MODULE 13
COST ACCOUNTING (MANUFACTURING)
Note to the Teacher:
In Grade 10 learners were exposed to cost concepts and then in Grade 11 they drew up manufacturing ledger
accounts, calculated costs of manufacturing and were exposed to some ethical and internal control measures.
In Grade 12 the focus falls on the Production Cost Statement, costing and ethical and control measures. If
you wish to revise the General Ledger accounts then we suggest you refer to the Grade 11 textbook. However,
it is not necessary. At this stage you would be better off revising the different cost components and then lead
them into the Production Cost Statement. Most learners find this statement a lot easier than the ledger
accounts.
It is important to note that it has become the norm in examinations to test the two aspects, i.e. the Production
Cost Statement and the costing in two different parts of a question. This is because of work-in-progress. If
costing includes work-in-progress then the calculations are far more complicated as they are bringing in costs
from the previous year. In the examination guideline document it states that for costing calculations there
must be no work-in-progress at school level.
Further assumptions are also made around factory overheads and administration and selling and distribution
costs. In terms of the school curriculum Factory overheads and Administration costs are regarded as fixed
costs – in other words the costs remains the same irrespective of the number of units produced. However,
Factory overheads will include some items that could be seen as variable, for example electricity. While
electricity does have a fixed amount each month the balance will be variable – if you double your production
then this will affect the electricity charges. The same can be said for other costs, e.g. consumable stores.
At school level we regard Factory overheads and Administration costs as fixed – the majority of the costs will
be fixed. However, make learners aware of the fact that this is a bit of an assumption and that at tertiary
level they will be involved in more complicated calculations when they will have to split these costs further in
to what is fixed and what is variable.
TASK 13.1 
Matching columns
COLUMN A
COST CONCEPTS
1. Direct materials
2. Indirect materials
3.
4.
Direct labour
Indirect labour
5.
6.
7.
8.
9.
10.
11.
12.
Prime cost
Factory overheads
Fixed costs
Variable costs
Total cost of production
Unit cost
Mark-up
Selling price
COLUMN B
DEFINITION
J
Material that forms a part of the item produced.
F
Materials that are used in the manufacturing process but do not form
part of the item produced.
L
Labour directly involved in the manufacture of the goods.
A Labour used in the factory but are not involved in the manufacture of
the goods.
H Total direct costs (raw materials + direct labour).
B Other expenses incurred by the factory other than direct expenses.
K Costs that remain constant irrespective of the amount produced.
D Costs that vary in proportion to the amount of goods produced.
I
Includes all costs involved in the production.
C Cost of one item produced.
G The profit made on the goods produced.
E
The price that the items are sold for.
TASK 13.2 
Ralley Bike Manufacturers:
Statement
Production Cost
13.2.1 NAME OF MANUFACTURER: RALLEY BIKE MANUFACTURERS
PRODUCTION COST STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8
Note
Direct / Prime costs
430 000
Direct material costs
Direct labour costs
Factory overhead costs
Total manufacturing costs
Work-in-process at beginning of the year
1
2
3
Work-in-process at end of the year
Cost of production of finished goods
13.2.2 NOTES TO THE FINANCIAL STATEMENTS
1. Direct material costs
Opening stock
Net purchases (200 000 + 60 000)
Carriage on purchases
Closing stock
Direct material cost
80 000
260 000
30 000
370 000
*(40 000)
330 000
*Balancing figure
2. Direct labour costs
Factory wages (210 000 – 110 000)
Direct labour cost
100 000
100 000
3. Factory overhead costs
Consumable stores (24 000 – 6 000)
Salaries and wages/indirect labour
Depreciation
Rent (200 000 x 3/5)
Electricity
Sundry expenses (25 000 x 80%)
Factory overhead costs
18 000
60 000
16 000
120 000
120 000
20 000
354 000
4. Selling and distribution costs
Depreciation
Rent (200 000 x 1/5)
Electricity
Sundry expenses (25 000 x 15%)
Commission
Selling and distribution costs
7 000
40 000
8 000
3 750
84 000
142 750
330 000
100 000
354 000
784 000
40 000
824 000
(44 000)
780 000
5. Administration costs
Salaries & wages (210 000 – 100 000 – 60 000)
Depreciation
Rent (200 000 x 1/5)
Electricity
Sundry expenses (25 000 x 5%)
Administration costs
TASK 13.3 
50 000
3 000
40 000
8 000
1 250
102 250
Kwa-Mabula Manufacturers:
Statement, Income Statement
Production Cost
13.3.1 NAME OF MANUFACTURER: KWA-MABULA MANUFACTURERS
PRODUCTION COST STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8
Note
Direct / Prime costs
1 482 000
Direct material costs
Direct labour costs
Factory overhead costs
Total manufacturing costs
Work-in-process at beginning of the year
1
2
1 302 000
180 000
3
923 200
2 405 200
80 000
2 485 200
(75 200)
2 410 000
Work-in-process at end of the year[2]
Cost of production of finished goods[1]
[1]
[2]
Refer to the finished goods stock note below to get this figure.
Work-in-process is the balancing figure.
INCOME STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8
Note
Sales
Cost of finished goods sold / Cost of sales
6
Gross profit
Other costs
Administration costs
Selling & distribution costs
Net profit
13.3.3 NOTES TO THE FINANCIAL STATEMENTS
1. Direct material costs
Opening stock
Net purchases (600 000 + 460 000 – 24 000)
Carriage on purchases
Closing stock
Direct material cost
2. Direct labour costs
Factory wages
Direct labour cost
3 600 000
(2 400 000)
1 200 000
(599 500)
4
5
180 000
1 036 000
150 000
1 366 000
(64 000)
1 302 000
180 000
180 000
(182 500)
(417 000)
600 500
3. Factory overhead costs
Consumables stores (14 000 + 44 000 – 6 000)
Salaries and wages (indirect labour)
(360 000 – 180 000 – 80 000)
Depreciation [(1 000 000 – 240 000) x 12%]
Rent (500 000 x 60%)
Electricity
Sundry expenses (90 000 x 4/6)
Factory overhead costs
100 000
91 200
300 000
320 000
60 000
923 200
4. Selling and distribution costs
Depreciation – sales vehicles
Rent (500 000 x 25%)
Electricity (344 000 – 320 000 – 10 000)
Sales vehicle running expenses
Sundry expenses (90 000 x 1/6)
Commission (3 600 000 x 5%)
Selling and distribution costs
11 000
125 000
14 000
72 000
15 000
180 000
417 000
5. Administration costs
Salaries
Depreciation – office equipment
Rent (500 000 x 15%)
Electricity
Sundry expenses (90 000 x 1/6)
Administration costs
80 000
2 500
75 000
10 000
15 000
182 500
6. Cost of finished goods sold / Finished Goods
Opening stock of finished goods
Cost of finished goods produced during the year
Closing stock of finished goods
Cost of finished goods sold / Cost of sales
52 000
70 000
2 410 000
2 480 000
(80 000)
2 400 000
Note:
Procedure to complete the Finished goods note:
• The opening balance of R70 000 was given.
• The closing balance of R80 000 was given.
• The cost of sales can be calculated as you have the sales figure and the mark-up:
3 600 000 x 100/150 = R2 400 000
• The cost of finished goods produced becomes the balancing figure.
TASK 13.4
Centipede Manufacturers:
Production
Statement, Income Statement, Calculations
13.4.1 NAME OF MANUFACTURER: CENTIPEDE MANUFACTURERS
PRODUCTION COST STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8
Note
Direct / Prime costs
506 400
Direct material costs
1
246 000
Direct labour costs
2
260 400
Factory overhead costs
3
208 200
Total manufacturing costs
714 600
Work-in-process at beginning of the year
120 000
834 600
Work-in-process at end of the year
(41 000)
Cost of production of finished goods
793 600
13.4.2 INCOME STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8
Note
Sales
1 500 000
Cost of finished goods sold / Cost of sales
4
(1 049 840)
Gross profit
450 160
Other costs
(207 160)
Administration costs
Selling & distribution costs
Net profit
NOTES TO THE FINANCIAL STATEMENTS
1. Direct material costs
Opening stock
Net purchases (210 000 + 62 000)[1]
Carriage on purchases (19 500 + 9 920)[2]
Import duties[3]
Closing stock
Direct material cost
(82 040)
(125 120)
243 000
60 000
272 000
29 420
6 200
367 620
(121 620)
246 000
[1]
£5 000 x 12.40
£800 x 12.40
[3]
62 000 x 10%
[2]
2. Direct labour costs
Factory wages (198 000 + 19 800)
Medical Aid contributions (39 000 + 3 600)
Direct labour cost
217 800
42 600
260 400
3. Factory overhead costs
Consumables stores (15 000 + 45 000 – 6 000)
Factory electricity (9 000 + 3 000)
Maintenance on factory equipment
Factory rent [72 000 + 1 200 (600 x 2)]
Depreciation
Factory overhead costs
54 000
12 000
24 000
73 200
45 000
208 200
Cost
4. Cost of finished goods sold / Finished Goods
Opening stock of finished goods
Cost of finished goods produced during the year
Closing stock of finished goods
Cost of finished goods sold / Cost of sales
308 040
793 600
1 101 640
(51 800)
1 049 840
13.4.3
Calculate the following:
(a)
(a) The unit cost of production of each pool filter.
793 600 ÷ 3 280 = R241.95
(b)
(b) The selling price of each pool filter.
1 500 000 ÷ 4 000 = R375
(c)
(c) The mark-up % on each pool filter.
/241.95 x 100 = 55%
133.05
TASK 13.5
Vilakazi Shoe Factory: Production Cost Statement,
Income Statement, Calculations
13.5.1 NAME OF MANUFACTURER: VILAKAZI SHOE FACTORY
PRODUCTION COST STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8
Note
Direct / Prime costs
775 150
Direct material costs
1
427 150
Direct labour costs
2
348 000
Factory overhead costs
3
212 500
Total manufacturing costs
987 650
Work-in-process at beginning of the year
70 000
1 057 650
Work-in-process at end of the year
(124 700)
Cost of production of finished goods
932 950
13.5.2 INCOME STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8
Note
Sales
1 080 000
Cost of finished goods sold / Cost of sales
6
(720 000)
Gross profit
360 000
Other costs
(252 655)
Selling & distribution costs
Administration costs
Net profit
4
5
(125 383)
(127 272)
107 345
NOTES TO THE FINANCIAL STATEMENTS
1. Direct material costs
Opening stock
Net purchases (280 000 + 70 000)
Carriage on purchases
Closing stock (balancing figure)
Direct material cost
160 000
350 000
4 700
514 700
(87 550)
427 150
2. Direct labour costs
Factory wages
Direct labour cost
348 000
348 000
3. Factory overhead costs
Consumable stores [(9 400 + 19 800 – 3 900) x 75%]
Indirect labour
Salary: Foreman (96 240 + 5 000 + 400 + 50)
Depreciation
Maintenance
Insurance
Rent (21 800 – 2 000 + 1 800)
Factory overhead costs
18 975
39 600
101 690
6 000
12 155
12 480
21 600
212 500
4. Selling and distribution costs
Salaries
Depreciation
Bad debts
Commission on sales (1 122 + 9 678) (1 080 000 x 1%)
Consumable stores
Selling and distribution costs
76 000
34 300
1 120
10 800
3 163
125 383
5. Administration costs
Salaries
Depreciation
Insurance: Administration offices (22 440 – 4 000)
Sundry administration expenses
Rent
Consumable stores (6 325 ÷ 2)
Administration costs
56 100
4 800
18 440
33 110
11 660
3 162
127 272
6. Cost of finished goods sold / Finished Goods
Opening stock of finished goods
Cost of finished goods produced during the year
Closing stock of finished goods
Cost of finished goods sold (1 080 000 x 100/150)
13.5.3 Calculate the unit cost of producing the shoes.
932 950 ÷ 23 324 = R40
13.5.4 Calculate how many shoes were sold.
40 + 50% = R60
1 080 000 ÷ R60 = 18 000 pairs
55 800
932 950
988 750
(268 750)
720 000
TASK 13.6 
Tugela Water Bottle Manufacturers: Production
Cost Statement, Income Statement, Unit costs
13.6.1/3 NAME OF MANUFACTURER: TUGELA WATER BOTTLE MANUFACTURERS
PRODUCTION COST STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8
Note
Total
Unit cost
Direct / Prime costs
708 000
R8.74
Direct material costs
Direct labour costs
Factory overhead costs
Total manufacturing costs
Work-in-process at beginning of the year
Work-in-process at end of the year
Cost of production of finished goods
1
2
3
330 000
1 038 000
582 000
1 620 000
0
1 620 000
0
1 620 000
R4.07
R12.81
R7.19
R20.00
R20.00
13.6.2/3 INCOME STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8
Note
Total
Unit cost
180
Sales [1 620 000 x /100]
2 916 000
R36.00
Cost of finished goods sold / Cost of sales
6
(1 620 000)
R20.00
Gross profit
1 296 000
R16.00
Other costs
(660 700)
(R8.16)
Selling & distribution costs
4
(465 500)
(R2.41)
Administration costs
5
(195 200)
(R5.75)
Operating profit
635 300
Interest income [66 000 – 60 000]
6 000
Operating profit before interest expense
641 300
Interest expense [200 000 x 18%]
(36 000)
Net profit
605 300
NOTES TO THE FINANCIAL STATEMENTS
1. Direct material costs
Opening stock
Purchases [240 000 + 370 000]
Carriage on purchases
Closing stock
Direct material cost
105 000
610 000
35 000
750 000
(42 000)
708 000
2. Direct labour costs
Factory wages
Direct labour cost
330 000
330 000
3. Factory overhead costs
Wages: Cleaner [42 000 x 4/6]
Salary: Foreman
Cleaning materials [(3 000 + 38 000 – 5 000) x 4/6]
Rent expense [432 000 x 800/1 200]
Insurance [36 000 x 800/1 200]
Electricity & water [31 000 + 4 000 – 10 000]
Depreciation [(500 000 – 180 000) x 20%]
Factory overhead costs
28 000
129 000
24 000
288 000
24 000
25 000
64 000
582 000
4. Selling and distribution costs
Wages: Cleaner [42 000 x 1/6]
Sales commission [(2 880 000 – 78 000) x 5%]
Cleaning materials [(3 000 + 38 000 – 5 000) x 1/6]
Rent expense [432 000 x 220/1 200]
Insurance [36 000 x 220/1 200]
Electricity & water [(31 000 + 4 000 - 25 000) ÷ 2]
Packing materials [52 000 x 80%]
Bad debts
Cell-phone allowances
Sales vehicle expenses
Depreciation [240 000 x 25%]
Selling and distribution costs
7 000
140 100
6 000
79 200
6 600
5 000
41 600
78 000
12 000
30 000
60 000
465 500
5. Administration costs
Wages: Cleaner [42 000 x 1/6]
Salary: Office workers
Cleaning materials [(3 000 + 38 000 – 5 000) x 1/6]
Rent expense [432 000 x 180/1 200]
Insurance [36 000 x 180/1 200]
Electricity & water [(31 000 + 4 000 - 25 000) ÷ 2]
Bank charges
Sundry administration expenses
Depreciation [(50 000 – 30 000) x 20%]
Administration costs
7 000
84 000
6 000
64 800
5 400
5 000
9 000
10 000
4 000
195 200
TASK 13.7 
Break-even point: Calculations
Selling price per
item
Variable cost
per item
Profit per item
Fixed costs (in
total)
R10
R24
R50
R75
R40
R80
R80
R8
R16
R30
R45
R25
R68
R54
R2
R8
R20
R30
R15
R12
R26
R60
R160
R1 000
R900
R750
R144
R624
TASK 13.8 
Tau Factory: Calculations
1. Direct material cost per unit.
100 000 ÷ 10 000 = R10
2. Direct labour cost per unit.
150 000 ÷ 10 000 = R15
3. Total direct cost per unit.
250 000 ÷ 10 000 = R25
4. Factory overhead cost per unit.
200 000 ÷ 10 000 = R20
Break-even
point (no. of
items)
30
20
50
30
50
12
24
5. Cost of production of finished goods per unit.
450 000 ÷ 10 000 = R45
6. Selling & distribution costs per unit.
50 000 ÷ 10 000 = R5
7. Administration costs per unit.
70 000 ÷ 10 000 = R7
8. Variable costs per unit.
Direct material cost (DMC) per unit + Direct labour cost (DLC) per unit + Selling & distribution cost (SDC) per
unit
R10 + R15 + R5 = R30
9. Fixed costs per unit.
Factory overhead cost per unit (FOHC) + Administration cost (AC) per unit
R20 + R7 = R27
10. Contribution per unit.
Selling price per unit less Variable costs per unit
R60 – R30 = R30
11. Break-even point (i.e. the point at which no profit or loss is earned).
Fixed costs ÷ Contribution per unit
270 000 ÷ 30 = 9 000 units
Proof of break-even point:
9 000 units sold at R60 each = R540 000
Variable costs [9 000 x R30] = R270 000
Fixed costs
R270 000
Profit / Loss
= NIL
TASK 13.9
Icicles Factory:
Production Cost Statement,
Income Statement
NAME OF MANUFACTURER: ICICLES FACTORY
PRODUCTION COST STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8
Note
R
Per unit
Direct / Prime costs
60 000
R0.50
Direct material costs
Direct labour costs
Factory overhead costs
Total manufacturing costs
Work-in-process at beginning of the year
Work-in-process at end of the year
Cost of production of finished goods
36 000
24 000
96 000
156 000
0
156 000
0
156 000
R0.30
R0.20
R0.80
R1.30
R1.30
INCOME STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.8
Note
R
Sales
360 000
Cost of finished goods sold / Cost of sales
(156 000)
Gross profit
204 000
Other costs
(114 000)
Selling & distribution costs
(36 000)
Administration costs
(78 000)
Net profit
90 000
Per unit
R3.00
R1.30
R1.70
(R0.95)
(R0.30)
(R0.65)
R0.75
TASK 13.10 
Analysis and
Ground Leather Manufacturers:
interpretation
13.10.1 Give 2 reasons why the direct material cost has decreased.
Cheaper quality material being used.
They may have found a cheaper supplier.
May have found a supplier that was closer so transport costs are reduced.
13.10.2 Give 2 reasons why the direct labour cost has increased.
Employed more labour without increasing production, workers were given an increase in salaries /wages,
labour is not as productive.
13.10.3 Discuss the increase in the cost of production and explain what effect this will have on
the profits of the business.
The costs of production have increased from R42 to R50 (R8 increase) but the selling price has remained the
same which means less profits for the business.
13.10.4 Explain why selling and distribution expenses have increased by R7 but admin costs
only by R1.
Various reasons:
Perhaps they did more advertising and employed more sales people plus the normal increase for inflation while
admin expenses have only increased due to inflation – increased costs.
13.10.5 What does the increase in the break-even point mean to the business? Explain fully.
The business has to make an extra 30 items before they make a profit.
13.10.6 Do you think Groundcover made the correct decision in not increasing the selling price
of the belts? Why?
Learners to debate – costs have increased so they need to increase the sales price to make the same profit
but sales have already decreased so maybe the demand for the product has decreased.
If there was more advertising (increased selling and distribution expenses) this has not really paid off.
13.10.7 Give the owners advice on what they need to do to improve the situation for the next
year.
Learners to give their own opinions.
Possible answers:
Look for another supplier.
Cut back on labour.
Reduce overhead costs.
Do more advertising.
Reward increased productivity, etc.
TASK 13.11
13.11.1
No.
(a)
(b)
(c)
(d)
(e)
Tick-Tock Lollies:
interpretation
Calculations, Analysis and
Complete the unit cost table by calculating the missing figures marked with (a) – (e).
Working
200 000 ÷ 40 000
40 000 ÷ 40 000
R5 + R1
40 000 x R6 (or R200 000 + R40 000)
40 000 x R1.50
Answer
R5
R1
R6
R240 000
R60 000
13.11.2 Calculate the unit cost of each lolly made during the year.
R5 + R1 + R2 = R8
OR (200 000 + 40 000 + 80 000) ÷ 40 000 = R8
13.11.3 Calculate the mark-up achieved by the business.
Gross profit: 12 – 8 = R4
4
/8 x 100 = 50%
13.11.4 What is the difference between a fixed and a variable cost? Give one explain of each.
Fixed cost:
The costs remain the same within a period of time irrespective of the number of units produced, e.g. Factory
overheads, rent, etc.
Variable cost:
The costs vary in direct proportion to the number of units produced, e.g. raw materials, direct labour.
13.11.5 Calculate the break-even point in 20.8.
80 000 + 160 000
12 – (5 + 1 + 1.50)
240 000
4.50
53 334 units
13.11.6
Should the owner be happy with the performance of the business in terms of the breakeven? Take into account that the break-even last year was 25 000.
No.
He is selling 40 000 and the break-even is 53 334 which means he is making a loss on 13 334 units.
His break-even has increased from 25 000 to 53 334.
13.11.7 (a) Give two possible reasons why the direct material cost per unit has increased.
• Increase in the price of the goods.
• Increase in transport of the goods.
• More wastage.
• Any other viable reason.
(b) What effect has this increase had on the profits of the business?
Decreased the profits.
(c) Briefly discuss two suggestions the owner could consider to reduce this cost.
• Find an alternative supplier.
• Find a closer source so that the transport costs are reduced.
• Control the wastage.
Any other viable reason.
13.11.8
Factory overheads have decreased as a result of “economies of scale”. Briefly explain
what is meant by this term.
Factory overheads are fixed so the more you produce the total amount of the costs is divided by a larger
number so the costs per unit come down.
13.11.9
Do you agree with the owner keeping the selling price of the lollies the same for 20.7
and 20.8? Why? Explain briefly.
No.
The cost of manufacturing each lolly in 20.7 was R6.30 but in 20.8 this increased to R8, therefore they are
making less profit.
OR Yes.
Their sales have increased from 25 000 to 40 000 and in view of the economic climate if they increase the
selling price they might not sell as much.
TASK 13.12
Barney’s Toy Manufacturers (1): Internal control
The purpose of this Task is for the learners to engage with the figures and real-life scenarios. There is no
right or wrong answer but the discussion is what is important. However, it is important that the students can
substantiate any statements made.
Suggested marking rubric:
Criteria
Level 1
Possible
Fails
to
identify
reasons for
possible
reasons
the
stock
why the stock has
being used
been used up.
up
Poor
suggestions
Control
made for control
measures
measures.
Poor advice that
Advice
does not address the
issue.
Possible answers:
Possible reasons for
the stock being used up
Control measures
Advice
TASK 13.13
Level 2
Level 3
Level 4
Identifies
some
reasons why the
stock has been used
up.
A good discussion on
possibilities.
An
excellent
discussion showing
great insight.
Some
control
measures discussed.
Good discussion on
control
measures
that are feasible.
Aspects of the advice
are feasible.
Good advice given
that is feasible.
Excellent discussion
on control measures
to take.
Excellent advice that
shows
great
understanding.
Staff stealing material, wastage, cutting out wrong pieces that need to be recut, errors, etc.
Material issued must be strictly controlled, make people answerable, people to
check up on each other, make people responsible for damages and losses,
reward for targets met, etc.
Various answers: Yes – so that there is no stoppage in production, needs
strict control
No – as this puts temptation in people’s way.
Barney’s Toy Manufacturers (2): Ethics
The focus of this Task is the ethical issues at stake. Learners need to realise that there are consequences to
all actions and that they cannot take decisions into your own hand. Even though Annie has got a problem
just taking the off-cuts is not ethically correct. She should rather talk to the management in an attempt to
solve her problem. If Barney is to just forget the issue he is opening himself up to further issues in future but
he cannot discriminate and take action against some and not others.
Give the learners time to discuss this Task. You might decide that they do not need to write a report on the
Task. Often assessment stunts people from expressing their views so it could therefore be done as a discussion
or a debate.
Suggested marking rubric:
Criteria
Level 1
Poor discussion on
Ethical issues
the ethical issues at
stake.
Reasons
for
and
against
Poor discussion.
just
‘forgetting it’
Advice
Poor advice given.
Level 2
Level 3
Level 4
Some ethical issues
raised.
Good discussion on
the ethical issues.
Excellent discussion
on the ethical issues.
Some valid reasons
posed.
Good discussion for
and against why to
just ‘forget it’.
Excellent discussion
for and against why
to just ‘forget it’.
Some
advice
acceptable.
Good advice based
on prior discussions.
Excellent
advice
based on discussion.
is
Note to the Teacher:
Many of the Tasks that follow are integrated with inventory valuations. These two topics can very easily be
integrated in a final examination, so you are urged to allow the learners to do some of these tasks.
TASK 13.14 
Hopkins Manufacturers:
Production
Statement, Analysis and interpretation
Cost
13.14.1 NAME OF MANUFACTURER: HOPKINS MANUFACTURERS
PRODUCTION COST STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 20.2
Note
Direct / Prime costs
678 384
Direct material costs
1
223 884
Direct labour costs [450 000 + 4 500]
454 500
Factory overhead costs
Total manufacturing costs
Work-in-process at beginning of the year
Work-in-process at end of the year
Cost of production of finished goods
NOTES
1. Direct material costs
Opening stock
Purchases plus carriage
Closing stock*
Raw materials issued to production
2. Cost of finished goods sold / Finished Goods
Opening stock of finished goods
Goods from manufacturing department (balancing figure)
Closing stock of finished goods
Cost of sales (1 760 000 x 100/160)
411 616
1 090 000
110 000
1 200 000
(150 000)
1 050 000
15 400
226 340
241 740
(17 856)
223 884
112 000
1 050 000
1 162 000
(62 000)
1 100 000
*CALCULATION OF CLOSING STOCK
15 400 + 226 340 = R241 740
= (96 x 241 740) ÷ (100 + 1 200)
= 23 207 040 ÷ 1 300 = R17 852
Due to rounding off the learners can get different amounts. Take this into consideration in the Production
Cost Statement.
13.14.2
Briefly explain why you think Hopkins Manufacturers chose the weighted average
method to value the bags of polystyrene. Discuss two reasons.
• Cannot separate different bags of polystyrene.
• Value is low.
13.14.3 Discuss two possible reasons for the change in direct material cost per unit in 20.2.
• Found cheaper material.
• Found a supplier that is closer so reduced transport costs.
• Found alternative supplier.
13.14.4 Discuss two possible reasons for the change in direct labour cost per unit in 20.2.
• Increase in wage rate.
• Staff are not as productive.
• Staff worked overtime.
Do not accept increased labour force as this is a unit cost.
13.14.5
Should the owners be happy with the break-even for 20.2? Why? Explain briefly
quoting figures to substantiate your answer.
Yes / No.
They have sold 3 520 units and break-even point is 3 240 so they are making a profit.
The break-even has increased from last year.
TASK 13.15
Maria: Calculations, Production Cost Statement,
Analysis and interpretation
13.15.1 Raw material / Direct material issued to the production process.
Opening stock
20 992
Purchases
436 300
Carriage on purchases [755 x R6]
4 530
461 822
Closing stock [62 x R578]*
(35 836)
Raw materials issued to production
R425 986
*Working:
(461 822 ÷ 755) - 44 = R578
13.15.2 NAME OF MANUFACTURER: MARIA
PRODUCTION COST STATEMENT FOR THE PERIOD ENDED 31 AUGUST 20.1
Note
Direct / Prime costs
749 986
Direct material costs
Direct labour costs (1 500 x 216)
Factory overhead costs (1 500 x 166.67)
Total manufacturing costs
Work-in-process at beginning of the year
Work-in-process at end of the year
Cost of production of finished goods
425 986
324 000
250 005
999 991
50 009
1 050 000
(60 000)
990 000
13.15.3 Calculate the unit cost of production for the year ended 31 August 20.1.
990 000 ÷ 1 500 = R660
13.15.4
(a)
Give a possible reason, other than price changes, for the change in each of the
unit costs provided above.
Raw materials: More wastage.
Direct labour: Better productivity.
Factory overheads: Economies of scale.
(b)
Explain whether Maria should be concerned about the break-even point. Quote
figures to support your answer.
No.
The break-even point has reduced from last year and she is producing more.
Her sales are 1 464 so she is making a profit.
(c)
Maria sells most of her travel bags to overseas tourists. In view of this she has
decided to increase her mark-up to 150%. Do you agree with her? Discuss
with full explanation.
Yes / No.
No as the mark-up is too high and it is unethical to exploit overseas visitors.
Yes if people are prepared to pay there is no reason why she cannot increase the cost.
TASK 13.16
Clay Potters and Cwele Ltd: Production Cost
Statement, Stock valuations, Analysis and
interpretation
PART A: CLAY POTTERS
13.16.1 NAME OF MANUFACTURER: CLAY POTTERS
PRODUCTION COST STATEMENT FOR THE PERIOD ENDED 31 JULY 20.1
Note
Direct / Prime costs
527 880
Direct material costs [(240 000 + 40 000) x 80%]
Direct labour costs
Factory overhead costs
Total manufacturing costs
Work-in-process at beginning of the year
Work-in-process at end of the year
Cost of production of finished goods
13.16.2
• CALCULATION OF DIRECT OR (RAW) MATERIALS COST
Opening stock
Purchases
Carriage on purchases
Closing stock*
Direct material cost
*Calculation of Closing stock:
326 600 ÷ 230 = 1 420
1 420 x 16 = R22 720
303 880
224 000
302 120
830 000
28 000
858 000
(21 000)
837 000
28 960
269 350
28 290
326 600
(22 720)
303 880
• CALCULATION OF FACTORY OVERHEAD COST
Consumable stores
Rent [180 000 x 60/100]
Water and electricity
Depreciation
Indirect labour [280 000 – 224 000]
Sundry expenses
Factory overhead cost
• CALCULATION OF FINISHED GOODS STOCK
Opening stock
Cost of goods manufactured (balancing figure)
Less Closing stock
Cost of sales [1 376 000 x 100/160]
40 000
108 000
50 000
26 000
56 000
22 120
302 120
52 000
837 000
889 000
(29 000)
860 000
13.16.3
The owners of Clay Potters have instructed the accountant to switch between the
Weighted average and FIFO method when valuing the raw materials.
• Why do you think the owners would give this instruction?
To show higher or lower profits depending on what he is trying to achieve.
• Do you agree with the owners? Why?
No.
It is unethical to switch – businesses have to stick to one method in the interest of comparison.
PART B: CWELE LTD
UNIT COSTS: (Note that this is a separate question to Part A)
13.16.4
UNIT COST
UNIT COST
COSTS
TOTAL
20.10
20.9
Direct / raw materials
R250 000
R10
R12
Direct labour cost
375 000
R15
R11
Prime cost
625 000
R25
R23
Factory overheads
R200 000
R8
R10
Administration costs
R75 000
R3
R3
Selling & distribution costs
R100 000
R4
R2
13.16.5
Define the following concepts and give an example of each:
• Fixed costs
Remains constant irrespective of the number of goods produced.
Example: Rent, etc.
• Variable costs
Varies in direct proportion to the number of units produced.
Example: Raw materials.
13.16.6 Calculate the unit cost of production for 20.10.
825 000 ÷ 25 000 = R33
13.16.7
Discuss 2 possible reasons for the change in the following costs from 20.9 to 20.10:
• Direct / raw materials cost
Cheaper source of material / supplier.
Less wastage.
• Direct labour cost
Increase in wage rate.
Employed more labourers.
• Factory overheads
Economies of scale.
Costs, e.g. rent, have decreased.
13.16.8 Calculate the break-even point for 20.10.
200 000 + 75 000
60 – 29
= 275 000
31
= 8 871 units
13.16.9
The owner of Cwele Ltd is very pleased regarding the trend in the break-even point
from 2.09 to 20.10. Do you agree? Why?
Yes.
Because the break-even is less than 20.9 so more profit is being made.
TASK 13.17
Rani
Manufacturers:
Calculations,
valuations, Analysis and interpretation
Stock
13.17.1
The owner (Rani) is of the opinion that the FIFO method is the best method to use in
the manufacturing of raincoats. Briefly explain why you think he is of this opinion.
The stock is valued at the current prices and in times when prices are increasing (as it has during the past
year) this will give a more realistic value of the stock.
13.17.2
Calculate the following: (Refer to information note no. 2 below.)
(a) The value of the raw (direct) materials on hand on 28 February 20.9 using the
FIFO method of stock valuation.
(2 200 x 48) + (4 300 – 2 200 x 42)
= 105 600 + 88 200 = R193 800
(b)
Calculate the value of the raw (direct) material cost that would appear in the
Production Cost Statement for the year ended 28 February 20.9.
(700 x 30) + 490 600 – 193 800
= 21 000 + 490 600 – 193 800
= R317 800
13.17.3
Rani has asked you to investigate the control over the raw materials:
(a) Calculate the number of metres of raw material fabric that appears to be missing.
9 100 (issued to factory) – 4 000 x 1.8 (no. of raincoats x 1.8 metres each)
= 9 100 – 7 200
= 1 900 metres missing
(b)
Apart from theft state one possible reason for this shortage. Briefly offer Rani
advice on what she could do to prevent this shortage. Discuss one point.
Wastage of material.
Unskilled labour that are not cutting the material properly.
Any other valid reason.
Proper supervision.
Training of staff.
Any other valid reason.
13.17.4
(a)
Calculate the value of the direct labour cost (including contributions) that would
appear in the Production Cost Statement for the year ended 28 February 20.9
(Refer to information 3 below).
Basic:
5 x R5 000 x 12 = R300 000 (note the R5 000 is monthly but you are working for a year)
Overtime: 180 x 5 x 70
= R63 000
Pension: R300 000 x 10% = R30 000
UIF:
R300 000 x 1% = R3 000
Total = 300 000 + 63 000 + 30 000 + 3 000 = R296 000
(b)
Rani is concerned about the number of hours that the workers have worked
overtime. She has had the same number of employees in the factory this year as
last and the overtime has increased by double.
• Why do you think she should be concerned?
Last year they produced 4 500 raincoats and this year this number was reduced to 4 000 but the same number
of workers that worked double the time.
This will increase the costs of manufacturing and thus result in lower profits.
•
•
•
•
• Suggest two measures that Rani could introduce to try and cut back on the
overtime.
The norm time to make a raincoat must be worked out so that staff will know what is expected of them in
normal working hours.
There needs to be constant supervision.
Staff needs to be given extra training.
Any other feasible suggestion.
13.17.5
Calculate the following:
(a) The total cost of production of finished goods.
R317 800 + R396 000 + (4 000 x 67.55)
= 317 800 + 396 000 + 270 200
= R984 000
(b) The unit cost of production of each raincoat.
R984 000 ÷ 4 000 = R246
(c) Calculate the break-even point for the year ended 28 February 20.9.
350 200
350 – 215.95
350 200
134.05
2 613 raincoats (2 612.5) (Remember break-even must always be rounded up)
(d)
The break-even point for the year ended 28 February 20.8 was 2 273 units. Should
Rani be happy with the break-even point for 20.9? Explain briefly.
Yes.
The business has produced 4 000 raincoats which is above the break-even point (they are making a profit on
1 387 units).
OR No.
The break-even point is higher than it was in 20.8 (340 units). Therefore they have to manufacture more in
20.9 before they can make a profit.
13.17.6
Discuss two possible reasons why the selling and distribution costs per unit have
decreased. In your opinion has this been beneficial to the business? Discuss briefly.
Two possible reasons:
The salesman’s commission on sales has been reduced as they have sold fewer raincoats.
Less advertising.
Deliveries have been reduced.
Any other feasible reason.
Has this been beneficial to the business?
No.
The number of raincoats sold has decreased and therefore less profit will be made.
TASK 13.18
BB Bakery: Production Cost Statement, Stock
valuations, Analysis and interpretation
13.18.1 NAME OF MANUFACTURER: BB BAKERY
PRODUCTION COST STATEMENT FOR MARCH 20.8.
Direct / Prime costs
Direct material costs
Direct labour costs [30 000 x 1.40]
Factory overhead costs
Total manufacturing costs of finished loaves of bread
Raw material / Direct material cost
Opening stock
Purchases [52 000 + 25 000]
Carriage on purchases
Raw materials available for production
Closing stock
Raw materials issued to the manufacturing process
APRIL 20.8
120 000
MARCH 20.8
*
78 000
42 000
48 000
168 000
57 600
33 600
*
120 000
7 000
77 000
2 000
86 000
(8 000)
78 000
13.18.2 Calculate the unit cost of each loaf of bread in April 20.8.
168 000 ÷ 30 000 = R5.60
13.18.3 Give 2 possible reasons why the raw materials cost have increased.
• Due to inflation.
• Increase in transport costs.
• Different supplier.
• Any other reasonable reason.
13.18.4 Name 2 items that could possibly be included in factory overhead costs.
• Rent.
• Electricity.
• Factory manager / supervisor.
• Cleaning and / or maintenance staff.
• Etc.
13.18.5 Calculate the break-even point in April 20.8.
48 000 + 10 500
7 – (2.60 + 1.40 + 0.50)
58 500
2.50
23 400 units
13.18.6
The owner of BB Bakery is very happy that the number of loaves of bread has increased
by 6 000 since last month. He has therefore decided to take a holiday overseas in view
of the increased profit he believes he is making. Is the owner correct in his assumption?
Explain using figures to substantiate your answer.
Calculation of profit:
MARCH
APRIL
Sales (24 000 x R7) (30 000 x R7)
168 000
210 000
Cost of manufacturing
(120 000)
(168 000)
Administration cost
(10 000)
(10 500)
Selling and distribution costs
(10 000)
(15 000)
Net profit
R28 000
R16 500
No.
Although the number of loaves has increased he has made less profit in April than March due to increased
costs.
13.18.7
On investigation the owner has discovered that the sales figure for the month of April
20.8 was actually R8 000 less than what was expected but no bread has been left over.
• Give 2 reasons why the sales are lower than budgeted.
• Loaves of bread have been stolen.
• There has been wastage of bread.
• Any other feasible reason.
• Discuss 2 measures that the owner could take to prevent this situation in future.
• Introduce security measures to prevent theft.
• Division of duties – somebody needs to be checking up so that there isn’t wastage or bread been badly
made that cannot be sold.
• Any other feasible reason.
13.18.8
In order to improve the profitability the owner has made the following proposal and
has requested your comment. The standard loaf of bread weighs 700g. He is proposing
reducing each loaf of bread to 680g although it will still be marked on the packet as
700g. He does not, however, intend reducing the selling price of each loaf of bread. Do
you agree with his suggestion? Why? Discuss at least 2 points in your discussion to
qualify your decision.
No.
• This is unethical – he needs to tell the customers if he is reducing the weight of the bread.
• The business will get a bad reputation and they will lose customers and this will have more of an effect on
the profit of the business.
13.18.9
The stock controller has recently left the bakery and the owner is not sure what method
he was using in the calculation of the value of the closing stock. The owner is aware
that there are two basic methods used in business, i.e. the FIFO and weighted average
method. He has come to you for assistance as to which method he should use. Briefly
explain which method you believe will be the most appropriate for a bakery business.
Weighted average method:
• The ingredients used in baking bread cannot be separated from each other – e.g. it would be impossible to
separate a bin of flour in to separate purchases.
• The amount of ingredients would also be large (R78 000 of raw materials were used in April).
• Therefore the weighted average method would be the most appropriate.
OR FIFO (This method would not be the most appropriate):
• FIFO makes use of the most current prices
• Therefore the stock valuation is the most realistic value.
TASK 13.19
Article
13.19.1
A friend of yours has read the article but does not understand certain terms. Explain to
her what the terms in bold in the text mean.
Rising input costs – cost incurred in the manufacturing process, i.e. raw materials, labour and factor overheads.
As these are increasing it is pushing the cost price of the articles up.
13.19.2 Explain to your friend, why in terms of the article, food prices are expected to increase.
Costs have increased.
Shortages of raw materials through droughts.
Crop failures.
13.19.3 Why do you think it is cheaper to import some products than manufacture them locally?
South Africa’s input costs are often high.
For example our labour costs are much higher than in many other countries of the world.
Electricity tariffs have increased considerably over the last few years.
Shortages of raw materials produced locally.
13.19.4 Why is the poultry industry expected to be hard hit? Explain briefly.
The poultry are fed on maize and related feeds.
13.19.5
•
•
•
•
•
You have been tasked by the board of a mill to make a presentation at the next board
meeting around strategies that the business should be adopting in the new year to
ensure the sustainability of the mill. Give a brief report in which you discuss at least
five possible strategies that the board could look at.
Economise on costs, e.g. overheads.
Source cheaper supplier of raw materials.
Introduce incentive schemes so that labour becomes more productive.
Set up the mills near the source of labour and / or raw materials to cut down on transport.
Seek alternative products to manufacture.
TASK 13.20
Ethics and Internal control
NO.
PROBLEM
13.20.1
Yes
INTERNAL
CONTROL
ETHICAL
PROBLEM
Ethical problem
13.20.2
Yes
Ethical problem
13.20.3
Yes / No
Ethical problem
13.20.4
Yes
Ethical
Internal control
/
SUGGESTIONS
If the company is going to reduce the quantity they need to
inform the customers.
If products are used that could be potentially dangerous then
they must be clearly stated on the packaging.
Depends on their contracts. If this was a condition of service
then management cannot just take it away. However, if it
has been a privilege then they can remove it. It could have
a very demotivating effect on the workers.
Under the regulations of the country all workers working
more than the prescribed minimum have to be paid overtime.
If management is of the opinion that staff is wasting time in
order to earn overtime, then this is an internal control
problem.
NO.
PROBLEM
13.20.5
Yes or No
INTERNAL
CONTROL
ETHICAL
PROBLEM
Ethical
13.20.6
13.20.7
Yes
Yes
Ethical
Internal control
13.20.8
Yes
Internal control
13.20.9
Yes
Internal control
13.20.10
Yes
Unethical
/
SUGGESTIONS
Ethically if the costs are reduced these should be passed on
to the customer. However, according or market forces, if
customers are prepared to pay a price the seller can charge
what he wants.
This is breaking the law.
Management are not controlling the packaging and the
quality that is been produced. Needs stricter control
measures.
The matter needs to be investigated and the relevant
people who have made up the ghost employees need to
face a disciplinary meeting.
Staff must be eating more than their allowance or they are
taking cereal home.
If individuals are been paid to say something it must be
true. Playing on the physiological impact of advertising.