QUESTION 1 DIRECT AND ABSORPTION COSTING (20 marks)

Books Galore (Pty) Ltd manufactures books and was recently awarded a bid to supply books to the National Department of Education.

Books Galore has provided you with the following information to assist you with the preparation of the budgeted statement of comprehensive income for the year ended 31 December 2016:

Books Galore uses the weighted average method of inventory valuation.

2014 2015 2016

Opening inventory 0 ? ?

Closing inventory ? ? ?

Sales 20 000 ? ?

Production 25 000 ? ?

Additional information

1. Selling price per book in 2014 was R200 and is expected to increase by 10% per year in the 2015 and 2016 financial periods.

2. The sales volume is expected to increase by 5% in 2015 and by a further 5% in 2016.

3. Production volume is expected to increase by 10% in 2015 and then decrease by 15% in 2016.

4. The following costing information relates to the 2014 financial period:

Fixed manufacturing overheads R800 000

Fixed administration costs R80 000

Variable selling costs per unit R50

Variable manufacturing costs R1 500 000

5. Fixed manufacturing overheads will increase by 10% in 2015 and by a further 5% in 2016. Variable selling costs per unit will remain constant in 2015 and increase by 10% in 2016. Variable manufacturing costs on a per unit basis will remain constant from 2014 to 2016. Fixed administration costs will remain the same as in 2014 in the 2015 and 2016 periods.

REQUIRED

(a) Prepare the budgeted statement of comprehensive income for the year ended 31 December 2016 using the absorption costing method (10)

(b) Prepare the budgeted statement of comprehensive income for the year ended 31 December 2016 using the direct costing method (10)