Question 1

a) Manufacturing variable cost per backpack

Direct materials 100 Given

Direct labour 75 1.5 50
Variable manufacturing overheads 30 2 15
205 3

b) Units
Opening 50
Production 1500
Closing 350
Sales 1200 1

Income statements
i ii
Variable Absorption
Sales 1 200 x 300 R 360,000 R 360,000 2 MWE only if SP is correct and units calculated were used
Cost of sales R 245,750 R 269,650
Opening inventory Variable Given R 10,000 R 10,000 1
Fixed Given R 900 0.5

Production Variable 1500 x 205 R 307,500 R 307,500 2 MWE only if units and c/u is used from part a
Fixed 1500 x 20 R 30,000 1

Closing inventory Variable 350 x 205 R 71,750 R 71,750 2 MWE only if units and c/u is used from part a
Fixed 350 x 20 R 7,000 1
Over recovery See below R 2,000 1
Selling and admin variable cost 1200 x 5 R 6,000 1
Contribution R 108,250
Gross profit R 92,350
Fixed costs Manufacturing R (28,000) 0.5
Non-manufacturing R (15,000) 0.5
Non-manufacturing cost Variable R (6,000) 1
Fixed R (15,000) 0.5
Profit R 65,250 R 71,350

Allocated cost and under-/over recovery

Budgeted cost Given 28000
Normal capacity Given 1400 1
Allocation rate (POR) 20

Actual production Given 1500

Allocated cost 20 x 1 500 30000 1
Actual cost Given 28000

Thus over recovery 2000 1

18
c) Reconciliation
Profit in absorption R 71,350
Add fixed cost in opening inventory R 900 1
Min Fixed cost in closing inventory R 7,000 1
Profit in variable R 65,250
2

d) Operating results can be presented in a readily understandable and synoptic form. 1

Control more sufficient, controlling the different elements that make up cost is made easier since variable cost
can be controlled per unit 1
and fixed costs can be controlled in total.
Direct cositng also overcomes the problem of allocating fixed costs (the danger of over/under allocation). 1
There is a strong argument in favour of marginal costing when profit is calculated at frequent intervals
because of seasonal 1
variations in sales which cause cause significant fluctuations in stock levels.

MAX 3
 Question 2

Dep A Dep B Service

Cost item Allocation basis
a) Rent of building Floor space R 559,091 R 340,909 R 300,000 1.5
Electricity Kilowatt hours R 32,845 R 22,968 R 9,187 1.5
Depreciation Machine hours R 168,421 R 140,351 R 11,228 1.5
Salaries Number of employees R 316,800 R 230,400 R 172,800 1.5
Insurance Value of machinery R 157,055 R 117,791 R 45,153 1.5
Indirect material Given R 110,000 R 66,000 R 58,000 1
Total cost per department R 1,344,212 R 918,420 R 596,369 1.5 mwe
Secondary allocation - service Machine hours R 313,878.28 R 261,565.23 -R 575,444
Overhead cost to be recovered R 1,658,090 R 1,179,985 R 20,925
Overhead Rate R 552.70 R 858.17 2 mwe
b)
c) Accurate 12
Complete
Cost beneficial
Understandable
Relevant
Authorative
Timely
Easy to use 4
Question 3

a) Calculate the margin of safety ratio.

Contribution per unit = R400400 / 77 000 = R5,20 per unit 1

Breakeven units = 208 000/ R5,20 per unit = 40 000 1

Margin of safety ratio = 77 000 - 40 000 x 100

77,000.00
48.05% 3

b) Determine the sales volume requred to earn net profit of R 171 600.

Sales volume = Fixed cost + Target proft

Contr. Per unit

= 208000 + 171 600 1

5.2 1

= 73000 1 mwe

c)
Calculate the net profit before tax if sales reach R950 000.

Variable cost per unit = 369600/77 000 = R4,80 1

Sales 950000 (95 000 x R10) 1

Less: Variable cost 456000 (95 000 x R4,80) 1
Contribution 494000
Less: Fixed costs 250000 (208 000 + 42 000) 1
Net proft 244000 1
5

d) Stepped fixed cost 1

e) The seller price per unit is constant within the relevant range. 1
The variable cost per unit and the total foxed costs are not affected by changes in production or sales throughout the relevant range. 1
The number of units produced is equal to the.number of units sold, i.e. inventories do not change. 1
Costs can be accurately divided into variable and fixed costs, and there is a linear relationship between cost and activity. 1
In organisations that produce a variety of products the sales mix is constant. 1
Changes in total costs and revenues are only caused by changes in the level of production/sales. 1
Analysis applies only to the short term time horizon. max 4
Profits are calculated on a variable costing basis.