AVALON MANUFACTURERS

Avalon Manufacturers began operations on the outskirts of Durban at the start of 2022 manufacturing energy drinks. Their message to their customers is Everything we do is about you. They prioritised what their customers needed through extensive market research and subsequently created a range of exciting flavours of their product.

During January 2022, Avalon Manufacturers produced 10 000 cases of the energy drink of which their only sale was 8 000 cases to a large wholesaler. No marketing costs were incurred. Fixed manufacturing and administration costs totalled R600 000 and R120 000 respectively. Variable manufacturing costs and variable administration costs amounted to R130 per case and R20 per case respectively.

During February 2022 the production and sales increased to 20 000 cases and 17 000 cases respectively as sales personnel were employed and the energy drinks were sold to other traders. The costs for February 2022 were higher as the production capacity increased and better-quality ingredients were used. The selling price was R280 per case for wholesalers (who purchased 10 000 cases) and R300 per case to other traders. Variable manufacturing costs increased to R140 per case. Advertising and salespersons salaries amounted to R90 000 and are expected to remain the same per month in the year ahead. A sales commission of R15 per case was paid to the salespersons. Fixed manufacturing and administration costs increased by 33 1/3 % (thirty-three and one third percent). Other office costs amounted to R20 per case sold. The first-in-first-out method for valuing inventories is used.

Question 1 (10 Marks)

Prepare the Income Statement for the month ended 28 February 2022 using the variable costing method.

Question 2 (10 Marks)

Prepare the Income Statement for the month ended 28 February 2022 using the absorption costing method.

Question 3 (3 Marks)

Reconcile the profit calculated according to variable costing (in question 1) with the profit calculated according to absorption costing (in question 2).

Question 4

If the value of inventories is ignored, calculate the total product costs and total period costs for the month ended 28 February 2022 using: 4.1 Variable costing (2 marks)

4.2 Absorption costing (2 marks)

Question 5

Would you recommend that the management of Avalon Manufacturers use variable costing or absorption costing for decision-making? Motivate your answer.