Question 1

Mayana Limited manufactures a specialised storage accessory for automobiles called 'the Storax', which is a type of pocket which can be easily fixed in the boot of any vehicle. The company has been in operation for two years and, now that the production process has been established and refined, the directors have decided to focus on the income and costs arising from activities. The managing director has recently read an article about product costing and, in particular, absorption and variable costing and is keen to understand how this would affect company profits.

The following information is available for the months of July and August:

July August

Production (units) 13000 15000

Sales (units) 12000 16000

Direct materials N$29250 N$33750

Direct labour N$19500 N$22500

Variable production overheads N$7800 N$9000

Total selling and administrative expenses N$45200 N$57600

Additional information:

1. For Ludo Limited normal production capacity is 15 000 units per month.

2. Fixed production overheads are N$29 400 per month.

3. The company sells 'the Storax' for N$20 each.

4. Total selling and administrative expenses includes a fixed and variable element. The variable portion is N$ 1.55 per unit and is based on units sold.

5. At 30 June the company had no 'Storax' accessories in its warehouse.

REQUIREMENT:

REQUIRED:

1.1 Prepare profit statements for Mayana Limited for the months of July and August using Absorption costing.

1.2 Reconcile the profit between Absorption costing and Variable costing.

1.3 Provide a brief explanation of the effect on profit of using each of the methods above.

Question 2

Ncaute Apparels Limited produces fashionable clothes for all ages through two processes; cutting and assembly materials undergo these processes in cutting and assembly departments. At the beginning of August 2020, the cutting process has opening WIP of 200 units at N$8 102 and its breakdown was:

Degree of Completion N$

Materials 100% 4950

Labour 30% 968

Overhead 20% 2184

Totals 8102

In August 2020, 1 000 units of materials were added to the cutting process. Due to limitations of the cutting machine, 10% of materials added to the cutting process were expected to become loss with a scrap value of N$10 per unit. It is the company's cost accounting policy to deduct the scrap value of normal losses from the cost of materials in the current process. By end of August, 940 units of finished cutting process were transferred out to the next process: assembly. 100 units remained in closing WIP and their degrees of completion of individual inputs were:

Materials 100%

Labour 60%

Overheads 40%

Costs incurred in August were:

Materials N$20 700

Labour N$ 5 074

Overheads N$10 920

REQUIRED:

Prepare the process report for August 2020 showing for the following:

2.1 Quantity statement (inclusive of equivalent units)

2.2 Production cost statement per unit

2.3 Cost allocation statement

2.4 Journal entries to record: (i) Raw materials requisitioned by cutting department (ii) Items transferred from cutting department.

2.5 Cutting Process account