Topics:

Material and Inventory control

Labour costs

Classification and analysis of overheads

Cost flows and manufacturing companies

Question 1 (25 Marks)

The following information for July and August were extracted from the costing records of Venus CC:

JulyAugust

Production and sales (units)12 00010000

RR

Costs:

Direct material270 000225 000

Direct labour360 000300 000

Factory overhead360 000331 500

Marketing expenses93 00087 000

Administrative expenses153 000144 000

At the beginning of September, it was estimated that production for that month would be either 13 000 or 14 000 units.

REQUIRED

1. Draw up the flexible budget for September based on

13 000 and 14 000 units. (15)

2. At the end of September the cost records revealed that the following costs/expenses were incurred in producing and selling

13 500 units:

R

Direct material302 400

Direct labour400 500

Factory overhead425 250

Marketing expenses108 450

Administrative expenses180 900

Draw up a variance analysis report for September and indicate next to each variance whether it is favourable or unfavourable.(10)

Question 2 (25 Marks)

The following budgeted figures have been taken from the cost records of Ace Ltd:

Production units9 00012 000

Capacity level75%100%

RR

Sales1 035 0001 380 000

Direct material (@ R5 per kg)180 000240 000

Direct labour (@ R20 per hour)225 000300 000

Factory overheads300 000330 000

Selling and administrative expenses180 000192 000

Normal capacity is equal to 12 000 units. As a result of the poor economic conditions the budget for February 2015 has been set at 80% of normal capacity. The company uses the absorption costing method for internal reporting purposes.

The following variance report for February 2015 has been presented to management of the production department:

Fixed

Budget

Actual

Results

Variance

Production units

10 000

9 000

Sales units

10 000

9 000

R

R

R

Sales

1 150 000

1 056 700

93 300 (a)

Material

200 000

188 100

11 900 (f)

Direct labour

250 000

236 250

13 750 (f)

Factory overhead

300 000

310 600

10 600 (u)

Selling and administrative expenses

180 000

208 200

28 200 (u)

Net profit

220 000

113 550

106 450 (u)

Required:

a) Discuss how a flexible budget can be used when exercising cost control. (5)

b) Critically discuss the format and content of the variance report for February 2015 as presented

to the department.

Prepare an alternative variance report for the department that would be more meaningful to management

Question 3 (25 Marks)

The following information is applicable to Shine Wholesalers:

Budgeted sales

JulyR105000

AugustR132000

SeptemberR165000

Cash sales amount to 20% of total sales.

55% of credit sales are collected in the month of sale, with a discount of 10% those debtors who pay during this time. The remaining outstanding credit sales are collected in equal instalments over next two months. In October, the sales are expected to increase by 20% when compared to September. There are no bad debts.

Purchases of raw materials and sales in October will be at the same ratio as in September. Shine Wholesalers is allowed two month's credit on purchases of raw materials. 40% of purchases are paid in the month following purchase and the rest in the second month after purchase.

Purchases of raw materials are expected to as follows:

JuneR55000

July R68000

AugustR85000

SeptemberR105000

Wages and salaries are paid to employees at the end of the month in which they were earned. Salaries and wages are expected to be:

JuneR22200

JulyR20500

AugustR23500

SeptemberR26500

OctoberR28000

Rent amounts to R48000 per annum. All other overheads amount to R38160 per annum, which includes R1875 depreciation on equipment, bought on 1 July 20x20 for R75000. This amount is expected to be paid off in three equal monthly instalments, commencing on 1 August 20x20. Rental expenses and overheads expenses are expected to accrue evenly throughout the financial year.

Overdraft facilities are available. The opening bank balance on 1 September 20x20 amounted to R16800 (favourable).

Required:

Prepare columnar cash budget for September and October 20x20. Show all calculations. Round off to the nearest rand.

Question 4 (25 Marks)

Quail Limited is a retail distributor for computer hardware, related software and support services. The management accountant has prepared sales budgets for the first semester of 20x20. These are presented below:

Month

Total Sales

January

R550 000

February

R500 000

March

R480 000

April

R400 000

May

R425 000

June

R600 000

Cash sales amount to 25% of the total sales. Collections of the credit sales are as follows:

40% in the month of sale and it is subject to a 4% discount

30% one month after the month of sale

28% two months after the month of sale

2% in uncollectable

Quail Limited's inventory requirements are equal to 30% of the next month's sales. The purchasers' terms of payment require a down payment of 45% and the balance is payable 30 days thereafter. July's total sales are expected to be R620000. Quail Limited had a bank overdraft of R150000 on 1 May 20x20.

Required:

Prepare cash budget for Quail Limited by month for May and June 20x20. Show all your calculations.