Question

QUESTION 1 (25 Marks) Sonop Stores (Pty) Ltd is currently operating out of the Eastern Cape. The company was started more than 10 years ago. The company aims for a 30% gross profit margin and according to the lastest approved budget should end up on a 10% nett profit margin. Over the last few years the company has been struggling to control the escalating manufacturing costs. The cost of doing business in the region escalates year on year at a % signicantly higher than the official published inflation rate. The company manufactures steel furniture aimed at the higher income group and its clients includes major chain furniture stores as well as certain spesicialist furniture retailers. Recently one of Sonop's major clients demanded a higher trading rebate, while the sales rate of Sonop's key product range also is under pressure, with customers opting for cheaper alternatives. The following information is available for the month of August as well as information for the past 3 financial years (12 months): 2019 August R/unit Actual Original Budget August 19 Forecast done in June 19 Direct materials Direct labour MVOH Total Selling price/per unit L R7 355 R24 016 R2 987 R34 358 R45 404 R6 900 R19 200 R2 900 R29 000 R41 400 R7 000 R20 000 R3 000 R30 000 R43 500 2018 2017 Difference Full Year Actual 2017/2016 Direct materials Direct labour MVOH Total Selling price/per unit L R11 076 479 R36 168 096 R4 498 407 R51 742 982 R40 864 Full Year Actual R10 633 420 R35 083 053 R4 228 503 R49 944 976 R39 883 2016 Difference Full Year 2018/2017 Actual R9 676 412 4,2% R31 574 748 3,1% R3 763 367 6,4% R45 014 527 3,6% R37 4902 % 9,9% 11,1% 12,4% 11,0% 6% Fixed production overheads are budgeted to be R500 000 per month and are absorbed on a budgeted activity level of 1,500 units per year. For the month of August 2019, sales added up to 116 units although production added up to 131 units. There is zero opening stock for raw material/WIP & closing stock for the month. For August 2019 the actual fixed production overheads added up to R 557,300 Total expenditure on fixed selling cost added up to R155 000 for the month of August '19 as well the variable selling costs of R 500 per unit sold. REQUIRED: Prepare the budgeted income statement for the month for Sonop using absorption costing for August 2019. Clearly show the valuation of any stock figures. Use the formula to determine the profit for the month for Sonop using marginal/variable costing. You are the management accountant of Sonop. In your opinion what steps can Sonop take to control costs within the company and secure positive cashflow in the light of declining margins and lower than anticipated sales

Answer 1

Absorption Costing
Sales	45,404	116	52,66,864
op Inventory		-	-
Direct mat	7,355	131	9,63,505
Direct Labor	24,016		31,46,096
Var Prod. OH	2,987		3,91,297
Closing Inventory	38,358	15	-5,75,370
Var. Prod cost of sales			39,25,528
Var. selling & Dist Cost	500	116	58,000
Var. cost of sales			39,83,528
Contribution Margin			12,83,336
Fixed Cost
Fixed Prod. OH	4,000	131	5,24,000
Selling & Dist Fixed cost			1,55,000
Total Fixed Cost			6,79,000
Profit			6,04,336

Marginal Costing
Sales	45,404	116	52,66,864
op Inventory		-	-
Direct mat	7,355	131	9,63,505
Direct Labor	24,016		31,46,096
Var Prod. OH	2,987		3,91,297
Closing Inventory	34,358	15	-5,15,370
Var. Prod cost of sales			39,85,528
Var. selling & Dist Cost	500	116	58,000
Var. cost of sales			40,43,528
Contribution Margin			12,23,336
Fixed Cost
Fixed Prod. OH	4,000	131	5,24,000
Selling & Dist Fixed cost			1,55,000
Total Fixed Cost			6,79,000
Profit			5,44,336

In my opinion, the labor cost component is the highest and is more than 20% than original budget and the forecast figure. The exact reason of such increase in labor cost. Between years also teh labor cost has increased by about 14%. Whether any overtime cost is paid, which can be reduced by better production planning, accurate material forecasting etc.