Cervilos

Ignore VAT
You are the accountant of a local bicycle manufacturer. The bicycle that you
produce is called Cervilos. The frames and components are imported from
Europe. The current year end is 31 December 2010.

Cervilos employees 3 bike builders to assemble the bicycle. They work on an

hourly rate for each unit produced.

You also employ a full time supervisor. He earns a fixed salary per month.

The production process is very labour intensive and makes use of hand
equipment. Thus electricity does not differ according to the units produced.
The electricity bill can be divided accurately between the office and plant in
the ratio 30% office: 70% plant. Electricity is therefore a fixed cost
koste
Due to the economic environment in Europe the prices of 2009 has increased
by 15%. All other relevant costs have been incurred locally and have
increased according to inflation of 6%.
From the 2009 perspective - Future production costs goes up:
indicates NRV problem for WIP and material. (OB)

On 1 January 2010 the newest version of the frames that you use were made
available. This resulted in the old frames and the completed bicycles that
used these frames, that will have to be sold at a discount of 30%. You sell
your product at cost +25%. Frames are not sold separately.

Indicates that what is in stock on 1 Jan 2010 (beginning of the year) will also be impaired
(NRV write down) Therefore opening balances will also need to be tested for NRV write
down.

Due to a decrease in the demand for the frames the suppliers informed you
that they will not be bringing out a new version until 2012. However they still
have enough stock to supply you until then.

Can also indicated an NRV problem at the end of the current

year.

The costs for 2009 were as follows: (all costs have already been correctly
converted using the correct exchange rate where applicable)

Remember that these are the previous year’s prices! In other words the opening
inventory was manufactured at these prices, but in the current year it was
manufactured at the higher prices.
Cost 2009 Amount
First decide what is fixed and R
Frame (per unit) what is variable! 2 000
Components (per unit) 3 000
Electricity (total) Fixed costs are allocated 6 000
limited to actual cost incurred
Wages (bike builders) 36 500
to determine price per unit.
Salaries (supervisor) 60 000
Depreciation (Plant) 50 000
Depreciation (Office) 30 000

The inventory levels were as follows:

Units
Frames – 31 December 2009 10
Frames – 31 December 2010 40
Finished Goods– 31 December 2009 20
Finished Goods– 31 December 2010 30

There was no work in progress at the beginning or the end of the year. In
2009 and 2010, 100 units each, of finished bicycles were produced.

No other items were on hand in 2009 or 2010.

Inventory with a cost price of R 20 000 was presented as security to secure a

loan.
Disclosure!!!

You had two goods years and exceeded expected production in both years.
You budgeted to produce 80 units per year. Inventory is valued using the
FIFO method. Assume therefore that all bicycles built with hold frames, were
sold first.

NB! Actual production is more than budgted production!!!

Therefore if the fixed cost is for example R100 000 then the
allocated overheads is
R100 000/80 = R1 250 per unit. And if it is then allocated to
actual production it is R1 250x100=R125 000. Therefore more
than what was actually incurred. Therefore the fixed cost per
unit is limited to actual in other words R100 000 which is in
other words R1 000 (100 000/100) per unit.