QUESTION 1: PART A DIRECT AND ABSORPTION [30 Marks] Bindu Best Beds (Pty) Ltd manufactures two types of mattresses; Loft and Platinum in its factory in Pretoria. The company founded by Peter Mayivhue has shown rapid growth during the past decade. An extract from the absorption costing actual statement of comprehensive income for the year ended 30 June 2020 and related information are set out below: BINDU BEST BEDS (PTY) LTD ACTUAL RESULTS FOR THE YEAR ENDED 30 JUNE 2020 R Sales 3 425 000 Less: Cost of sales (660 875) Opening inventory 206 000 Production costs 652 500 Closing Inventory (197 625) Gross Profit (unadjusted) 2 764 125 Under/over applied overheads ? Gross Profit (adjusted) ? Selling and administration costs (1 500 000) Net profit ? Additional information 1. Opening inventory at 1 July 2019 consisted of 200 units of Loft and 300 units of Platinum at a value of R72 500 and R133 500 respectively. The fixed manufacturing expense absorbed per mattress was R130 for the 2019 financial year (blanket rate per unit). The company uses the MAC2601/105 7 weighted average method of inventory valuation. Opening inventory values are considered to be correct. 2. The blanket predetermined fixed manufacturing overhead allocation rate for the 2020 financial year was calculated at R150 per unit. 3. The following information pertains to the actual figures for the 2020 financial year: The company manufactured 500 units of Loft and 900 units of Platinum, selling 400 units of Loft and 1 050 units of Platinum during the period. Selling prices per unit are R2 000 for Loft and R2 500 for Platinum. Direct material cost for Loft amounted to R200 per unit and R250 per unit for Platinum. Direct labour: The mattresses manufacturing process is highly automated. Only one unskilled, casual worker is required to operate the equipment at a time. It takes an average of 30 minutes in total for Loft and 45 minutes in total for Platinum to be manufactured. The company pays an hourly wage of R100. There were no changes in the amount of time required per mattress or the hourly wage rate from the 2020 financial year. Actual fixed manufacturing overhead amounted to R217 500 for the 2020 financial year, of which R77 500 was incurred in Loft and R140 000 in Platinum. No variable manufacturing costs were incurred. Selling and administrative costs for the 2020 financial year consists of 55,05% fixed costs that should be split in a 1:4 ratio between Loft and Platinum. The variable cost per unit of Loft and per unit of Platinum is the same. Cost per unit is rounded to two decimal places. REQUIRED Marks (a) Prepare the actual Statement of Comprehensive Income for the year ended 30 June 2020 with separate columns for Loft and Platinum using direct costing method. A total column is not required. (20) (b) Discuss why a company would prefer a direct costing system as opposed to an absorption costing system from a management accounting perspective. (3) (c) i. Calculate the under/ over recovered overhead for the 2020 financial year and prepare a journal entry to show how the under/over recovered overhead would normally be dealt with in the company's books at the end of the 2020 financial year. ii. Prepare a journal entry to show how the under/over recovered overhead would normally be dealt with in the company's books at the end of the 2020 financial year. (3) (2) 8 (d) Based only on the information presented in additional information point 1 above, provide a reason why the opening inventory in the extract from the actual results has been valued in terms of the absorption costing system. (2)