Question

QUESTION 1 (25 Marks) You are the recently appointed management accountant of Mopanie (Pty) Ltd. You are provided with the following data pertaining to the month of October 2018 Original Budget Full Year 31-Oct-18 9000,00 Forecast Full Year 31-Oct-18 9700,00 Actual Year End 31-Oct-18 9 500,00 Actual Month End 30-Nov-18 960,00 Units Produced kg per unit kg per unit Direct Material AA BB CC 15,00 5,20 4,00 17,00 6,20 5.00 Total kg 96 500,00 48 100,00 14 100,00 Total Kg 10 500,00 6 100,00 1 100,00 Direct Material Price per kg R1,50 R15,00 R5 22 Price per kg R1,25 R11,50 R5 20 R1,65 R17,00 R5,00 BB сс Price per kg R1,26 R11,51 R5,22 | ТАА BB CC hours per unit 5,00 1,20 || 4,90 hours per unit 5,00 1,22 5,11 | Total Hours 47 100,00 46 900,00 45 300,00| Total Hours 5 100,00 3 900,00 3775,00 Direct Wages AA BB CC Price per hour R3,00 R 2,11 R2.90 Price per hour R3,00 R4,10 R4,05 Price per hour R3,18 R3,11 R3,11 Price per hour R3,18 R3,90 R3,15 Price per Unit Price per Unit Total Total Variable Production Overheads R4,00 R4,50 R35 200,00 R3 200,00 Total Total Total Total Admin & Marketing Expenses R110 000,00 R112 000,00 R99 200,00 R10 200,00 Sales - November 2018 - Units 750,00 Actual Sales for the year ending 31 October 2018 came to 8,870 units at a price of R 190 per unit Fixed production overhead is absorbed at 200% of direct wage hour per component at a rate of R 1,20 per hour. Actual fixed production overhead expenditure was R 298,000 for the year REQUIRED Using the data given, you are required to prepare the absorption income statement for the year ended 31 October 2018 What would the operating income be for Mopanie using variable costing (shortcut formula)? Mopanie has been in operation since 2010. You have noticed an increase in stock levels over the last year. The company recently revised its incentive scheme for senior management based solely on the profit in the income statement. You have a meeting with the Managing Director of Mopanie (Pty) Ltd. Explain the advantages & disadvantages of basing an incentive scheme solely on the profit in the income statement

Answer 1

ABSORPTION COSTING METHOD : FIXED OVERHEAD ARE INCLUDED IN COST OF GOODS SOLD.

MOPANIE (PTY) LTD
Statement of Comprehensive Income
For the Year Ended October 31, 2018 (IN R)
Sales revenue			1,685,300
Cost of goods sold
Direct Materials
AA	96500*1.25	120,625
BB	48100*11,50	553,150
CC	14100*5.20	73,320
Direct Labor
AA	47100*3.18	149,778
BB	46900*3.11	145,859
CC	45300*3.11	140,883
Variable production overhead		35,200
Fixed production overhead
AA	94200*1.2	113,040
BB	93800*1.2	112,560
CC	90600*1.2	108,720
			1,553,135
Gross profit			132,165
Operating expenses:
Administrative and marketing expenses			99,200
Operating income			32,965

VARIABLE COSTING METHOD: THE ACTUAL AMOUNT OF FIXED EXPENSES IS TAKEN INSTEAD OF APPLIED.

PARTICULARS		AMOUNT
Sales revenue		1,685,300
Direct Materials	747,095
Direct Labor	436,520
Variable production overhead	35,200	1,218,815
Net income		466,485
Less:
Fixed production overhead	296,000
Administrative and marketing expenses	99,200	395,200
Operating income		71,285

THE PROFIT OF INCOME STATEMENT IS DERIVED AFTER REDUCING FIXED EXPENSES WHICH ARE NOT DEPENDENT ON THE PRODUCTION OR SALES. THUS THE EXPENSES WILL BE INCURRED IRRESPECTIVE OF THE EFFORTS MADE BY EMPLOYEES IN PRODUCING OR SELLING THE PRODUCT. INSTEAD OF INCOME STATEMENT THE INCENTIVE SHOULD BE ON THE BASIS OF NUMBER OF UNITS SOLD OR PRODUCED OR CONTRIBUTION OF THE PRODUCT.