a) Calculate the cost per unit of finished goods of Gemsbok Ltd for the year ending
31 December 20.8. (12)
b) Calculate the amount of the write-down of inventory to net realisable value at
31 December 20.8 in terms of IAS2. (8)
Your solution should be in accordance with International Financial Reporting
Standards (IFRS). Clearly show all calculations and work to the nearest Rand.
Assume all amounts to be material. Comparative figures are not required.

Page 9 of 22
QUESTION 2 (20 marks; 30 minutes)
Greentools (Pty) Ltd (Greentools) manufactures garden tools and has a 30 June
financial year-end. The information below relates to the production of garden forks
for the year ended 30 June 20.12. Greentools manufactures only one type of garden
fork and production thereof commenced on 20 August 20.11 for the first time.

Note R
Raw materials- Steel on hand at 1 July 20.11 1 530 000
Raw materials- Steel on hand at 30 June 20.12 1 240 000
Raw materials- Plastic handles on hand at 1 July 20.11 2 675 000
Purchases of steel at cost price (excluding delivery costs) 2 300 000
Delivery cost of steel purchased 50 000
Salaries and wages 3 4 650 000
Variable production overheads (Garden forks) 4 240 000
Depreciation of factory 5 150 000
Fixed production overheads 6 1 755 000

Notes and additional information

1. Steel is used in the manufacturing of all Greentools’ products, not only in the
production of garden forks.
35% of the steel transferred to the production process was used in the
manufacturing of garden forks. You may assume that 2% wastage of all steel
transferred to the production process is normal to the process. There were no
other losses of steel during the year.
2. Plastic handles are used in the manufacturing of all Greentools’ products, not
only garden forks. All Greentools' products require only one handle per product.
The inventory on hand at 1 July 20.11 consists of 15 000 handles. No handles
were purchased during the year nor lost due to losses and there are no handles
on hand at 30 June 20.12.
3. Salaries and wages relate to the company’s total employee costs. 20% of the
total salaries and wages expense can be allocated to the manufacturing of
garden forks. 40% of the amount allocated to the manufacturing of garden forks
is in respect of fixed production overheads and the rest is variable production
overheads.
4. Variable production overheads (Garden forks) consist of indirect labour and
material. 85% of the variable production overheads were incurred to bring
inventory to its current location and condition.

Page 10 of 22
5. Greentools has owned the factory, in which all its products are manufactured,
since 1 August 1995. An estimated 15% of the factory surface area is utilised
for the manufacturing of garden forks. Depreciation does not vary in
accordance with production of inventory.
6. An estimated 10% of fixed production overheads can be allocated to the
manufacturing of garden forks. Greentools’ production of garden forks for the
year ended 30 June 20.12 reached planned normal capacity levels.
7. Greentools' policy is to value finished products according to the first-in-first-out
cost formula and all raw materials according to the weighted average cost
formula.
8. 1 200 garden forks were sold during the current financial year. There were no
other losses of garden forks.
9. Garden forks on hand at 30 June 20.12 consist of 3 600 completed garden
forks and 1 200 garden forks which only need handles. Except for the cost of a
handle, you may assume that no further costs are needed to complete the
1 200 garden forks.
10. Completed garden forks can be sold at R500 per unit, after selling costs of R7
per unit is incurred.

REQUIRED Marks

(a) Calculate the balance (the Rand value) of finished product garden
forks on hand at 30 June 20.12 in accordance with IAS2 Inventories.
18
Your calculation must, where applicable, make a clear distinction
between fixed and variable production costs.

(b) Calculate the net realisable value (“NRV”) of a garden fork in work-
2
in-progress at 30 June 20.12.

Show all calculations clearly. Round all amounts to the nearest R1. Ignore
any VAT and other tax implications.

TOTAL MARKS 20

Page 11 of 22
QUESTION 3 (22 marks; 33 minutes) T3 2013
Crox Ltd (Crox) manufactures rubber covers for cellular phones. The following
information is applicable to the inventory of Crox for the financial year ended
30 June 20.13:

Normal capacity (per annum) 15 000 covers

Finished covers on hand (01/07/20.12) (5 000 units) R1 000 000
Finished covers on hand (30/06/20.13) 4 000 units
Direct labour R540 000
Variable manufacturing overheads R670 000
Fixed manufacturing overheads R810 000
Raw materials on hand (01/07/20.12) (23 000 kg) R230 000
Raw materials purchased (once off) (14 000 kg) R182 000
Raw materials on hand (30/06/20.13) 11 750 kg

Additional information:
1. The company has experienced strong competition from fake imported products
being dumped on the South African market. The selling price of a cover
therefore, decreased to R150 by the end of the 20.13 reporting period. The
government has, however, agreed to protect the local market and it is expected
that the covers will be sold in future at R200. Crox has an agreement with its
sales agents that they will be paid a commission of 5% of the sales.
2. A faulty heating element resulted in Crox having to write off 1 250 kg of the raw
material, that was purchased during the year, as an abnormal wastage.
3. During the year ended 30 June 20.13, Crox sold 11 000 covers.
4. At the end of the 20.13 reporting period, the replacement value of raw materials
is R18 per kilogram.
5. Finished products and raw material inventories are valued according to the first-
in, first-out method.
6. There is no work-in-progress at the beginning, or the end, of the years ended
30 June 20.13 and 30 June 20.12.

Page 12 of 22
 REQUIRED Marks

(a) Calculate the number of units produced during the year ended
1
30 June 20.13.

(b) Calculate the cost per unit produced during the year ended
8
30 June 20.13.

(c) Disclose the “Inventory” note to the financial statements of

Crox for the year ended 30 June 20.13, in accordance with 4
International Financial Reporting Standards (IFRS’s).

(d) Calculate the value of the “Cost of sales” line item in the
statement of profit or loss and other comprehensive income of
9
Crox for the year ended 30 June 20.13, in accordance with
International Financial Reporting Standards (IFRS’s).

TOTAL MARKS 22

Your answers are to comply with International Financial Reporting

Standards (IFRS’s). Round all amounts to the second decimal point. Show
all calculations clearly.

QUESTION 4: (30 marks; 45 minutes)

Cakelite Ltd manufactures chocolate cakes for an elite food retail group.
The following balances and relevant information were extracted from the financial
records of Cakelite Ltd for the year ended 31 December 20.10:

1. Oven
1.1 Cakelite Ltd was purchased an oven at a cost of R3 500 000 on 30 June 20.8.
The oven was ready for use as intended by management on 31 July 20.8. The
cost of the oven includes an amount of R500 000 in respect of the lining of the
oven. The useful life of the oven is 10 years and the oven lining needs to be
replaced every 5 years. The lining does not have any residual value, but the
oven has an estimated current residual value of R60 000.
1.2 During the year ended 31 December 20.10 Cakelite Ltd acquired spare parts
to the value of R20 000 for the oven. These spare parts can also be used on
other items of equipment and spare parts to the value of R5 000 were used to
repair the oven during the year.
1.3 The oven and the lining are depreciated in accordance with the straight-line
method over their estimated useful lives, in terms of the cost model per IAS
Page 13 of 22
 16, Property, Plant and Equipment. The directors confirmed that all the
estimates applicable to the oven and the lining were still correct at
31 December 20.10.

2. Back-up generator
2.1 Regular power failures during the year ended 31 December 20.10 caused
Cakelite Ltd to only bake 170 000 chocolate cakes instead of the normal
capacity of 200 000 chocolate cakes per year. As a result Cakelite Ltd
purchased a back-up generator on 31 August 20.10 to prevent future
interruptions in production. The generator was purchased at a cost of
R250 000 and was immediately ready for use as intended by management.
The generator has an estimated useful life of 2850 hours with no residual
value. Based on the past power failures, Cakelite Ltd expects to use the
generator for approximately 30 hours a month. The future dismantling costs in
respect of the generator is estimated at R 85 066 (present value R40 000)
and must be recognised as a provision in terms of IAS 37, Provisions,
Contingent Liabilities and Contingent Assets. The dismantling cost has not yet
been recognised by Cakelite Ltd.

3. Plant and other equipment

3.1.1 The plant and other equipment was ready for use as intended by
management on 31 March 20.8. The useful life was initially estimated to be 15
years with a current residual value of R150 000. The carrying amount of the
plant and equipment on 1 January 20.10 amounted to R3 992 500 (Cost
R4 500 000; Accumulated depreciation R507 500). On 31 December 20.10
the financial manager of Cakelite Ltd revised the plant and other equipment’s
remaining useful life to 10 years. The current residual value was re-estimated
to be R140 000.
3.2 Cakelite Ltd provides for depreciation on the plant and other equipment in
accordance with the straight-line method over its estimated useful life, in
terms of the cost model per IAS 16, Property, Plant and Equipment.

4. Inventories
4.1 The following information relates to the manufacturing of chocolate cakes for
the year ended 31 December 20.10 by Cakelite Ltd:

Raw materials purchased (50 000 kilograms) R6/ kilogram

Import duties on raw materials R5/ kilogram
Transport of raw materials R2/ kilogram
Variable overheads incurred R322 000

Page 14 of 22
 Direct labour incurred R650 000
Fixed overhead costs incurred (including depreciation) R850 000
Administrative and selling expenses incurred R150 000
Abnormal raw material spillage R80 000
Normal raw material spillage R50 000

4.2 Cakelite Ltd sold 210 000 chocolate cakes during the year ended
31 December 20.10. By attending the annual stock count as part of their audit
procedures during the final audit for the year ended 31 December 20.10, the
external auditors identified a case of fraud where chocolate cakes costing
R25 000 were stolen by a member of senior management. The theft has not
yet been accounted for by Cakelite Ltd. Cakelite Ltd uses the perpetual
inventories system in accounting for its inventories.
4.3 Finished goods, work-in-progress and raw materials are valued in accordance
with the first-in, first-out basis per IAS 2 (AC 108), Inventories. The directors
performed a net realisable value calculation at 31 December 20.10 and
confirmed that no adjustment was required.
4.4 Inventory on 1 January 20.10 consist of: R
- Finished goods (50 000 chocolate cakes) 700 000
- Work-in-progress nil
- Raw materials 300 000
4.5 Inventories on 31 December 20.10 costs of
- Finished goods ???
- Work-in-progress nil
- Raw materials nil
5. The directors confirmed that the recoverable amounts of all items of property,
plant and equipment exceeded their carrying amounts on 31 December 20.10
and all previous financial years.
6. The taxation rate applicable for the year ended 31 December 20.10 is 28%.

Page 15 of 22
REQUIRED:
a) Calculate the total depreciation of Cakelite Ltd for the year ended
31 December 20.10. (8)
b) Calculate the amount of the closing inventory of Cakelite Ltd at
31 December 20.10 (9)
c) Calculate the cost of sales amount as it would appear on the statement of
comprehensive income of Cakelite Ltd for the year ended 31 December 20.10.
(11)
d) Disclose all the relevant notes relating to the inventories of Cakelite Ltd as at
31 December 20.10, in accordance with the International Financial Reporting
Standards (IFRS’s). (2)

Note: - Show all calculations and make use of cross references.

- Round all final calculated amounts to the nearest R1.
- Assume all amounts are material.
- Comparative amounts are not required.

Page 16 of 22
QUESTION 5 (30 marks; 45 minutes)
A well-known shoe manufacturing company, Sando Shoes Ltd. (Sando), has
launched an in-depth investigation to improve their cost effectiveness in the shoes
production process. They have approached you, a well-respected cost analyst, to
examine their current costing process.
You inspected the following incomplete general ledger accounts:

Dr. Raw Material: Leather Cr.

01/03/20.14 Opening balance 78 500.00

28/02/20.15 Purchases for the year 195 800.00

274 300.00

28/02/20.15 Balance carried forward 129 200.00

Dr. Packaging material: Shoe boxes Cr.

01/03/20.14 Opening balance 30 000.00 28/02/2015 Work-in-progress 79 800.00

28/02/20.15 Purchases for the year 100 500.00

130 500.00

Additional information for the year ended 28 February 20.15:

1. Under optimal conditions, 22 500 pairs of shoes can be produced annually.
Optimal conditions excludes abnormal losses of leather material due to trainee
operators not applying their acquired skills. These losses are estimated at 25%
of leather material consumed during an annual production process.
2. Wages of the production line operators amounted to R850 000, whilst the manual
labourers performing detailed stitching work on the shoes were paid a total of
R650 000 for the year.

Page 17 of 22
3. The following summarised cost reports were provided by the line managers:

Sando Shoes Ltd. – Cost Report for the year ended

Nails
O/B -
Purchased 25 000.00
Transferred to production line D 25 000.00

Glue
O/B 5 000.00
Purchased 7 000.00
Transferred to production line (10 000.00)
C***
C/B 2 000.00

***Includes stale glue of R2 500.00. Employee WiseOne has been reprimanded for
this abnormal cost that resulted from his negligent conduct.
Upon inspection, the following overhead costs were identified:
- Variable production overheads of R639 000
- Rental of the building that houses the entire production line: R59 250
- Rental of the off-site administrative offices: R10 000
- Raw material sourcing and procurement costs: R15 000
- Warehouse rental for the storing of finished goods after production awaiting
sales: R17 500
4. At year-end products to the value of R10 000 were still in work-in-proses.
Conversion costs to convert the leather to 100 items ready for sale is accurately
estimated at 7% of this value.
5. During the year 20 000 pairs of shoes were produced and sales amounted to an
all-time high of 25 000 pairs.
6. Shoes that are in competed and ready for sale amounted to 7 000 pairs as at the
end of February 20.15; and 12 000 at the end of February 20.14.
7. In order to facilitate and complete the sales transaction, advertisement cost of
R15 per pair needs to be incurred. The selling price of one pair of shoes is
R135. The net realisable value of material and items not yet used in the
production process is assumed to be equal to cost.

Page 18 of 22
8. The first-in-first-out formula of inventory valuation is applied to all categories of
inventory.
REQUIRED:

a) Calculate the total cost per unit produced by Sando for the year 18
ending 28 February 20.15. All amounts should be indicated clearly.
Ignore VAT.

c) Calculate the cost of closing inventory (for all classes of 5

inventory) of Sando Shoes Ltd. for the year ending 28 February
20.15. All amounts should be indicated clearly.
Ignore VAT.

d) Calculate the disclosed value of the Work-in-Progress and the 7

Finished Goods in the Statement of Financial Position of Sando as
at 28 February 20.15 in terms of IAS 2.

Total Marks 30

Round all amounts to 2 decimals.

QUESTION 6 (30 marks; 45 minutes)

Drone Delight Ltd (Drone Delight) manufactures drones. Parts are imported from the
United States (US) in kits and the drones are assembled and sold locally. The
company manufactures 1 000 drones per year at normal capacity.
The company uses the perpetual inventory system and the FIFO method of inventory
valuation throughout the process.
The company has a 31 December end of reporting period.

Page 19 of 22
The following information is available:
Note R
Inventory 1/01/20.15:
- Parts 800 000 128 units
- Work in progress 0
- Finished products 500 000 50 units
- Glue and screws, etc. 2 40 000

The following information was given for the year ended 31 December 20.15:
Parts purchased 1 ?
Import cost: Parts 1 500 000
Salaries and Wages paid 3&4 6 840 000
Glue and screws purchased 2 52 400
Water and electricity paid 5&9 398 000
Rent paid 6&9 2 400 000
Insurance paid 8 900 000

Drones completed ?
Drones sold 810 units

Inventory: 31/12/20.15
- Parts ? 118 units
- Work in progress 0
- Finished drones 76 units
- Glue and screws 25 000
Sales 19 263 600
Machinery: Purchased 1 June 20.14 7 600 000
ADDITIONAL INFORMATION:
1. The drone parts are imported from the US in the form of a kit and the drones
are assembled locally. The purchases of parts were as follows:

Date Number of kits Total in $ Date paid Import cost

purchased R

30 April 20.15 500 270 000 29 Jun 20.15 300 000

15 Oct 20.15 330 160 540 15 Jan 20.16 200 000
The only journal entries recorded (other than the import cost), for the purchases
of the parts, using the supplied foreign exchange tables, were:

Page 20 of 22
 30/4/20.15
Dr Parts inventory (SFP) (270 000*11,81) 3 188 700
Cr Creditor (SFP) 3 188 700
Purchase of parts
29/06/20.15
Dr Creditor (SFP) 3 307 500
Cr Bank (SFP) (270 000*12,25) 3 307 500
Payment of foreign creditor
15/10/20.15
Dr Parts inventory (SFP) (160 540*13,11) 2 104 679
Cr Creditor (SFP) 2 104 679
Purchase of parts
2. A loss of 5% of the glue and screws that is available for the production
process is regarded as normal.
3. Specific skilled workers are allocated to the assembly of the drones. The
assembly of the drones are specialised, as it includes electronic components. A
worker is paid R3 000 per drone once the drone is completed. The cleaner
spend her time only in the factory and earns R6 000 per month. These wages
are all included in the salaries and wages given above. These are the only
salaries and wages applicable to the factory.
4. During the year a new worker was employed who indicated on his CV and
during the interview that he had the necessary skills to assemble drones. While
doing the electronic work on 4 drones, he damaged them completely and the
drones had to be written off as scrap. These drones were from the inventory
kits that was available at 1 January 20.15. No payment has been made to the
worker for the 4 drones and he was dismissed after that.
5. Water and electricity of R22 000 for December 20.15 is still outstanding at 31
December 20.15
6. On 1 May 20.15 the monthly rent increased 10%. On 1 December 20.15 the
company paid three months’ rent in advance.
7. Depreciation on the machine, which is used in the manufacturing of the drones,
is calculated on the straight line basis over its useful life of five years with no
residual value.
8. An insurance contract with ABC Insurance on 1 January 20.15 stipulated an
insurance period of 18 months. The full amount for the contract was paid on 2
January 20.15. 80% of the insurance cost is attributed to the factory.
9. Water and electricity and rent get allocated on the ratio of area occupied.
There is no direct relation between the water and electricity used and the

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 number of units produced. The factory has a total area of 1440 m 2 and the
selling department has a total area of 960 m2.
IGNORE VAT

REQUIRED Marks

(a) Prepare any additional journal entries for the recording of the
purchases and payment of the parts (kits) that you regard as
necessary in the records of Drone Delight for the year ended
31 December 20.15. Make use of the foreign exchange tables
supplied. 6

Clearly indicate which component, part and/or item of the

financial statement is affected by any journal entry. Journal
narrations are not required.

(b) Calculate the number of drones that Drone Delight manufactured

3
for the year ended 31 December 20.15.

(c) Calculate the fixed overhead allocation rate per drone for the year
9
ended 31 December 20.15.

(d) Calculate the total cost per drone that Drone Delight manufactured
12
during the year ended 31 December 20.15.

TOTAL MARKS 30

Your answers are to comply with International Financial Reporting Standards

(IFRS). Show all calculations clearly.

14.1.6. HOMEWORK

Not all the questions included in this guide will necessarily be given as homework.
Specific selected questions for completion will be announced. Students may
complete all homework questions if they wish to do so – the suggested solutions to
specific questions may be requested from lecturers and will only be provided if
students can show their attempts to the questions first.

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