Subject - Cost Accounting(Financial Management)

CASE STUDY Read the case study provided below and answer the questions that follow.

COMFYCHAIRS LIMITED

Comfychairs Limited commenced business on 01 November 2021. It manufactures a special type of chair designed to alleviate back pain. During the first month of operations 500 chairs were produced of which 300 were sold. The selling price was R1 500 per chair. The manufacturing costs for November 2021 included direct materials of R240 per unit, direct labour of R150 per unit, variable manufacturing overheads of R90 per unit and fixed manufacturing overheads of R120 000 per month. Fixed administration costs amounted to R60 000 per month. Marketing costs included a sales commission of 5% of the sales revenue and advertising costs of 4% of the sales revenue.

During December 2021, 1 000 chairs were produced whilst 800 were sold. During this month the variable manufacturing costs per unit increased by 10% but all other costs remained the same or were determined in the same way as for November 2021. The selling price for chairs sold during December 2021 was increased by 5% because of the increase in some costs.

Comfychairs Limited uses the first-in-first-out method in the management of its inventories.

The directors asked for your help in producing the income statements using the variable costing and absorption costing methods. They say that they will use the statement that shows the higher profit when presenting the financial l statements to the shareholders.

Question 2

Prepare the Income Statement for the month ended 31 December 2021 using the variable costing method. (10 Marks)

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