QUESTION TWO [25]

Getaway (Pty) Ltd manufactures rubber balls. The following costs were incurred during August 2019:

• Rubber R10 per kg
• Factory worker R30 per hour
• Rental of building R16 000 per month
• Electricity R9 700 per month
• Depreciation on factory machinery R3 300 per month
• Production manager salary R21 500 per month
• Sales commission 2.5% on sales value
• Sales price R20 per ball

Additional information:

0.5 kg rubber is needed to manufacture one ball.

One factory worker is employed and paid on a per hour basis.

The factory worker can manufacture 60 balls, in total, in an hour.

75% of the building is used as a factory and the rest of the building is used as offices.

Electricity is a mixed cost. The total fixed cost was determined as R1 200 per month.The total fixed cost and 70% of the variable cost will be allocated to the factory.

Finished goods inventory on 1 August (valued at R10 per ball, using the absorption costing method, including fixed manufacturing overhead of R4 per ball) was 3 000 balls.

Finished goods inventory on 31 August was 2 000 balls.

Actual production during August amounted to 9 600 balls.

The company uses the FIFO method to value inventory.

Fixed manufacturing overhead is recovered on the basis of units produced.

The company closes the over- or under applied overhead directly to cost of goods sold.

The budget for 2019 reflected the following:

Production, 115 200 balls

Fixed manufacturing overheads, R527 400

Required:

2.1 Calculate the manufacturing cost per ball using the absorption costing method. (10)

2.2 Prepare the income statement for August 2014 using the absorption costing method. (10) 2.3 Prepare the income statement for August 2014 using the direct costing method. (5)