Manufacturing Questions and Answers | Accounting Grade 12

Worked example 1
Example adapted from November 2010 NSC Exam Paper You are provided with information (balances, transactions and adjustments) relating to Fatima Manufacturers owned by Fatima Fala. The business manufactures shoes.
Required

1. Calculate the value of the raw materials that were issued to the factory for the year ended 28 February 2010. [6]
2. Prepare the following notes to the Production Cost Statement for the year ended 28 February 2010:
   2a) Direct labour cost [5]
   2b) Factory overhead cost [16]
3. Prepare the Production Cost Statement for the year ended 28 February 2010. [12]
4. Using the figures in the Production Cost Statement you have just prepared, calculate the following (show your workings):
   4a) Raw materials cost per unit [3]
   4b) Total cost per unit [3]
5. You are provided with the number of units produced and the break-even point calculated for the past two years:
   2010 2009
   Break-even point 19 548 units 11 300 units
   Number of units produced 20 000 units 24 000 units
   5a) Briefly explain what the term break-even point means. [2]
   5b) Explain whether Fatima should be concerned about the break-even point for
   2010. Quote figures to support your answer. [4]

Information
Fatima Manufacturers

1. OPENING BALANCES ON 1 MARCH 2009:
   

   Raw materials stock	R160 000
   Work-in-process stock	158 000
   Finished goods stock	120 000
   Consumable stores stock: Factory	6 000
   Factory plant and equipment at cost	2 225 000
   Accumulated depreciation on factory plant and equipment	450 000

2. SUMMARY OF TRANSACTIONS FOR THE YEAR ENDED 28 FEBRUARY 2010:
   

   Purchases of raw materials on credit	R1 023 475
   Carriage on purchases of raw materials	22 500
   Consumable stores purchased for the factory	43 000
   Cleaning materials purchased for the office	12 000
   Factory plant and equipment purchased on 1 September 2009	250 000
   Production wages	723 800
   UIF – contribution for factory employees
   Salaries: Factory foreman	150 000
   Administration	400 000
   Sales staff	250 000
   Water and electricity	163 000
   Sundry expenses: Factory	194 680
   Administration	530 000
   Sales department	340 000

3. CLOSING BALANCES ON 28 FEBRUARY 2010:
   

   Raw materials stock	R259 125
   Work-in-process stock	122 900
   Finished goods stock	142 500
   Consumable stores stock: factory	7 000

4. ADDITIONAL INFORMATION AND ADJUSTMENTS:
   1. No entry was made for the transport of raw materials by Pops Carriers to the factory, R3 750.
   2. No entry was made for the following in respect of the production wages for the last week of February 2010. The entry was omitted (left out) from the wages journal:
      Gross wages R6 200
      Deductions: Unemployment Insurance Fund 62
      PAYE 1 240
      The employer contributes 1% to the UIF.
   3. An amount of R4 200 was still outstanding on the water and electricity account for February 2010. Sixty per cent (60%) of all the water and electricity was used in the factory.
   4. Depreciation on factory plant and equipment must be brought into account at 10% per annum, according to the diminishing balance method.
   5. During the year 20 000 pairs of shoes were manufactured.

Answers to worked example 1 (see pages 40–41)

1. Value of raw materials issued:
   

   Direct Materials Cost
   Opening balance of raw material stock	R160 000
   Add: Purchase of raw materials +	R1 023 475
   Add: Carriage on purchases of raw materials +	R22 500
   Add: Transport of raw materials (adjustment A) +	R3 750
   Less: Closing balance of raw material stock –	(R259 125)
   Equals: Raw materials issued to the factory =	R950 600

   [6]

2. NOTES TO THE PRODUCTION COST STATEMENT
   

   1. DIRECT LABOUR COST	R
      Production wages (723 800 + 6 200)	730 000
      UIF contribution	7 300
      	737 300

      [5]

   2. FACTORY OVERHEAD COST	R
      Salary of foreman	150 000
      Consumable stores: factory (6 000 + 43 000 − 7 000)	42 000
      Depreciation (177 500 + 12 500)	190 000
      Water and Electricity (163 000 + [4 200 × 60%]) (Total water and electricity already paid during the year + the amount that still has to be paid as per adjustment C) × only the portion used in the factory (60% as per adjustment C).	100 320
      Sundry expenses: factory	194 680
      	677 000

      [16]
      Only use FACTORY COSTS on the Production Cost Statement. No administration and selling, and distribution costs appear on this statement.
      There are a number of costs that may need to be split between factory, administration and selling, and distribution.
      For example: water and electricity could be split in the ratio 3 : 2 : 1.

3. PRODUCTION COST STATEMENT OF FATIMA MANUFACTURERS FOR THE YEAR ENDED 28 FEBRUARY 2010
   

   	TOTAL
   Direct materials cost	950 600 This figure comes from the answer you calculated in part 1 of this question.
   Direct labour cost	737 300 This figure comes from the answer in the direct labour note in part 2 of this question.
   Prime/direct cost	1 687 900 Direct materials cost + Direct labour cost = Prime costs
   Factory overhead cost	677 000 This figure comes from the answer in the factory overhead cost note in part 2 of this question.
   Total cost of production	2 364 900
   Work-in process at the beginning of the year	158 000 This figure comes from opening balances at the beginning of the financial year.
   	2 522 900
   Work-in process at the end of the year	(122 900) This figure comes from closing balances at the end of the financial year.
   Total cost of production of finished goods	2 400 000 This final figure provides the accountant with the total cost of making the 20 000 pairs of shoes during the year (see additional information E).

   [12]

4. 1. Raw materials cost per unit
      R950 600 ÷ 20 003 units = R47,53 [3]
      Direct materials costs (see Production Cost Statement) ÷ number of shoes manufactured as per additional information E.
   2. Total cost per unit
      R2 400 000 ÷ 20 000 units = R120 [3]
      Total cost of production of finished goods (see Production Cost Statement) ÷ number of shoes manufactured as per additional information E.
5. 1. It tells you how many items you must make and sell before you can start making a profit.33 [2]
   2. Explanation:
      Yes, she should be concerned as units produced are close to BEP; or Yes, as the BEP has increased significantly from the previous year; or No, she is still exceeding the BEP.
      Quoting of figures:
      Compare 20 0003 units produced to BEP3 of 19 548 or BEP is 97,7% of total units; or Compare BEP 19 548 to 11 300 of the previous year; or Compare units of 20 000 to 24 000 of the previous year – affects BEP [4]

Learn this! Formula to calculate break-even point (BEP):
Total fixed costs

Practice task 1

1. Production Cost Statement calculations:
   

   Opening balance of raw material stock
   Add: Purchase of raw materials +
   Add: Carriage on purchases of raw materials +
   Add: Transport of raw materials +
   Less: Closing balance of raw material stock –
   Equals: Raw materials issued to the factory =

   [6]

2. NOTES TO THE PRODUCTION COST STATEMENT
   

   DIRECT LABOUR COST	R

   [5]

   FACTORY OVERHEAD COST	R

    [16]

3. PRODUCTION COST STATEMENT OF FATIMA MANUFACTURERS FOR THE YEAR ENDED 28 FEBRUARY 2010
   

   	TOTAL
   Primed/direct cost
   Total cost of production
   Total cost of production of finished goods

   [12]
   Below is a list of suggested past examination questions for extra practice:

   Topic	Paper	Question
   Costing calculations and Production Cost Statement	November 2008	3
   Production Cost Statement	November 2009	3
   Costing calculations	February/March 201	4
   Multiple choice	November 2010	3.1
   Costing calculations and concepts	February/March 2012	2
   Production Cost Statement	November 2013	2.1
   Break even point	November 2013	2.3

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