QUESTION 1(35 MARKS)

Mr. Smith chairman of Mpapela Manufacturing Company gave his son full responsibility for the operations of one of the business' as from 1 September 2020.The company manufactures metal frames.

Mr. Smith however, is very concerned about the ability of his son in running the operation, as the income statement for the month ended 30 September 2020 reveals that he has failed to meet the budgeted profit target of R6000 even though he has exceeded sales volume by 200 frames and selling price by R1.00 per unit.

Budget Income Statement for the month of September 2020

Sales:RR

2000 frames at R3672000

Production costs:

Material18000

Labour - variable22000

Manufacturing overhead16000

5600056000

Gross profit16000

Selling and administration (40% variable)10000

ProfitR 6000

Budget break-even=1400 units

Standard cost per unit at the budget level of 2000 sales units

R

Material:Metal 3 units @ R2.006

Welding 1 unit @ R3.003

Labour:30 minutes @ R22 per hour11

Prime cost20

Manufacturing overhead8

Total cost of manufactureR28

Mr. Smith explained that at the beginning of the year, his son had prepared a "Profit graph" which showed for various levels of volume what his plant sales revenue, various categories of expense and profit should be.

"It appears to me that an increase above the budget sales of 2000 units should have increased the profit substantially.

As you can see, he has managed to exceed budgeted sales volume and raise the selling price on the frames by R1.Not only that, he looked around until he found a fellow who would sell us welding rods at a lower price.Regardless of these facts, he still has not managed to achieve the target profit.

Actual results for the month of September

Sales - 2200 units at R37 per unit

Opening stock - 400 units

Actual production2000 units

Actual costs for September

Raw MaterialsR

Metal6500 units13000

Welding3250 units7475

Labour1200 hours25200

Manufacturing overhead

Variable-10% higher than budget cost

Fixed-5000

Selling and administration11500

The company operates a standard variable costing system.The opening stock of 400 units of finished product was valued at current standards.

There was no opening or closing stock of raw material in the month of September.

REQUIRED:

a)Prepare the statement showing the actual profit for the month of September. (16)

b)Reconcile the budget profit to the actual profit as calculated by you in (a) above.Your reconciliation must show the variances in as much detail as possible. (19)