Question

Patterns for Africa ('PFA') is a newly established organization in Johannesburg, South Africa. PFA
provides jobs to jobless people who have crafting skills. PFA specializes in the making and sale of
cushions with an African flare. Material used for the making of these cushions are hand-painted by
its employees. All employees are also owners of the organization and share in the profits made by
the organization. The organization strives to give back to the community by providing jobless people
the opportunity to start a career. PFA strives to pay out all profits at the end of the year to its owners.
Thandi Mathemba is the founder and head of operations of PFA. She is currently busy with the
analysis of the previous financial period's results.
The following actual information for the previous financial period is available to Thandi:

Notes Rand
Sales (9 732 cushions) 1,946,400
Less: Cost of Sales
Labour 1    (765,800)
Material purchased 2 (243,300)
Overhead expenses 3 (158,205)
Gross profit 779,095
Less: Other expenses
Water and electricity 4 (119,000)
Rent of administrative building 5 (240,000)
Telephone expenses 6 (85,000)
Other operating expenses 7 (35,095)
Profit share paid to employees 8 (300,000)
Net profit 0

Notes:
(1) Besides the profit-share that is yearly paid out to employees, they are also paid a wage of R20 per
hour worked on the making of cushions. Due to PFA being a newly established business, employees
are still in a learning phase and the time is takes to make cushions decreases as the employees
become more used to their tasks. On average, the time it takes for an employee to make the first
cushion is 2.5 hours. A learning curve percentage of 80% is present in this industry.
(2) Direct material amounts to R25 per cushion.
(3) Overhead expenses consists out of a fixed and variable amount. Variable overheads varies per
labour hour and fixed overheads were the same each month. The monthly overhead expenses were
as follows:

Month Hours Amount Month Hours Amount
January 1,600 13,200 July 1,500 13,000
February 1,650 13,300 August 1,650 13,300
March 1,550 13,100 September 1,600 13,200
April 1,559 13,200 October 1,600 13,200
May 1,598 13,150 November 1,598 13,150
June 1,700 13,400 December 1,540 13,005
Total overheads for the year 158,205

(4) Water and electricity are paid based on the following sliding scales (kl = kilolitres; kWh = kilowatt
hour)

Water Electricity
First 6,000 kl Free   First 100 kWh Free
6,001 kl - 10,000kl R12 per kl 101 kWh - 500 kWh R2 per kWh
10,001 kl and above R54 per kl 500 kWh and above R5 per kWh

(5) Rental amounts to R20,000 per month.

6) A fixed monthly fee of R945 are payable to the telecommunication service provider as well as a
cost of R2.50 per calling minute and R0.50 per megabyte of data used.
(7) Other expenses are all fixed costs paid for operational purposes.
(8) There were 30 employees employed by PFA and they all received a payout at year-end of
R10,000 from the profits for the year.

Select the correct answer from the options below:
1. The fixed portion of operating expenses are fixed per month. The fixed cost per hour will
therefore stay constant with a change in the labour hours in a specific month. The variable
portion of operating expenses are variable per month. The variable cost per hour will
therefore increase as the labour hours in a specific month increase.
2. The fixed portion of operating expenses are fixed per month. The fixed cost per hour will
therefore stay constant with a change in the labour hours in a specific month. The variable
portion of operating expenses are variable per month. The variable cost per hour will
therefore decrease as the labour hours in a specific month increase.
3. The fixed portion of operating expenses are fixed per month. The fixed cost per hour will
therefore decrease as the labour hours in a specific month increase. The variable portion
of operating expenses are variable per month. The variable cost per hour will therefore
stay constant with a change in the labour hours in a specific month.
4. The fixed portion of operating expenses are fixed per month. The fixed cost per hour will
therefore increase as the labour hours in a specific month increase. The variable portion
of operating expenses are variable per month. The variable cost per hour will therefore
stay constant with a change in the labour hours in a specific month.

Answer 1

The fixed portion of operating expenses are fixed per month. The fixed cost per hour will
therefore stay constant with a change in the labour hours in a specific month. The variable
portion of operating expenses are variable per month. The variable cost per hour will
therefore increase as the labour hours in a specific month increase.
generally, it is treated as direct labour cost and shown in prime cost. however, if an operator manages several machines,the wages should be shown as standing charge.