Tom (Pty) Ltd is making a brand of ice cream called Fruiti ice cream. The ice cream is sold in two different sizes a 500ml and 1 litre container. The company expects to sell 2000 units of the smaller 500 ml containers per year and 7 800 units of the 1 litre containers per year. The ice cream is made in batches and then poured into the appropriate sized container, i.e. either a 500 ml container or a 1 litre container. The ice cream is made in batches of 100 litres. The budgeted requirements for a batch of 100 litres are shown below.

Quantity and costs of a batch of 100 litres of ice cream:

		Quantity	Cost	Batch cost
Materials	Milk	200 litres	R2	R400
	Fruit	25 kg	R20	R500
Labour		5 hours	R18	R90
Variable overheads		5 hours	R22	R110
				R1100

	Rands
Fixed overheads	R26 700
Fixed selling costs	R8000

Inventory is valued on the basis of equivalent units of inventory i.e. 2 x 500 ml ice cream are valued the same as a 1 litre of ice cream. Variable overheads vary with direct labour hours. Fixed overheads are allocated to products on the number of litres of ice cream produced (all ice cream irrespective of the size of the output).

	500ml	1 litre
Sale price of the containers	R10	R15
Expected inventories (units)	500ml	1 litre
Opening inventory	50	80
Closing inventory	70	170

Required:

1. Prepare a sales budget for the company in both litres and rands.

2. Prepare a production budget for the year (Hint: Manipulate the following: Opening Inventory + Production Sales = Closing Inventory).

3. Prepare a materials purchases budget for milk and fruit only in both rands and units (Hint: Calculate the equivalent annual output of the two variants in litres first, rather than in 500ml and 1 litre).

4. Calculate the variable costing income statement for the year (Hint: Calculate the equivalent opening and closing stock of the two variants in litres rather than in 500 ml and 1 litre).

5. Calculate the budgeted absorption costing income statements for the year.

6. Reconcile and explain the difference between the variable costing income statements net profit and the absorption costing income statement net profit.

QUESTION THREE [50] Tom (Pty) Lld in making a brand of ice cram called "Friti kee croart." The ice cream is cold in two diflerent sues a 500m and 1 litre contaner. The compery asoects to seff 2000 units of the amalier 600 mi oontanert per year and 7800 units of the 1 litte conesaners por year. The lice crean is rude in batches and then poured into the approprate trood pontainer, 1 h. e ther a 600 mi cortanee or a 1 tre oontuiner. The ice cream a mase in batches of 100 litres The budgeted requiremente for a bafch. of soo lifres are ahewir bolow. Quamity and costs of a batch of 100 sitres of ice cream! inventory is velued on the basis of equalent unas of invertory le. 2600 mi ice croam are valued the same as a 1 atre of lce cream. Yariabie overheads vay with drect iabcer hours. Fxed overheads are allocated to productis on the number an fitres of ice cream nrosused cal lee cream in icectrve of the size of the output). Required: 1. Prepare a sales budget for the company in both litres and rands. (2) 2. Prepare a production budget for the year (Hint: Manipulate the following: Opening Inventory + Production - Sales = Closing Inventory). (3) 3. Prepare a materials purchases budget for milk and fruit only in both rands and units (Hint Calculate the equivalent annual output of the two variants in litres first, rather than in 500ml and 1 litre). 4. Calculate the variable costing income statement for the year (Hint: Calculate the equivalent opening and closing stock of the two variants in litres father than in 500ml and 1 litre). 5. Calculate the budgeted absorption costing income statements for the year. (6) 6. Reconcile and explain the difference between the variable costing income statements net profit and the absorption costing income statement net profit. (5) 7. Write a short comparative of the variable and absorption costing for management accounting purposes, paying particular attention to profit measurement