Comprehensive class example
Lecture 8
Inventories
v
cv
JKL Limited
(19 Marks; 30 Minutes)
REQUIRED:
a)
Calculate the total fixed production overhead costs incurred by JKL Limited
during the year ended 31 December 2023, in accordance with IAS 2, Inventories.
(2.0)
b)
Calculate the total variable production overhead costs incurred by JKL
Limited during the year ended 31 December 2023, in accordance with IAS 2,
Inventories.
(2.0)
c)
Calculate the actual number of silicone smartphone covers manufactured by
JKL Limited during the year ended 31 December 2023, in accordance with IAS
2, Inventories.
(1.5)
d)
Calculate the total production cost AND the production cost per silicone
smartphone cover of JKL Limited for the year ended 31 December 2023, in
accordance with IAS 2, Inventories.
(7.0)
e)
Prepare the “Inventories” note that will accompany the statement of financial
position of JKL Limited as at 31 December 2023, in accordance with IAS 2,
Inventories.
(2.5)
f)
Calculate the “cost of sales” line-item as it would be presented in the statement
of profit or loss and other comprehensive income of JKL Limited for the year
ended 31 December 2023, in accordance with IAS 2, Inventories.
(4.0)
NOTE:
• Comparative amounts are not required.
• All amounts must be rounded off to TWO decimal places.
• Show all calculations and make use of cross-references.
Adapted from FRK211 Test 2 (2019)
BACKGROUND INFORMATION:
JKL LIMITED is a South African company that specialises in the production of silicone
smartphone covers (hereafter referred to as covers), repairing broken cell phone
screens, as well as other maintenance services for cell phones.
Established in 2005, JKL Limited has grown into a nationally known brand, respected
as the most experienced Apple, Huawei, LG and Samsung repair and servicing
provider in South Africa. JKL Limited has almost 18 years’ experience in production,
screen repairs and maintenance services. JKL Limited’s philosophy is to “CREATE”
(Customer First, Result Oriented, Execution, Achievement of goals, Trust & integrity,
and Excellence in products & services).
JKL Limited’s current reporting period is from 1 January 2023 to 31 December 2023.
Extract from the accounting policies of JKL Limited for the year ended
31 December 2023:
•
•
•
Inventories are measured at the lower of cost and net realisable value.
All inventories are valued according to the First-in, First-out (FIFO) method and the
perpetual inventory system is applied.
The currency of the entity is the South African Rand and all foreign denominated
amounts are translated at the ruling spot rate on transaction date.
JKL Limited also applies the following:
•
•
The entity makes use of control accounts for debtors and creditors.
The entity’s payment policy is to take advantage of any settlement discount
receivable.
Ignore Value Added Tax (VAT) throughout this case study.
INFORMATION
In addition to the repair and maintenance services offered by JKL Limited, the entity
also manufactures silicone smartphone covers. The Chief Financial Officer (CFO) of
JKL Limited describes the market for smartphone covers as booming, because
“…when people get a nice, new, shiny phone, they don’t want to leave the store without
protecting it”. Due to the increased demand, JKL Limited specialises in the production
of covers for the new Apple iPhone 14, which was recently launched.
The following information has been made available for the year ended
31 December 2023:
Production capacity:
JKL Limited estimated that the normal production capacity for the year ended
31 December 2023 would be 22 000 covers.
Direct material costs (Silicone):
The production of the covers starts with a silicone block being inserted into a slowspeed roller. The slow-speed roller slightly heats up and then flattens the silicone block
into a silicone sheet, which is the exact thickness required for the compression moulds.
The silicone sheet is then inserted into a three-dimensional compression mould, which
compresses the silicone sheet into the required shape of the cover.
The following information has been provided in respect of the silicone for the year
ended 31 December 2023:
Opening balance (1 January 2023)
R535 000
Purchase of silicone from a supplier in China
Refer to point
?
1
Customs and import duties
R100 000
Transportation cost
Refer to point
R450 000
2
Normal
and
abnormal
losses
(included
purchases)
Closing balance (31 December 2023)
in
Refer to point
R100 000
3
R280 000
Additional information relating to the silicone:
1. The silicone was ordered from a supplier in China on 2 January 2023. The total
invoice price was settled in cash on 10 January 2023, when the silicone was
loaded on board the cargo ship in China. All significant risks and rewards
associated with ownership were transferred to JKL Limited on 10 January 2023.
The silicone was delivered to the manufacturing plant of JKL Limited on 20
January 2023.
The total purchase price amounted to ¥1 925 000 (¥ = Chinese Yuan). The
supplier granted a 10% volume discount on the purchase price. The spot
exchange rates were as follows on the respective dates:
• 2 January 2023:
• 10 January 2023:
• 20 January 2023:
¥1 = R1.95
¥1 = R2.00
¥1 = R2.05
2. The silicone was transported as follows:
• On a cargo ship from China to the Port Elizabeth (PE) harbour, R350 000.
• On a cargo truck from the PE harbour to the manufacturing plant of JKL
Limited, R100 000.
3. After the covers are removed from the three-dimensional compression mould, a
specialised cutting machine is used to trim off the excess silicone. Once the cover
is in its final form, another cutting machine is used to cut out the exact openings
on the side and back of the cover for certain buttons and connections. The total
value of the offcuts resulting from the cutting processes amounted to R30 000.
One of the thermostats in the slow-speed roller unexpectedly malfunctioned. This
caused silicone to the value of R70 000 to overheat and melt. This silicone could
not be used in the production process.
Direct labour costs:
The total direct labour costs amounted to R600 000 for the year ended
31 December 2023.
Overhead costs:
JKL Limited incurred a total of R2 430 000 in overhead costs (including production
and other non-production overhead costs) during the year ended 31 December 2023.
The management accountant correctly classified R1 600 000 of the total overhead
costs as follows:
Production
Other non-production
R1 400 000
R200 000
Fixed portion
40%
80%
Variable portion
60%
20%
Total overhead costs
The management accountant was not sure how the remaining R830 000 of the total
overhead costs should be classified. He provided you with the following information:
•
Depreciation: The depreciation on the factory equipment and the administrative
buildings amounted to R430 000 and R50 000, respectively.
•
Water and electricity: R250 000, of which 80% is attributable to the factory and the
remainder to the administrative buildings.
Rent of warehouse: Once the covers are completed and ready for sale, they are
stored in a warehouse close to the manufacturing facility for future delivery to
customers. The rent of the warehouse is considered to be fixed and amounted to
R100 000 for the year.
•
Work-in-progress:
There was no work-in-progress at the beginning or end of the 2023 financial year.
Finished goods (Completed covers):
The following information relates to finished goods (completed covers):
Opening balance (1 January 2023) *
Closing balance (31 December 2023)
Number
9 000 covers
4 000 covers
R
R2 970 000
?
* The production cost per cover manufactured during 2022 is not the same as the
production cost per cover manufactured during 2023.
Sale of covers:
JKL Limited normally sells the covers at R400 per cover. A total of 25 000 covers were
sold during the year ended 31 December 2023.
Towards the end of the 2023 financial year, the new Apple iPhone 15 was launched.
As a result of a decrease in demand for the Apple iPhone 14, and the corresponding
drop in demand for their covers, the selling price of JKL Limited’s covers dropped to
R275 on 31 December 2023. In addition, JKL Limited will also have to incur advertising
costs of R5 per cover.