Cost Accounting

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TABLE OF CONTENTS PAGE 1. Introduction 3 2. How to use this Self-study Guide 4 3. Cost Accounting 5 3.1 Key concepts and explanation 5 3.2 Production cost statement 11 3.3 Break-even point 24 3.4 Analysis and interpretation 27 4. Consolidation activities 34 5. Answer book 50 6. Suggested answers and Marking Guidelines 68 7. Examination guidance 90 8. General Study and Examination Tips 91 2

1. INTRODUCTION The declaration of COVID-19 as a global pandemic by the World Health Organisation led to the disruption of effective teaching and learning in many schools in South Africa. The majority of learners in various grades spent less time in class due to the phased-in approach and rotational/ alternate attendance system that was implemented by various provinces. Consequently, most schools were not able to complete all the relevant content designed for specific grades in accordance with the Curriculum and Assessment Policy Statements in most subjects. As part of mitigating against the impact of COVID-19 on the current Grade 12, the Department of Basic Education (DBE) worked in collaboration with subject specialists from various Provincial Education Departments (PEDs) developed this Self-Study Guide. The Study Guide covers those topics, skills and concepts that are located in Grade 12, that are critical to lay the foundation for Grade 12. The main aim is to close the pre-existing content gaps to strengthen the mastery of subject knowledge in Grade 12. More importantly, the Study Guide will engender the attitudes in the learners to learning independently while mastering the core cross-cutting concepts. 3

2. HOW TO USE THIS SELF STUDY GUIDE? 1. This Study Guide address content and offer strategies to understand the different aspects of assessing Cost Accounting in a piecemeal approach, with consolidation activities to conclude. 2. The explanations and activities are intended to supplement the work you may have covered in class or have gained from textbooks and not replace them. 3. Activities proceed from the short, simple focused examples to more complex calculations and interpretation of transactions of a manufacturing business. 4. It is important to allocate sufficient time to: • Carefully read the explanations provided; underline or highlight key concepts, difficult vocabulary, important dates, and relevant amounts. • Interrogate the worked examples to gain an understanding of the message being conveyed or the sequence of events being illustrated. 5. Attempt the activities on your own; make constant reference to the explanatory notes but avoid referring to the suggested answers before attempting to answer an activity. 6. Compare your answers to the suggested answers and do your corrections in a different colour-ink pen. Note that you will learn more by discovering your weaknesses (when you get things wrong) and trying to understand why you’re thinking was out of line with what was expected. 7. The activities provided may not be sufficient to perfect your skills. Always refer to similar questions from past examination papers for this purpose. Repetitive practice is always valuable. 8. Familiarize yourself with the use of Answer Books and prepared writing material as this is the trend with all accounting examinations. PRE-AMBLE: Ø The Cost Accounting is covered in Term 2 and may be integrated with other topics such as inventory valuation, financial indicators, etc. Ø It will feature in the Accounting P2 (Managerial Accounting, Internal Auditing). Ø This topic focus mainly on calculations, internal control, ethics, analysis and interpretation of unit costs and break-even point. 4

3. COST ACCOUNTING A BASIC EXPLANATION • “Costing” may be described as the value placed on the use of resources with the purpose of making a profit. • Cost Accounting includes all costs incurred to manufacture and sell a product or provide a service. • The management of the business will require this information to enable them to determine the markup to be added to the cost to arrive at the selling prices of products or services. • To remain competitive, the business must be able to provide products or services at prices lower than competitors. • It is therefore important that management are clear about the cost of each product it sells or each service it provides. NOTE: The following concepts are provided to assist you with understanding of calculations and interpretation of financial information of a manufacturing concern. 3.1 KEY CONCEPTS. Direct material Refers to the raw material used during the manufacturing process to manufacture finished products. They form an integral part of the manufactured product, for example, milk is the raw material used in the manufacturing of cheese. Direct labour Refers to the costs that are incurred to pay workers who are working in the factory. If the employer has made further contributions (fringe benefits) above basic wages and salaries the direct labour costs will increase. Prime Cost Refers to the SUM of direct material cost and direct labour cost. 5

Factory Overheads Are all other costs (excluding direct material and labour) incurred in the manufacturing process that cannot be directly allocated to a specific product. These may include the following: - Indirect material (consumable stores) which consists of supplementary materials, for example, cleaning products, colouring matter, glue, screws, lubricants. - Indirect labour which includes all wages and salaries that are not directly related to the manufacturing process, for example, wages for cleaning staff, salary for factory foremen, wages for security personnel employer contributions that increase labour costs (pension, medical, unemployment insurance fund). - Depreciation factory equipment or vehicles - Insurance (portion allocated for the factory) - Rent expense (portion allocated for the factory), - Water and electricity (portion allocated for the factory) - Telephone (portion allocated for the factory). Total manufacturing cost Refers to the sum of direct material, direct labour and factory overheads. Work-in-progress Consists of incomplete products that are at different stages of production at any given moment. Finished goods Are products that have been through the manufacturing process and are ready for sale. Total cost of production Equals total manufacturing cost PLUS opening inventory of work-in- of finished goods progress LESS closing inventory of work-in-progress. Cost of sales Refers to the cost of finished goods that have already been sold. PRIOR KNOWLEDGE (Content you would have covered in the previous Grades) • Concepts on manufacturing business as introduced in Grade 10. • General Ledger accounts as introduced in Grade 11. • An understanding to prepare the general ledger accounts and differentiate between stock and cost accounts. 6

OVERVIEW OF THE TOPIC PRODUCTION COST STATEMENT AND ABRIDGED STATEMENT OF COMPREHENSIVE INCOME (INCOME STATEMENT) COSTS IN MANUFACTURING BUSINESS TOTAL COST OF PRODUCTION Direct Material Direct Factory Administration Costs Selling and Costs Labour Cost Overhead costs Distribution Costs + Work in progress (beginning) – Work in progress (end) Profit and loss Cost of production of finished goods 7

Notes to the Production Cost Statement and Ledger Accounts 1. Direct material costs R DR DIRECT MATERIAL COSTS CR Balance at the beginning of the year 1 000 Balance 1 000 Creditors control 600 Net Purchases 2 200 + 1 800 – 600 3 400 b/d 2 200 Work in progress 4 500 Carriage on purchases 1 600 Bank 1 800 Balance c/d 1 500 Customs duties 0 Creditors’ control 1 600 6000 Carriage on purchases 6 600 6 600 Less: Balance at the end of the year (1 500) 350 Direct material costs 4 500 Balance b/d 8

Kindly note the following: • Net purchases = (Purchases – returns) • Carriage on purchases refers to the costs incurred for transportation of raw materials. • Customs duties OR import duties are the costs incurred for raw material purchased from a foreign country. 2. Direct labour costs R DR DIRECT LABOUR COSTS CR Factory wages 8 000 Bank 8 000 Work-in-Progress 9 000 Pension fund contribution 420 Pension fund contributions (portion by the factory) 420 Medical aid contribution 500 Medical aid contributions (portion by the factory) 500 UIF contribution 80 UIF contributions (portion by the factory) 80 9 000 9 000 Direct labour cost 9 000 When you are required to calculate direct labour cost always remember that Direct Labour cost = normal (or basic) wage + overtime wage + employers’ contribution (fringe benefits) Normal wage = number of employees x number of hours worked x normal or basic wage rate Overtime = number of employees x number of hours worked x overtime wage rate 9

3. Factory overhead costs R DR FACTORY OVERHEADS COSTS CR Indirect material 300 Indirect material 300 Work-in-Progress 2 400 (opening balance+ purchases – closing bal.) Indirect labour 700 Indirect labour 700 Depreciation 450 (salaries of supervisor, cleaner etc.) Depreciation 450 Maintenance 150 (on factory machines and vehicles only) Rent expenses 600 Maintenance: 150 Water and electricity 200 (on factory machines and vehicles only) 2 400 2 400 Rent expenses (factory portion only) 600 Water and electricity (factory portion only) 200 Factory overhead cost 2 400 NOTE: Do not include costs that are not related to factory production such as advertising, selling and distribution, bad debts, etc. 4. Cost of finished goods sold R DR FINISHED GOODS CR Opening stock of finished goods sold 2 000 Balance b/d 2 000 Cost of sales 16 200 Cost of finished goods produced during the year 15 900 Work in progress 15 900 Balance c/d 1 700 4 500 + 9 000 + 2 400 17 900 17 900 Cost of goods available for sale 17 900 Balance b/d 1 700 Closing stock of finished goods (1 700) Cost of finished goods sold 16 200 10

3.2 WHAT IS PRODUCTION COST STATEMENT? A Production Cost Statement (PCS) is a summary of the ledger accounts that are prepared in a manufacturing business to calculate the total cost of production. PCS consists mainly of THREE costs, namely, Direct material costs, Direct labour costs and Factory overheads costs. PRIOR KNOWLEDGE (Content you would have covered in the previous Grades) • In Grade 11 you learnt to draw general ledger accounts and then used this information to prepare the Statement of Comprehensive Income. • In Grade 11 general ledger accounts of a manufacturing business were prepared and the same procedure is followed when preparing the PCS. • PCS can be prepared using TOP-DOWN approach as well as BOTTOM-UP to calculate the missing amounts. The basic format of the PCS is provided below: Production Cost Statement for the year ended.. Refer to concepts above for detailed explanation Direct material costs 1 xxx ← Material issued for production Direct labour costs 2 xxx ← Costs incurred to compensate factory workers Primary costs xxx ← Direct material PLUS direct labour cost Factory overhead costs 3 xxx ← All other costs involved in the manufacturing process which increase the cost of producing the product. Total manufacturing costs xxx ← Prime cost PLUS Factory overheads costs Work-in-progress at the xxx beginning of the year ← Opening stock Work-in-progress during xxx ← Total manufacturing overheads PLUS the year Work in progress at the beginning Work-in-progress at the (xxx) ← Closing stock* (always subtracted) end of the year Cost of production of xxx finished goods 11

In the Work-in-Progress Account, the finished goods stock amount must be the same as the total cost of production of finished goods as illustrated above. DR WORK-IN-PROGRESS STOCK ACCOUNT CR Balance b/d XXX Finished Goods stock XXX Direct materials cost XXX Direct Labour cost XXX Factory overheads XXX Balance c/d XXX XXX XXX Balance b/d XXX 12

Illustration of a production process for a dress Issued to production Direct raw material stock Direct labour Factory overhead costs (Factory cleaners, indirect material etc) admnistration Selling and distribution NOTE: Administration costs and Selling and distribution are costs that are independent of the production and incurred throughout the production process. 13

BASELINE ACTIVITY • Classify the costs by making a tick in the appropriate columns. DIRECT INDIRECT DIRECT INDIRECT DESCRIPTION OF THE COSTS MATERIAL MATERIAL LABOUR LABOUR COSTS COSTS COSTS COSTS Transport costs paid for raw materials purchased Factory worker making the chairs Consumable stores bought to be used in a factory Medical aid contributions paid on behalf of the workers in the production process. Security guards in the manufacturing business • Match the different costs in column A with an explanation in column B. COLUMN A COLUMN B 1 Factory overheads A Compensation cost of employees who are producing goods. 2 Direct labour costs B Purchase costs of raw materials to be used in the production process. 3 Administration costs C Marketing-related costs incurred to ensure that the finished products reach the intended customers. 4 Direct material costs D Indirectly related to the production process yet necessary. 5 Selling and distribution costs E Originate from materials purchased from the foreign country. 6 Customs duties F Costs incurred for day to day running of the manufacturing concern. 14

SUGGESTED ANSWER • Classify the costs by making a tick in the appropriate columns. DIRECT INDIRECT DIRECT INDIRECT DESCRIPTION OF THE COSTS MATERIAL MATERIAL LABOUR LABOUR COSTS COSTS COSTS COSTS Transport costs paid for raw X materials purchased Payment of a factory worker X making the chairs Consumable stores bought to X be used in a factory Medical aid contributions paid X on behalf of the workers in the production process. Security guards in the X manufacturing business • Match the different costs in column A with the definition in column B. Column A Column B 1 Factory overheads D 2 Direct labour costs A 3 Administration costs F 4 Direct material costs B 5 Selling and distribution costs C 6 Customs duties E 15

WORKED EXAMPLE 1: The information relates to Buhle Manufacturers. REQUIRED: Complete the Direct Material Cost note. INFORMATION Stock balances: 28 February 2021 29 February 2020 Raw Material Stock 22 600 25 400 Additional transaction for the year: • Purchases for the year consists of the following: Cash R12 000 Credit R6 000 • Carriage on purchases amounted to R900. • Raw materials amounting to R1 500 were damaged in transit and returned to the suppliers. SUGGESTED ANSWER: 1. Direct Material Cost Raw material opening stock balance 25 400 Net purchases (12 000 + 6 000 – 1 500) 16 500 Carriage on purchases 900 Less:Raw material - closing stock balance (22 600) Direct Material Cost 20 200 Note: If raw materials have been imported you must ADD Customs duties to increase the cost of buying raw materials. 16

WORKED EXAMPLE 2: The information relates to Pooh Bear Manufacturers. REQUIRED: • Calculate the Direct Labour Cost. • Calculate the Indirect Labour Cost. INFORMATION Uncle who is the owner, employs the following individuals: Number of Normal time for Overtime (per year) Details employees the year Hours Rate per hour Employees in the R96 000 110 hours production process 3 (per employee) (each employee) R140 Factory foreman 1 R156 000 - - Cleaner 1 R48 000 - - Security (Factory) 2 R60 000 - - The following deductions were made from each employee’s wages: • SARS(PAYE), 25% of total gross wage. • Medical aid, 12% of wages (normal time). • Pension fund, 10% of wages (normal time). • Unemployment Insurance Fund, 1% of total gross wage (including overtime). The employer contributes the following: • Medical aid, 10% of wages (normal time). • Unemployment Insurance Fund on a rand-for-rand basis. NOTE: The factory cleaner hours are shared in a ratio 60:40 between the factory and administration, respectively. 17

Refer to the SUGGESTED ANSWER: concepts as explained DIRECT LABOUR COST ANSWER above for distinction between direct R 288 000 (96 000 x 3) Normal time and indirect labour costs R 46 200 (110 x 140 x 3) Overtime R 334 200 R 28 800 (288 000 x 10%) Medical aid contributions R 366 342 R 3 342 (334 200 x 1%) UIF contributions INDIRECT LABOUR COST ANSWER R 156 000 Factory foreman R 28 800 (R48 000 x 60/100) Cleaner R 120 000 (R60 000 x 2) Security R304 800 WORKED EXAMPLE 3: The information relates to Tiger Manufacturers REQUIRED: Complete the Factory Overheads Cost note. INFORMATION: A. Stock on hand: 30 April 2021 1 March 2020 Indirect material stock (consumable stores) 2 000 8 000 B. The bookkeeper calculated the costs below before considering additional information: Factory foreman 108 000 Depreciation 60 000 Rent expenses 132 000 Water and electricity 67 200 Insurance 68 000 18

C. Additional information: • Consumable stores bought during the year, R12 000. • Agreement was reached with labour unions to increase salaries of all factory employees by 5% effective from 1 April 2021. However, due to lockdown disturbances increment was not yet effected on the last day of the financial year. • 80% of depreciation was for factory and the rest for selling and distribution. • Rent is divided between different sections as illustrated below: Factory Sales Office Floor space 800 m² 300 m² 100 m² • Water and electricity amounting to R4 800 is still outstanding for April 2021. Water and electricity is divided in a ratio of 3:2 between factory and administration. • Insurance includes an annual premium of R15 600 for the period 1 July 2020 to 30 June 2021. A quarter relates to administration and the rest to factory. SUGGESTED ANSWER: FACTORY MATERIAL COST Indirect material 8 000 + 12 000 – 2 000 18 000 Indirect labour 108 000 + 450 (108 000/12 = 9 000 x 5/100 108 450 Depreciation 60 000 x 80% 48 000 Rent expenses 132 000 x 800/1 200 88 000 Water and electricity (67 200 + 4 800) x 3/5 43 200 Insurance (68 000 – 2 600) x 3/4 49 050 354 700 19

Note: • Indirect material: Only material used is recorded as a final amount, calculated using the following formula (where: Indirect material used = Open balance + purchases – returns - closing balance). CALCULATION OF TOTAL COST OF PRODUCTION OF FINISHED GOODS Tabile Manufacturers sells one type of Tabile Manufacturers sells one type of containers. Their mark-up is 50% on cost. containers. Use the finished goods ledger account to Use of total number of units produced and unit calculate total cost of production of finished cost to calculate total cost of production of goods. finished goods. 31 March 1 April 31 March 1 April 2021 2020 2021 2020 Work in progress 15 000 20 000 Work in progress 15 000 20 000 Finished goods 70 000 90 000 Tabile Manufacturers produced 15 200 Sales for the year amounts to R600 000 containers at a unit price of R25. Production Cost Statement Production Cost Statement Work in process (beginning) 20 000 Work in process (beginning) 20 000 Work-in-Progress during the year 375 000 375 000 Work in progress (end) (15 000) Work in progress (end) (15 000) Total cost of production of finished Total cost of production of goods 380 000 finished goods 380 000 (70 000 + 400 000 (600 000 (15 200 x R25) x100/150) – 90 000) Use the finished goods ledger account to Total units produced calculate total cost of MULTIPLY by unit cost production of finished goods 20

ACTIVITY 1 The information relates to Rocky Manufacturers REQUIRED: Complete the Production Cost Statement and the Notes: INFORMATION A. Stock Balances for two consecutive years: 30 APRIL 2021 30 APRIL 2020 R R Raw Material Stock 22 500 20 400 Work-in-progress 12 400 25 350 Finished goods stock 18 800 15 300 Consumables on hand 1 950 1 600 (indirect material) B. Summary of transactions for the year ended 30 April 2021 Raw material purchased : cash R 124 000 credit 192 600 Indirect material purchased 5 300 Carriage on purchases of raw materials 24 000 Raw material returned to suppliers 4 500 Factory workers wages 188 000 Salary to factory supervisor 62 000 UIF: for factory workers 1 880 for factory supervisor 620 Rent expense on factory building 2 850 Depreciation of factory equipment 21 300 Insurance on factory building 3 350 NSC June 2017 adapted 21

ACTIVITY 2 2.1 Choose the correct word(s) from those given in brackets. Write only the word(s) next to the question number (2.1.1–2.1.4) in the ANSWER BOOK. 2.1.1 The wages of factory cleaners are classified as (direct labour/ factory overhead) cost. 2.1.2 Factory rent is a (fixed/variable) cost. 2.1.3 Packing materials used are regarded as a/an (selling and distribution/ administration) cost. 2.1.4 Break-even point refers to the (minimum/maximum) number of units that must be produced and sold to cover all costs. (4 x 1) (4) 2.2 INFINITY HATS The information relates to Infinity Hats, a business that manufactures one type of hat. The financial year ended on 28 February 2021. REQUIRED: 2.2.1 Prepare the Factory Overhead Cost Note. (14) 2.2.2 Complete the Production Cost Statement for the year ended 28 February 2021. (10) 2.2.3 Infinity Hats are considering importing raw materials at a lower price than they are currently paying. Provide TWO points they should consider before deciding. (4) 22

INFORMATION: A. EXTRACT FROM STOCK RECORDS ON 28 FEBRUARY 2021: 2021 2020 Work-in-progress R94 000 R? Indirect factory materials R8 750 R5 950 B. TRANSACTIONS/INFORMATION FOR YEAR ENDED 28 FEBRUARY 2021: Raw materials issued for production R? Indirect materials purchased 36 000 Salaries and wages 2 900 000 Rent expense 291 000 Insurance 49 200 Telephone allocated to the administration section 28 800 Sundry factory expenses 189 856 C. 45% of salaries and wages are paid to employees who work directly in the production process and 10% must be allocated as the salary of the factory foreman. D. Rent expense must be distributed according to floor space used. The factory occupies 2 400 m2. Selling and distribution and the administration sections occupy the remaining 600 m2. E. The insurance premium has been paid up to 31 May 2021. Insurance is shared between factory, selling and distribution and the administration sections in the ratio 4 : 4 : 2. F. 20% of the telephone expense must be allocated to the factory. The remaining amount is shared equally between selling and distribution and the administration sections. G. 40 000 hats were produced during the financial year at a cost of R120 per hat. 23

3.3 Break-even point Refers to the point at which revenue of a manufacturing business is equal to its costs. At the break- even point, there is no profit or loss made as the total revenue is equal to the total costs. To calculate the break-even point, you need to have information relating to the following: • Fixed costs • Variable costs • Selling price of the product NOTE: The calculation of BEP includes a simple yet very significant calculation for the denominator i.e. Selling price per unit less Variable cost per unit. The answer to this calculation is referred to as the Contribution per unit. This can be expressed using the following formula: Contribution per unit = Selling price per unit – variable cost per unit There are many formulas to be applied when calculating certain amounts such as: Break-even point Formula is: Total Fixed Costs____________ Selling price per unit – Variable costs per unit Unit cost of production Total cost of production of finished goods Number of units produced NOTE: Practical example to strengthen understanding of BEP • If the Selling price is R900 per unit and the Variable costs are R500 per unit, the Contribution per unit is R400 (i.e. R900 less R500). • The selling price will increase the profit, but the variable costs will decrease profit, so the Contribution is the net effect. • You are expected to understand that the Contribution is the net Rand amount that each unit produced contributes towards covering the Fixed costs. • If the Fixed costs are R12 000 and the contribution per unit is R400 (as calculated) then: o If only 1 unit is produced, the loss made will be R11 600 (i.e. Fixed costs less R400). o If 2 units are produced, the loss will be R11 200 (i.e. Fixed costs less R800). o If 3 units are produced, the loss will be R8 400 (i.e. Fixed costs less R1 200) etc. • The business will have to produce 30 units* for the total Contribution to be equal to the total Fixed costs i.e. R12 000 ÷ R400 = 30 units (i.e. R400 x 30 units = R12 000)*. This is the BEP at which the business will make no profit and no loss i.e. it breaks even. If you understood the above explanation, you could easily use Contribution per unit to calculate other figures as suggested in the bullets below: 24

Ø For the calculation of expected profit on additional units produced, fixed costs are irrelevant as they remain constant (i.e. there is no increase in Fixed costs due to increased production). Ø The only relevant items are the Selling Price (R900) and the Variable costs per unit (R500) which are represented by the net effect for Contribution per unit of R400. It is not necessary to calculate or use total Rand amounts in this case. For example, If production is 20 units more than BEP (i.e. if total production is 30 + 20 = 50 units), expected profit will be 20 X R400 = R8 000 Ø If production is 70 units more than BEP (i.e. if total production is 30 + 70 = 100 units), expected profit will be 70 X R400 = R28 000. USE OF CONTRIBUTION PER UNIT IN CALCULATING PRODUCTION TARGETS • In a calculation such as this, Fixed costs are again irrelevant as they remain constant (i.e. there is no increase in Fixed costs due to increased production). For example, • To make a profit of R6 000, extra units of production will be R6 000 ÷ R400 = 15 units (i.e. if total production is 30 + 20 = 50 units) • To make a profit of R120 000, extra units of production will be R120 000 ÷ R400 = 150 units (i.e. if total production is 30 + 150 = 180 units). NOTE: For the purpose of examinations, all costs are either Fixed (i.e. Factory overheads & Administration costs) or Variable (i.e. Direct materials, Direct labour and Selling/Distribution costs). It must be assumed that Fixed costs will remain constant for at least one financial year, and that Variable costs are in direct proportion to the number of units produced. PRIOR KNOWLEDGE (Content you would have covered in previous Grades) • Manufacturing concepts as explained in Grade 10. • Calculation of Break- even point in Grade 11. 25

DIFFERENCES BETWEEN FIXED AND VARIABLE COSTS FIXED COSTS VARIABLE COSTS • These are costs that do not • These are costs that change THINGS TO REMEMBER change even if the quantities depending on the number of produced by the factory units produced. increase or decrease. For exam purposes, it will be assumed that all • They are output dependent. factory overhead • They are not output costs and administration costs dependent are Fixed costs, IMPORTANT unless otherwise stated. • The Fixed costs per unit • The total variable costs increase with a decrease in increase with an increase in the number of units the number of units produced. production. For exam purposes, it will be assumed that raw materials, direct labour • The Fixed costs per unit • The total variable costs and selling and distribution costs are decrease with an increase in decrease with a decrease in variable costs, unless the number of units the number of units produced. otherwise stated. produced. • The total variable costs vary • The Total Fixed costs directly with the number of remain constant irrespective units produced of the number of units produced. 26

3.4 ANALYSIS AND INTERPRETATION NOTE: Master calculations and thereafter interpret the amounts and/or answers as calculated. In the table below guidance on how to comment and interpret information is provided for you: With regards to • COMPARE: Current year to previous year Unit Costs: • TREND: Was there an Increase or Decrease? (Amount/%) • COMMENT: Possible explanation/reasons for the trend • ADVICE: What must the manager DO? With regards to • COMPARE: Current year to previous year Unit Costs: • TREND: Was there an Increase or Decrease? (Amount/%) • COMMENT: Possible explanation/reasons for the trend • ADVICE: What must the manager DO? About the • COMPARE: Current year to previous year Break-even Number of units produced against BEP point: BEP of this year against last year Units produced this year against last year • TREND: Better than/worse than; more than/less than • COMMENT: Satisfied/Not Satisfied Are we making a profit/loss? Is the actual production too close to the BEP? How can we manage expenses? RELATED QUESTIONS: • Integration with other topics/sections (Inventory valuation) • Calculating wastage (if metres used; fabric; timber) • Ethical issues (quality of the products) • Internal control (stock missing) • Problem solving (comparing TWO products) 27

BASELINE ACTIVITY Buhle Manufacturers produces hand sanitiser REQUIRED: Calculate how many hand sanitiser must she sell before making profit. The following information was found in her books. Selling price per sanitiser R25 Ø Total Fixed cost R60 Variable cost R 10 Total production cost is R60 + R10 = R70 NOTE: The cost of R70 is more than the selling price of one bottle of sanitiser (R25). It is therefore important to establish how many bottles must she sell before a profit can be made. 28

Selling price - total production cost Total Fixed cost + Total Variable cost PRODUCTION COSTS TOTAL SELLING PROFIT If only one bottle is sold, UNITS PRODUCTION PRICE OF she is making a loss of FIXED VARIABLE R45. SOLD COST THE UNITS COST COST SOLD 1 R60 + R10 = R70 R25 (R45) 2 R60 + R20 = R80 R50 (R30) When four are sold, the cost is equal to 3 R60 + R30 = R90 R75 (R15) the selling price [100 – 100] and therefore 4 R60 + R40 = R100 R100 0 zero profit (being the break-even point.) 5 R60 + R50 = R110 R125 R15 6 R60 + R60 = R120 R150 R30 7 R60 + R70 = R130 R175 R45 When five are sold the WORKED EXAMPLE 1 business starts to make a profit of R15. REQUIRED: Use the information given below to calculate Break-even-Point INFORMATION Sun Manufacturers manufactures hand cream and provides the following information: Total fixed cost R14 400 Total variable costs R10 800 Fixed costs per unit R24 Variable cost per unit R18 Total costs R25 200 Total cost per unit R42 Number of units produced 600 Selling price per unit R50 29

SUGGESTED ANSWER Break-even point = Total fixed costs . SP/U – VC/U = 14 400 50 – 18 = 450 units WORKED EXAMPLE 2 REQUIRED: Use the information given below and comment on the business’ present production level. INFORMATION 1. Production and sales information of Bobby Enterprises February 2021 Number of finished boxes of pet pellets produced and sold 30 000 BEP 14 250 units SUGGESTED ANSWER • The business is producing 30 000 units – they are above the BEP which means that the business will be making a profit. • The business has produced 15 750 units above the BEP. 30

WORKED EXAMPLE 3 2020 Examination guidelines adapted BB BUCKETS The business produces plastic buckets. You are provided with information for the financial year ended 28 February 2021. INFORMATION: A. Production, sales, and profit: • 10 000 buckets were produced during the 2021 financial year. • The selling price per bucket is R93,00. • Net profit for the 20.9 financial year per the Income Statement is R280 000. B. COST CATEGORIES TOTAL PER UNIT VARIABLE COSTS R430 000 R43,00 Direct materials R240 000 R24,00 Direct labor R130 000 R13,00 Selling & distribution R60 000 R6,00 FIXED COSTS R220 000 R22,00 Factory overheads R180 000 R18,00 Administration R40 000 R4,00 R650 000 R65,00 31

REQUIRED: (a) Calculate the break-even point. (b) Provide a calculation to show that the net profit of R280 000 is correct. (c) Calculate: • The increase in profit if an extra 600 buckets are produced. • The total profit that will be earned if an additional 600 buckets are produced. (d) Calculate: • The number of additional units that need to be produced to increase the net profit by R75 000. • The total number of units that need to be produced to increase the net profit by R75 000. 32

SUGGESTED ANSWER (a) Calculate the break-even point: R220 000 = R220 000 = 4 400 units R93,00 – R43,00 R50,00 (b) Provide a calculation to show that the net profit of R280 000 is correct: (10 000 x R93,00) – R650 000 = R280 000 OR: (10 000 – 4 400) X R50 = R280 000 (c) Calculate the increase in profit if an additional 600 buckets are produced: See (a) above 600 units X R50 = R30 000 Calculate the total profit that will be earned if an additional 600 buckets are produced: See above R280 000 + R30 000 = R310 000 (d) Calculate the number of additional units that need to be produced to increase the net profit by R75 000: R75 000 = 1 500 units R50 See (a) above Calculate the total number of units that need to be produced to increase the net profit by R75 000: 10 000 + 1 500 = 11 500 units 33

4. CONSOLIDATION ACTIVITIES ACTIVITY 3 NSC Nov 2018 adapted 3.1 Indicate whether the following statements are TRUE or FALSE. Write only 'true' or 'false' next to the question numbers (3.1.1 to 3.1.3) in the ANSWER BOOK. 3.1.1 Bad debts are an administration cost. 3.1.2 Indirect labour is a factory overhead cost. 3.1.3 Rent expense is a fixed cost. (3) 3.2 KRIGE SHIRTS The business manufactures shirts. The financial year-end is 31 July 2020. REQUIRED: 3.2.1 Refer to Information C. Calculate direct labour cost. (9) 3.2.2 Production Cost Statement for the year ended 31 July 2020 (12) INFORMATION: A. 31 JULY 2020 1 AUGUST 2019 Work-in-progress stock balance ? R35 570 B. Raw materials issued to factory: R528 300 C. Direct labour: Number of factory workers 4 Normal time expected per worker per year 1 960 hours Normal time rate R90 per hour Bonuses to workers: 12% of normal wages NOTE: One worker worked only 1 680 hours and received a reduced bonus of R12 146. 34

D. Factory overheads were calculated at R360 880 for the year. However, this excludes insurance of R48 750 paid for the period 1 August 2019 to 31 August 2020. Insurance must be allocated to the factory, administration, and sales in the ratio 4: 3: 2. E. Production for the year: 17 500 shirts at a cost of R95 per shirt ACTIVITY 4 NSC Nov 2019 adapted MANUFACTURING INFORMATION: Sihle Sangweni owns two separate factories that manufacture products according to orders received. There is no work-in-progress stock. The year-end is 28 February 2021. 4.1 DESKS FACTORY REQUIRED: 4.1.1 Complete the Factory Overhead Cost Note. (8) 4.1.2 Calculate the total cost of production of finished goods. (5) 4.4.2 Sihle wants to produce an additional 1 500 desks, while maintaining the selling price and costs. Calculate the additional profit he can expect. (4) 4.2 CHAIRS FACTORY REQUIRED: 4.2.1 Provide a calculation to confirm the break-even point for 2021. (4) 4.2.2 Comment on the break-even point and the production level achieved. Quote figures. (4) 4.2.3 Raw material consists of wood only. In 2021 the cost is R120 per square metre (m2) and 1,2 m2 of wood is needed to make one chair. During the year, 22 000 m2 wood was dispatched to the factory. Sihle feels that the wood raw material was not well controlled. • Provide a calculation to support his opinion. (4) • Identify TWO possible causes of this problem. Provide a solution for EACH. (4) 35

4.3.4 Give TWO reasons for the increase in direct labour cost. Provide a solution for EACH. Note that wages and salaries increased by 5% in the current financial year. (4) INFORMATION: A. DESKS FACTORY Extract of pre-adjustment amounts on 28 February 2021 R Indirect labour 296 500 Depreciation of factory plant 166 000 Advertising 24 500 Water and electricity 248 000 Rent expense 345 600 Insurance allocated to sales department 12 600 Factory sundry expenses 107 700 Adjustments to factory overheads for desks: • Water and electricity for February 2021, R18 000, must be considered. 80% is allocated to the factory. The balance is an administration cost. • Rent must be allocated according to floor area: Factory: 810 m2 Office: 180 m2 Sales department: 90 m2 • 75% of insurance must be allocated to the factory. The balance applies to the sales department. 36

B. INFORMATION FOR BOTH FACTORIES COSTS DESKS CHAIRS 2021 (Unit costs) AMOUNT PER UNIT 2021 2020 Variable Direct material R3 060 000 R340 R165 R124 Direct labour ? R160 R90 R70 Selling and distribution R720 000 R80 R50 R60 Total variable costs R580 R305 R250 Fixed Factory overheads R76 R75 Administration R360 000 R40 R20 R18 SELLING PRICES Per unit R750 R390 R370 UNITS Produced and sold 9 000 16 000 15 000 Break-even point 8 471 18 071 12 400 37

ACTIVITY 5 NSC Feb/Mar 2018 adapted 5.1 GLAMOUR DRESS CREATIONS Glamour Dress Creations manufactures one type of ladies' dress. The financial year ended on 28 February 2021. REQUIRED: 5.1.1 Prepare the Production Cost Statement for the year ended 28 February 2021. (21) 5.1.2 Calculate the net profit for the year ended 28 February 2021. (7) INFORMATION: A. Stock balances, among others, were taken from the General Ledger: 28 FEBRUARY 2021 1 MARCH 2020 Work-in-process stock ? R76 000 Finished goods stock R190 000 R110 000 B. Information extracted from the financial records on 28 February 2021: Administration cost R259 010 Raw/Direct material cost 918 550 Factory overhead cost 227 240 Selling and distribution cost 410 000 Net wages paid to factory workers (direct labour) 753 300 SARS: PAYE 48 600 UIF deductions 1% Sales ? Cost of sales 1 860 000 C. The following information has not been considered: • A problem was identified regarding the valuation of the closing stock of raw materials: 5 000 metres of material on hand, with a unit cost of R2,75 per metre, were erroneously recorded as R3,80 per metre. This must be corrected. 38

• Rent expense was omitted from the figures above. Total rent paid for the financial year amounted to R87 100. The rent for March 2021 has been paid in advance. The rent was increased by R650 on 1 December 2020. 80% of this expense must be allocated to the factory and the balance must be regarded as an office expense. • The employer contributes 1% to UIF on behalf of the employees. D. The business uses a mark-up percentage of 75% on cost. During the financial year special discounts of R85 000 were offered to cash customers who bought in bulk. 5.2 LIGHTING SOLUTIONS George Mkize is the owner of Lighting Solutions, a manufacturing business that produces one type of energy-saving light bulb. The financial year ended on 31 December 2021. NOTE: • Production is based on orders received; therefore, there are no balances for work-in- process. • The current inflation rate is 8%. REQUIRED: 5.2.1 Calculate the factory overhead cost per unit for the year ended 31 December 2021. (2) 5.2.2 Explain why George would not be concerned about the 28,1% increase in total variable cost from R936 000 to R1 200 000. (3) 5.2.3 Give TWO reasons for the increase in the selling and distribution cost per unit. (2) 5.2.4 George wants to know if the production level for this financial year is satisfactory. • Calculate the break-even point for the year ended 31 December 2021. (4) • Comment on the production level for 2021. State TWO points. Quote figures. (4) 5.2.5 Lighting Solutions are considering importing raw materials because it is cheaper and of a higher quality. Name TWO aspects that they must consider before finalising their decision. (2) 39

INFORMATION: Information from the records of Lighting Solutions on 31 December: 2021 2020 TOTAL UNIT COST TOTAL UNIT COST (R) (R) (R) (R) Fixed costs: 575 000 11,50 428 400 10,20 Factory overhead cost 395 000 (3.2.1) 310 800 7,40 Administration cost 180 000 117 600 2,80 Variable costs: 1 200 000 24,00 936 600 22,30 Direct material cost 435 000 8,70 344 400 8,20 Direct labour cost 560 000 11,20 441 000 10,50 Selling and distribution cost 205 000 4,10 151 200 3,60 Selling price per unit R45,00 R41,50 Number of units produced and sold 50 000 42 000 Break-even point (units) ? 22 313 40

ACTIVITY 6 NSC Nov 2017 adapted 6.1 GYMWEAR MANUFACTURERS Gymwear Manufacturers is owned by Jan Fiks. They produce shoes and shirts for gym training. Jan requires assistance in interpreting his 2020 results. Note that one pair of shoes comprises one unit. REQUIRED: 6.1.1 Shirts: (4) • Calculate the break-even point for shirts. • Jan is not satisfied with the variable costs per unit, even though the total variable costs per unit decreased by R6. - Identify ONE variable cost (with figures) that has not been well controlled. Give TWO possible reasons for this problem. - Explain why Jan might be concerned about the large decreases in the (4) other TWO variable costs. (4) • Jan does not understand why the unit cost of production has increased when (4) neither his fixed costs nor the variable costs have increased. Explain why this is so. State ONE point (with figures). 6.1.2 Shoes: • Calculate the % increase in the selling price of shoes. (3) • Jan decided to improve the quality of the shoes and to export them. Explain (4) how the direct material costs and the selling and distribution costs were affected by this decision. Provide figures. • Jan was concerned that the increase in price would have a negative impact (4) on the business. Explain whether his concern was justified. State TWO points. 41

INFORMATION SHIRTS SHOES 2020 2019 2020 2019 Break-even point ? 11 522 3 842 4 317 Units produced and sold 16 100 25 000 7 750 6 500 Net profit R500 400 R620 000 R2 379 750 R1 183 000 Selling price per unit R302 R290 R1 640 R1 260 Selling price of competitors R310 R290 R1 100 R1 250 Total fixed costs (factory R530 000 R530 000 R2 340 000 R2 340 000 overhead and administration) Total fixed cost per unit ? ? R302 R360 Total variable costs per unit R238 R244 R1 031 R718 Direct material costs per R92 R116 R456 R330 unit Direct labour costs per unit R131 R100 R381 R360 Selling and distribution R15 R28 R194 R28 costs per unit Unit cost of production R242 R228 R1 100 R1 004 ACTIVITY 7 NW Prelim 2019 adapted 7.1 N’SYNC MANUFACTURERS You are provided with information relating to N’Sync Manufacturers, a business manufacturing heart rate monitors for athletes. The financial year ends on 28 February 2021. REQUIRED: 7.1.1 Calculate the value of the raw material on hand on 28 February 2021, using the weighted-average method. (4) 7.1.2 Calculate the value of the direct material issued for production. (3) 7.1.3 Prepare the note for Factory overhead cost. (12) 42

7.1.4 Prepare the Production Cost Statement for the year ended 28 February 2021. Show all calculations in brackets. (14) INFORMATION: A. 28 FEBRUARY 2021 29 FEBRUARY 2020 STOCK ON HAND R R Indirect material cost 2 730 4 500 Work-in-progress ? 65 050 Finished goods 80 500 101 450 B. Direct material: TOTAL UNITS AMOUNT Stock on hand 1 March 2020 500 55 000 Purchases: 9 020 1 135 000 Jun 2020 1 250 137 500 Sept 2020 4 560 592 800 Dec 2020 3 210 404 700 Total available for production 9 520 1 190 000 Stock on hand 28 February 2021 560 ? C. Other costs: R Direct labour cost 467 720 Factory overhead cost 616 280 Selling and distribution cost 16% of sales Administration cost 92 500 Sales 6 282 375 Cost of finished goods sold 2 512 950 43

D. The following items must still be taken into account: • Indirect material Indirect material bought during the year was R260 000. At the end of the year it was discovered that indirect material in the factory costing R1 750 had been stolen. The material is insured and the insurance will pay out R1 130 in March 2021. No entries have been made to record this theft. The net loss on the theft must be treated as an Administration cost. Indirect material used is divided between the factory, administration and selling and distribution departments in the ratio of 1 : 1 : 3. • The monthly insurance premium increased by 10% on 1 January 2021. Insurance paid for the year amounted to R124 992 and this included insurance paid in advance for March and April 2021. Insurance of R59 520 was allocated to selling and distribution, and R7 440 to administration. • Salary and wage expenses were incurred: Gross CONTRIBUTIONS Direct salaries and Deductions Medical aid UIF Labour wages Factory 312 850 15 750 7 002 2 428 44

ACTIVITY 8 Limpopo Prelim 2019 adapted 8.1 Chunky Chairs produces kitchen chairs. The financial year ended on 31 May 2019. REQUIRED 8.1.1 Calculate the total purchases of raw material for the financial year ended 31 May 2019. (4) 8.1.2 Complete the Production Cost Statement on 31 May 2019. (9) 8.1.3 Calculate the following for the financial year ended 31 May 2019: • Number of units sold during the year (5) • Cost of sales (5) • Net profit for the year (8) 45

INFORMATION A. The business uses the FIFO-method to value their stock and the periodic inventory system. B. Balances: 31 MAY 2019 1 JUNE 2018 Raw material stock ? R325 000 Work in Progress R94 000 ? Finished Goods ? R285 000 9 500 units 15 000 units C. Carriage on raw materials amounted to R27 000 for the year. D. Raw Material available for production was R1 450 000, while raw materials used in the factory were R1 140 000. E. Salaries and wages amounted to R650 000 for the year. 40% of this was wages of workers who worked on the chairs. The rest was divided equally between Factory overheads and Administrative cost. F. 80 000 chairs were completed during the year at a unit cost of R21,25. G. Sales: chairs were sold at R42,50 per unit. H. After all expenses above were taken into account, the Distribution cost was R625 600 and Administrative cost R787 400. 8.2 Glitterati Bags manufactures exclusive evening handbags. REQUIRED 8.2.1 Calculate the following: (a) the variable cost per unit. (4) (b) the breakeven point. (5) 8.2.2 After an analysis of cost and efficiency, the internal auditor is concerned about a few points. Refer to Information C and answer the following questions: (a) Direct material: Identify ONE problem and suggest ONE possible solution for the problem. (2) 46

(b) Direct labour and Sewing machine maintenance: Identify TWO different problems with each item and suggest a solution for EACH separate problem. (8) INFORMATION A. The business manufactured and sold 23 400 handbags during this year. The bags were sold at R299 each. B. Analysis of cost: TOTAL PER UNIT Direct Material R1 989 000 R85 Direct Labour R2 527 200 R108 Factory Overhead R842 400 R36 Administrative cost R538 200 R23 Selling and distribution R795 600 R34 C. After an analysis of cost and efficiency, the internal auditor is concerned about the following points: • Direct material: o 50 cm of material is needed to produce one handbag. o It was determined that 1 meter of material was used per handbag. • Direct labour: o 8 workers are employed that produce the handbags. o The average production per worker is 2 925 handbags. o The wage records reflected that one worker, Tarren, produced 2 100 handbags and she earned the highest overtime pay. • Sewing machines maintenance: o The maintenance cost increased significantly in the last year. o The maintenance on two workers’ machines, those of Roger and Gary, were three times higher than the other machines. 47

ACTIVITY 9 NSC Nov 2014 Adapted 9.1 BEN'S CATERING Ben Khulamo owns a small business that produces pies and doughnuts which he supplies to local school tuck shops. The financial year ended on 28 February 2021. NOTE: Where comments/explanations are required below, quote figures, unit costs or financial indicators to support your opinions. REQUIRED: 9.1.1 Identify ONE unit cost for doughnuts and TWO-unit costs for pies that were major problems in 2021, considering that the inflation rate was 5%. For each unit cost identified, give a possible cause of the problem, and give advice on how to rectify it. (12) 9.1.2 Ben feels that he can produce and sell more doughnuts. Calculate the number of extra doughnuts he must produce and sell to make an additional profit of R15 000. Assume that the unit costs and selling price for 2021 remain unchanged. (4) 9.1.3 Ben is concerned about the financial performance of his business and the fact that a new competitor has opened in the area. • Name the product which has been negatively affected by the new competitor. • Comment on how this would have affected the net profit on this product. (5) 48

INFORMATION DOUGHNUTS PIES 2021 2020 2021 2020 Total units produced & sold 55 000 units 51 000 units 35 000 units 44 000 units Break-even point (units) 21 667 units 24 074 units 38 095 units 18 519 units Ben's selling price per unit R8,00 R7,00 R12,50 R12,00 Selling price of competitor R8,60 - R12,50 - VARIABLE COSTS PER UNIT R5,00 R4,30 R8,30 R5,85 Direct material cost per unit R1,95 R2,05 R5,05 R2,20 Direct labour cost per unit R1,90 R1,55 R2,20 R2,60 Selling & distribution cost per unit R1,15 R0,70 R1,05 R1,05 FIXED COSTS PER UNIT R1,18 R1,27 R4,57 R3,64 Factory overhead cost per unit R0,67 R0,78 R3,38 R2,50 Administration cost per unit R0,51 R0,49 R1,19 R1,14 49

5. ANSWER BOOK ACTIVITY 1 PRODUCTION COST STATEMENT OF ROCKY MANUFACTURES FOR THE YEAR ENDED 30 APRIL 2021 Note R Direct material costs 1 Direct labour costs 2 Primary costs Factory overhead costs 3 Total manufacturing costs Work-in-process at the beginning of the year Work-in-process at the end of the year Cost of production of finished goods NOTES TO THE PRODUCTION COST STATEMENT 1. DIRECT MATERIAL COSTS R Balance at the beginning of the year Net purchases Carriage on purchases Less: Balance at the end of the year Direct material costs 2. DIRECT LABOUR COSTS R Factory wages UIF contributions Direct labour costs 3. FACTORY OVERHEADS COSTS R Indirect materials Indirect labour Rent expenses Depreciation Insurance Factory overheads costs 50

4. COST OF FINISHED GOODS SOLD R Opening stock of finished goods sold Cost of finished goods produced during the year Closing stock of finished goods Cost of finished goods sold ACTIVITY 2 2.1 2.1.1 2.1.2 2.1.3 2.1.4 4 2.2 2.2.1 Factory Overhead Cost Note 14 51

2.2.2 Production Cost Statement for the year ended 28 February 2021 Prime cost Total manufacturing cost 4 824 000 Cost of production of finished goods 10 ACTIVITY 3 3.1 3.1.1 3.1.2 3.1.3 3 3.2 KRIGE SHIRTS 3.2.1 Calculate direct labour cost. 9 52

3.2.2 PRODUCTION COST STATEMENT FOR THE YEAR ENDED 31 JULY 2020 Direct material cost 528 300 Prime cost Total production cost Work-in-progress (1 August 2019) 12 Cost of production of finished goods ACTIVITY 4 MANUFACTURING 4.1 DESKS FACTORY 4.1.1 Factory Overhead Cost Note Indirect labour R 296 500 Depreciation on factory plant 166 000 8 53

4.1.2 Calculate the total cost of production of finished goods. Workings Answer 5 4.4.2 Sihle wants to produce an additional 1 500 desks. Calculate the additional profit he can expect. Workings Answer 4 4.2 CHAIRS FACTORY 4.2.1 Provide a calculation to confirm the break-even point for 2021. Workings Answer 4 4.2.2 Comment on the break-even point and the production level achieved. Quote figures. 4 54

4.2.3 Sihle feels that wood raw material was not well controlled. Provide a calculation to support his opinion. 4 Identify TWO possible causes of this problem. Provide a solution for EACH. POSSIBLE CAUSES SOLUTION FOR EACH Cause 1 Cause 2 4 4.2.4 Give TWO reasons for the increase in direct labour cost. Provide a solution for EACH. REASONS SOLUTION FOR EACH Reason 1 Reason 2 4 ACTIVITY 5 5.1 GLAMOUR DRESS CREATIONS 5.1.1 PRODUCTION COST STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2021. Prime cost Total manufacturing cost Work-in-progress (1 March 2020) 76 000 Production cost of finished goods 21 55

5.1.2 Calculate the net profit for the year ended 28 February 2021. 7 5.2 LIGHTING SOLUTIONS 5.2.1 Calculate the factory overhead cost per unit for the year ended 31 December 2021. 2 5.2.2 Explain why George would not be concerned about the 28,1% increase in total variable cost from R936 000 to R1 200 000. 3 5.2.3 Give TWO reasons for the increase in the selling and distribution cost per unit. 2 56

5.2.4 Calculate the break-even point for the year ended 31 December 2021. 4 Comment on the production level for 2021. State TWO points. Quote figures. 4 5.2.5 Lighting Solutions are considering importing raw materials because it is cheaper and of a higher quality. Name TWO aspects that they must consider before finalising their decision. 2 57

ACTIVITY 6 6.1 GYMWEAR MANUFACTURERS 6.1.1 Shirts: Calculate the break-even point for shirts. 4 Identify ONE variable cost (with figures) that has not been well controlled. Give TWO possible reasons for this problem. ONE VARIABLE COST REASONS WITH FIGURES Reason 1: Reason 2: 4 Explain why Jan might be concerned about the large decreases in the other TWO variable costs. 4 58

Jan does not understand why the unit cost of production has increased when neither his fixed costs nor the variable costs have increased. Explain why this is so. State ONE point (with figures). 4 6.1.2 Shoes: Calculate the % increase in the selling price of shoes. 3 Jan decided to improve the quality of the shoes and to export them. Explain how the direct material costs and the selling and distribution costs were affected by this decision. Provide figures. 4 Jan was concerned that the increase in price would have a negative impact on the business. Explain whether his concern was justified. State TWO points. Point 1: Point 2: 4 59

ACTIVITY 7 7.1 N’SYNC MANUFACTURERS 7.1.1 Calculate the value of the raw material on hand on 28 February 2021, using the weighted-average method. Calculation Answer 4 7.1.2 Calculate the value of the direct material issued for production. Calculation Answer 3 7.1.4 PRODUCTION COST STATEMENT ON 28 FEBRUARY 2021 R Direct material cost Direct labour cost Prime cost Factory overhead cost Manufacturing cost Work-in-progress: Beginning 65 050 Work-in-progress: End Total cost of production 14 60

ACTIVITY 8 8.1.1 Calculate the total purchases of raw material for the financial year ended 21 May 2020. 4 8.1.2 Production Cost Statement 1 140 000 Prime cost Total cost of production 1 712 000 Total cost of production of complete products 9 61

8.1.3 Calculate the following for the financial year ended 31 May 2020: Number of units sold during the year. 5 Cost of Sales 5 62

Calculate the Net Profit for the year ended 31 May 2020. 8 8.2.1 Calculate the following: (a) the variable cost per unit. 4 (b) the breakeven point. 5 63

8.2.2 After an analysis of cost and efficiency, the internal auditor is concerned about a few points. Refer to Information C and answer the following questions: (a) Direct material Problem Solution 2 (b) Direct labour Problem Solution 4 Sewing machine maintenance: Problem Solution 4 64

ACTIVITY 9 9.1 BEN'S CATERING 9.1.1 Identify ONE unit cost for doughnuts and TWO-unit costs for pies that were major problems in 2021, considering that the inflation rate was 5%. ONE unit cost for doughnuts Problem and advice (Quote figures.) TWO-unit costs for pies Problem and advice (Quote figures.) 12 65

9.1.2 Calculate the number of extra doughnuts he must produce and sell to make an additional profit of R15 000. Assume that the unit costs and selling price for 2021 remain unchanged. 4 9.1.3 Name the product which has been negatively affected by the new competitor. Comment on how this would have affected the net profit on this product. 5 66

6. SUGGESTED ANSWERS AND MARKING GUIDELINES ACTIVITY 1 Production Cost Statement of Rocky Manufactures for the year ended 30 April 2021 Note R Direct material costs 1 334 000 R Direct labour costs 2 189 880 R Primary costs DM + DL 523 880 P Factory overhead costs 3 95 070 R Total manufacturing costs PC + FO 618 950 P Work-in-process at the beginning of the year 12 400 P 631 350 Work-in-process at the end of the year (25 350) P Cost of production of finished goods 606 000 R NOTES TO THE PRODUCTION COST STATEMENT 1. Direct material costs R Balance at the beginning of the year 20 400 P Net purchases (124 000P + 192 600P – 4 500P) 312 100 R Carriage on purchases 24 000 P Less: Balance at the end of the year (22 500) P Direct material costs 334 000 R 2. Direct labour costs R Factory wages 188 000 P UIF contributions 1 880 P Direct labour costs 189 880 R 3. Factory overheads costs R Indirect materials (1 600P + 5 300P – 1 950P) 4 950 R Indirect labour (62 000 + 620) 62 620 PP Rent expenses 2 850 P Depreciation 21 300 P 67

Insurance 3 350 P Factory overheads costs 95 070 R 4. Cost of finished goods sold R Opening stock of finished goods sold 15 300 P Cost of finished goods produced during the year 606 000 R Closing stock of finished goods (18 800) P Cost of finished goods sold 602 500 R ACTIVITY 2 2.1.1 factory overhead cost P 2.1.2 fixed cost P 2.1.3 selling and distribution cost P 2.1.4 minimum P 4 2.2 2.2.1 Factory Overhead Cost Note Indirect factory materials (5 950 + 36 000 – 8 750) 33 200 PP Salaries and wages (2 900 000 x 10%) 290 000 PP Rent expense (291 000 x 240/300) 232 800 PP Insurance (49 200 P x 12/15 P x 4/10 P) 15 744 þ* (49 200 – 9 840) or 39 360 two marks Telephone (28 800 x 20/40) / 57 600 X 20/80 14 400 PP Sundry factory expenses 189 856 P 776 000 R* 14 68

2.2.2 Production Cost Statement for the year ended 28 February 2021 Direct materials cost 2 743 000 R Direct labour cost (2 900 000 x 45%) 1 305 000 PP Prime cost 4 048 000 R Factory overhead cost 776 000 R Total manufacturing cost 4 824 000 Work-in-process at beginning 70 000 R 4 894 000 R Work-in-process at end (94 000) P Cost of production of finished goods (40 000 x 120) 4 800 000 PP 10 ACTIVITY 3 3.1 3.1.1 False P 3.1.2 True P 3.1.3 True P 3 69

3.2 KRIGE SHIRTS 3.2.1 Calculate direct labour cost. 3 P x 1 960 P x 90 P 529 200 three marks 529 200 (normal time) x 12% 63 504 þþif 12% of normal time 1 x 1 680 x 90 151 200 PR 12 146 P 756 050 R 529 200 x 112% 592 704 + 151 200 + 12 146 = 756 050 five marks two mark one mark one method mark 705 600 -25 200 63 504 (4 x 1 960 x 90) – 90 (1 960 – 1 680) + (3 x 1 960 x 12%) + 12 146 = 756 050 three marks two marks two method marks one mark one method mark 705 600 84 672 -25 200 - 9 022 (4 x 1 960 x 90) + (705 600 x 12%) – 90 (1 960 – 1 680) – (21 168 – 12 146) = 756 050 three marks two marks two method marks one mark one method mark 9 70

3.2.2 PRODUCTION COST STATEMENT FOR THE YEAR ENDED 31 JULY 2020 Direct material cost 528 300 Direct labour cost 756 050 R Prime cost 1 284 350 R Factory overhead cost 20 000 three marks 45 000 two marks 360 880 P + 4/9 P (48 750 P- 3 750 P ) one mark one mark one mark + one R mark for both 380 880 360 880 + (21 667 – 1 667) one mark two marks one mark for both 360 880 + (45 000 – 15 000 – 10 000) Total production cost Operation 1 665 230 R Work-in-progress (1 August 2017) 35 570 P 1 700 800 Work-in-progress (31 July 2020) (38 300) R Cost of production of finished goods 1 662 500 PP 12 3.3 GEMMA'S MANUFACTURERS 3.3.1 Calculate the break-even point for the year ended 31 August 2020. 118 860 two marks 67 200 P + 51 660 P 910 P– 577 P (180 + 252 + 145) one mark -180 – 252 – 145 one mark 333 two marks . = 356,9 OR 357 units R 5 71

3.3.2 Compare and comment on the break-even point and the production level achieved over the last two years. Quote figures. Comparison of the BEP with the level of production of 2020 PP Figures P Comparison of 2017 and 2020 BEP and/or production PP Figures P Compulsory response see 3.3.1 Business produced 63 units (15%) more than the BEP (420 – 357) OR: The business made a profit on only 63 units (420 – 357) compared to 105 units last year (540 – 435) Other optional responses: • BEP decreased from 435 units in 2017 to 357 units in 2020 (78 units; 17,9%) • The business produced 120 units (22,2%) less than last year (540 – 420) 6 3.3.3 Give TWO reasons for the increase in direct material cost. Suggest ONE way to control this cost. REASONS: Any TWO valid reasons. PP PP Inflationary increases / transport costs / increase in fuel price / scarcity. Wastage due to poor workmanship. Theft of material (in the factory) due to poor internal controls. VAT increased to 15% Change in exchange rate (if raw materials imported) Changed suppliers (more expensive) / Better quality raw materials SUGGESTION: Any ONE valid suggestion P Look for cheaper suppliers without compromising quality. Negotiate transport and delivery discounts. Take advantage of bulk discounts. Recycle waste material / use off-cuts Train and supervise workers to minimise wastage. Control stock regularly to identify shortages. 5 Buy stock as required to avoid stock piling and possible theft. 72

ACTIVITY 4 4.1 DESKS FACTORY 4.1.1 Factory Overhead Cost Note Indirect labour R 296 500 Depreciation on factory plant 166 000 Water and electricity (248 000 + 18 000) x 80% or – 53 200 212 800PR* 198 400 + 14 400 Factory rent (345 600 x 810/1080) or – 83 200 259 200PR* Insurance (12 600 x 75/25) or x 3 OR 50 400 – 12 600 37 800PR* Factory sundry expenses 107 700P 1 080 000R* 8 4.1.2 Calculate the total cost of production of finished goods. Workings Answer 9 000 x 160 two or no marks 3 060 000 + 1 440 000 + 1 080 000 R5 580 000 P PP R see 4.1.1 R OR: units DMC/u DLC/u FOHC/u one part correct 620 three marks three marks 9 000 x (340 + 160 + 120) 4.1.1 ÷ 9 000) + 500 one mark one mark one mark one method mark see 4.1.1 ÷ 9 000 5 73

4.4.2 Sihle wants to produce an additional 1 500 desks. Calculate the additional profit he can expect. Workings Answer Extra units x Contribution per unit 750 one mark – 580 one mark [340+160+80] 1 500 P x 170 PP Correct OR: two marks one mark 510 000 + 240 000 + 120 000 operation 1 125 000 – 870 000 & one part correct OR: (Total units x Contribution per unit) – Fixed costs – Original profit R R255 000 one mark one mark one mark for both = –1 530 000 (10 500 x 170) – 1 440 000 – 90 000 1 785 000 two marks OR: (BEP units x Contribution per unit) – Fixed costs – Original profit OR: R255 070 one mark one mark one mark Note: 4th option due to Due to possible ambiguity rounding off (9 971 x 170) – 1 440 000 1 500 more than BEP instead of BEP 1 695 070 or 1 695 000 two marks 1 500 more than current production’ 4 4.2 CHAIRS FACTORY 4.2.1 Provide a calculation to confirm the break-even point for 2021. Workings Answer 16 000 x 96 or 1 536 000 two marks 18 071 1 216 000 P + 320 000 P 390 P – 305 P 85 two marks OR: 0 or 35 OR: Sales VC FC 7 047 690 – 5 511 655 – 1 536 000 4 74

4.2.2 Comment on the break-even point and the production level achieved. Quote figures. If differences are shown for figures, this carries two marks Comment on BEPP FiguresP Comment on productionP FiguresP Produced 16 000 units but BEP is 18 071(or see 4.2.1) units so they will make a loss Produced 2 071 less than BEP so they will make a loss. Production increased from 15 000 to 16 000 units (by 1 000) BEP increased from 12 400 to 18 071 units (by 5 671) In 2018 they made a profit on 2 600 units. 4 4.2.3 Sihle feels that wood raw material was not well controlled. Provide a calculation to support his opinion. (16 000 x 1,2) METRES 22 000m P – 19 200m PP = 2 800m wasted R one part correct CHAIRS 22 000/1,2 18 334 – 16 000 = 2 334 fewer chairs OR two marks one mark one mark COSTS 22 000 x 120 19 200 x 120 2 640 000 – 2 304 000 = 336 000 extra cost OR R165 – R144 = R21 per unit extra one mark two marks one method mark 4 Identify TWO possible causes of this problem. Provide a solution for EACH. POSSIBLE CAUSES SOLUTION FOR EACH P P Wastage / Unskilled workers Train workers; supervise regularly Two valid & / Poor control Use technology (stencils / templates) different Internal controls / stock counts / supervision / Theft of wood causes with buy in smaller quantities / install cameras solutions Poor quality wood Source other suppliers P P 4 75

4.2.4 Give TWO reasons for the increase in direct labour cost. Provide a solution for EACH. REASONS P P SOLUTION FOR EACH P P Load shedding Generator or solar power / P P Workers dissatisfied (with Two valid & wages or conditions) / Engagement / communicate with union different Protests reasons Restrict overtime / employ more workers (avoid with Overtime overtime) solutions Inefficient / slow workers / Pay per unit produced / improve monitoring P P Lack of supervision procedures / training programme 4 ACTIVITY 5 5.1 GLAMOUR DRESS CREATIONS 5.1.1 PRODUCTION COST STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2021. Raw/Direct materials cost (918 550 P + 5 250 PP) 923 800 þ* Direct labour cost (753 300 ü + 48 600 ü + 8 100 ü + 8 100 þ) OR: Solve for Y y = 753 300 + 48 600 + (0,01y) 818 100 þ* y = 810 000 DLC = 810 000 + 8 100 OR 753 300+48 600+801 900 = 99% DLC = 101% 801 900 x 101/99 Prime cost 1 741 900 þ Factory overhead cost (227 240 P + 63 960 PPPP) 291 200 þ* [(87 100– 7 150) x 80% ] Total manufacturing cost 2 033 100 þ Work-in-process (1 March 2020) 76 000 2 109 100 Work-in-process (28 February 2021) (169 100) þ Cost of production of finished goods 1 940 000 üüþ* (1 860 000 + 190 000 – 110 000) 21 76

5.1.2 Calculate the net profit for the year ended 28 February 2021. 79 950 X 20% 3 170 000 PP – 1 860 000 P – 410 000 P – (259 010 P + 15 990 R) or – 259 010 – 15 990 275 000 = 625 000 R 7 5.2 LIGHTING SOLUTIONS 5.2.1 Calculate the factory overhead cost per unit for the year ended 31 December 2021. 395 000 /50 000 = R7,90 PP 7 5.2.2 Explain why George would not be concerned about the 28,1% increase in total variable cost from R936 600 to R1 200 000. Any valid comment üü compared to inflation rate ü The variable cost per unit increased up by 7,6% üü which is less than inflation rate ü An additional 8 000 units were produced (19% increase in production) There was an increase in units produced and therefore greater profits. 3 5.2.3 Give TWO reasons for the increase in the selling and distribution cost per unit. TWO valid reasons ü ü • Advertising costs may have increased • Increase in fuel price • Commission to sales staff increased • Due to inflation Do not accept increased sales / increased delivery expenses 2 5.2.4 Calculate the break-even point for the year ended 31 December 2021. 575 000 P 45 P– 24 P 21 = 27 381 units R (accept 27 380,9) 4 77

Comment on the production level for 2021. State TWO points. Quote figures. Comparison figures not necessary but may enhance answer Explanation ü ü must compare BEP with level of production figures P ü • The business produced and sold 50 000 units. This is 8 000 units more than the production achieved in the previous financial year (42 000 units). • The business produced 22 619 (50 000 – 27 381) units more than the BEP. • There is an increase of (22 619 – 19 687) 2 932 units over the BEP when compared to the previous financial year. 4 5.2.5 Lighting Solutions are considering importing raw materials because it is cheaper and of a higher quality. Name TWO aspects that they must consider before finalising their decision. Any TWO relevant aspects ü ü • Fluctuation in exchange rates (impact on cost/selling price) • Additional / increasing import costs (transportation and custom duties) • Time delays (availability and/or delivery) • Support for local suppliers (impact on the local economy) • Not easy to return damaged goods 2 78

Activity 6 6.1 GYMWEAR MANUFACTURERS 6.1.1 Shirts: Calculate the break-even point for shirts. 530 000 ÷ (302 – 238) = 8 281,25 / 8 282 / 8 281 / 8281,3 ü ü ü þ one part correct; do not accept R or c 4 Identify ONE variable cost (with figures) that has not been well controlled. Give TWO possible reasons for this problem. ONE VARIABLE COST REASONS WITH FIGURES P P Variable cost P Any two different reasons Figures P Expected responses: • Negotiated wage increase / applied minimum wage / inflation / increased salary scales (for qualifications) • Paid bonuses to some workers • Excessive overtime • Lack of productivity (inefficiency) of workers • Inexperienced / poorly trained workers Direct labour cost • High staff turnover rate Increased by R31 (31%) • Old equipment affects productivity (from R100 to R131) • Work hours lost due to training time (workers paid for training) / due to load-shedding (power-cuts) / due to paid sick leave • Errors in calculation of wages (over-paid) Do not accept: More workers; Absent workers; Poor budgeting 4 79

Explain why Jan might be concerned about the large decreases in the other TWO variable costs. Explanations on the two VC’s P State or imply what the concern is P P P Comment Using cheaper material Inferior quality. on DMC Economising on material May affect the quality of the product Reduced advertising or reduced May cause sales to drop / may commission / reduced demotivate salespersons remuneration of salespersons Comment Reduced distances for deliveries Leads to loss of customers on S&DC / discontinuing the service in certain areas Out-sourcing / using cheaper Might be inferior and negatively service providers affect business in future 4 Jan does not understand why the unit cost of production has increased when neither his fixed costs nor the variable costs have increased. Explain why this is so. State ONE point (with figures). Any one explanation üü Figures üü Expected responses: • No economies of scale / decrease in production by 8 900 units (25 000 to 16 100) • Lower production increased FC per unit by R11,72 or 55,2% (R21,20 to R32,92) 4 6.1.2 Shoes: Calculate the % increase in the selling price of shoes. 1 640–1 260 380 P x 100 OR 130,2% -100%= 30,2% 1 260 P 1 = 30,2% þ 3 80

Jan decided to improve the quality of the shoes and to export them. Explain how the direct material costs and the selling and distribution costs were affected by this decision. Provide figures. • DMC increasedP from R330 to R456 (by R126/by 38%/38,2%) P • S&DC increasedP from R28 to R194 (by R166/by 593%/592,8%)P 4 Jan was concerned that the increase in price would have a negative impact on the business. Explain whether his concern was justified. State TWO points. Reasons (any two) P P State NO concern OR imply NO concern in explanation or by using figures P P • Sales increased (by 1 250 units) / customers still supported the business (despite increase in price) • Net profit increased (by R1 196 750) / price did not negatively affect sales) • BEP decreased (due to increased contribution per unit) by 475 units / The business now exceeds BEP by bigger margin (3 908 units). 4 ACTIVITY 7 7.1 N’SYNC MANUFACTURERS 7.1.1 Calculate the value of the raw material on hand on 28 February 2021, using the weighted-average method. Calculation Answer (55 000 + 1 135 000) 70 000þ* 1 190 000 P 4 9 520 P x 560 P (9 020 + 500) OR 125 two marks x 560 one mark 81

7.1.2 Calculate the value of the direct material issued for production. Calculation Answer (55 000 + 1 135 000) 1 190 000 P – 70 000 þ* (see 7.1.1) 1 120 000 þ* 3 OR (9 520 – 560) x 125 7.1.3 Prepare the note for Factory overhead cost. R Factory overhead cost 616 280 Indirect material [(4 500 P + 260 000 P - 2 730 P) x 1/5 P] - 1750 P 50 604 þ* Insurance (124 992 - 19 096 PP) - 59 520 P - 7 440 P 38 936 þ* 12 705 820þ* 7.1.4 PRODUCTION COST STATEMENT ON 28 FEBRUARY 2021 R Direct material cost (see 7.1.2) 1 120 000 þ* Direct labour cost 790 000 þ* 467 720 P + 312 850 P + (7 002 + 2 428) P Prime cost (DMC + DLC) 1 910 000 þ* Factory overhead cost 705 820 þ* Manufacturing cost (PC + FOHC) 2 615 820 þ* Work-in-progress: Beginning 65 050 2 680 870 þ* Work-in-progress: End (Balancing figure) (188 870) þ* Total cost of production 2 492 000 þ* 2 512 950 P + 80 500 P-101 450 P 14 82

ACTIVITY 8 8.1.1 Calculate the total purchases of raw material for the financial year ended 21 May 2020. 1 450 000 ü – 27 000 ü – 325 000 ü = 1 098 000 þ one part correct 4 8.1.2 Production cost statement for the year ended 31 May 2020 Direct material 1 140 000 Direct labour (650 000 x 40%) PP 260 000 Prime cost DM + DL P1 400 000 Factory overhead cost balancing P 312 000 figure Total cost of production 1 712 000 Work in process (1 June 2018) balancing P 82 000 TCP + WIP begin P 1 794 000 Work in process (31 May 2020) P P (94 000) Total cost of production of complete products PP 1 700 000 9 80 000 x 21,25 8.1.3 Calculate the following for the financial year ended 31 May 2020: Number of units sold during the year. 15 000 ü + 80 000 ü ‒ 9 500 ü = 85 500 üü 5 Cost of Sales 201 875 285 000 ü + 1 700 000 þ ‒ (9 500 ü x 21,25 ü) = 1 783 125 þ Or: The Finished Goods Stock account 5 83

Calculate the Net Profit for the year ended 31 May 2020. Sales (85 500 ü see 2.1.3 x 42,50 ü) ü 3 633 750 Cost of Sales see 2.1.3 ü (1 783 125) Gross profit operation ü 1 850 625 Less: Distribution cost ü (625 600) Less: Administrative cost ü (787 400) Net profit ü 437 625 8 8.2.1 Calculate the following: (a) variable cost per unit. 85 ü + 108 ü + 34 ü = 227 ü OR: 4 1 989 000ü + 2 527 200 ü + 795 600ü = 227 per unit ü 23 400 (b) breakeven point. 842 400ü + 538 200 üüüüüüü 299 ü ‒ 227 þ see (a) above 5 = 19 175 units 84

8.2.2 After an analysis of cost and efficiency, the internal auditor is concerned about a few points. Refer to Information C and answer the following questions: (a) Direct material: Problem Solution Material is wasted ü Use templates when cutting / train workers to work efficiently ü 2 Direct labour: (b) Problem Solution Tarren is not producing enough (2 Give her daily targets / bring in 100 from 2 925) ü commission if they reach a certain goal / any acceptable or correct answer ü Tarren works the most overtime and Only approve overtime if daily target still does not reach the average has just been missed / count and production number / slow worker / compare the number of bags she exploits overtime ü produces every hour / any acceptable or correct answer ü Sewing machine maintenance: Problem Solution Machines are old / needs to be Replace the machines / buy newer 4 replaced ü and more productive machines / any acceptable or correct answer ü Roger and Gary cannot work the Train them again / move them to machines properly / lack of training another part of the production line / ü any acceptable or correct answer ü 4 85

ACTIVITY 9 9.1 BEN'S CATERING 9.1.1 Identify ONE unit cost for doughnuts and TWO unit costs for pies that were major problems in 2021, considering that the inflation rate was 5%. Identify cost P P P Figures P P P Problem P P P Valid advice P P P ONE unit cost for doughnuts Problem and advice (Quote figures.) Both must be specific, not general FC & VC & general expenses Variable costs now R5,00 / Must mention either DLC or S&DC R4,30 à R5,00 (16,3%) Possible cause of the problem: Workers are not operating OR efficiently/Wages increased/More overtime Direct labour cost now R1,90 / R1,55 à R1,90 (+ 23%) Advice: Assess the efficiency of workers/Offer incentives/Time and motion studies/Restrict overtime/Train workers to be more efficient/Improve supervision OR OR Selling & distribution cost now R1,15 R0,70 à R1,15 (+ 64%) Possible cause of the problem: Salespersons not efficient/Transport costs increased/Bad debts/Theft of fuel/Increase in fuel prices Do not accept Administration cost Advice: Offer commission on sales/Look for cheaper forms of transport/Training/ Plan trips better TWO unit costs for pies Problem and advice (Quote figures.) Both must be specific, not general FC & VC 12 86

Direct material cost now R5.05 / Must cover DMC R2,20 à R5,05 (+ 130%) Possible cause of the problem: Lack of expertise of workers/Poor quality raw materials/Increased raw materials cost/Theft of raw materials/Wastage Advice: Investigate causes of wastage/Look for a cheaper supplier/Better quality of raw material/Better training/Improve security Factory overhead cost now R3,38 Possible cause of the problem: R2,50 à R3,38 (+ 35%) Low production increased fixed cost per unit/ Increase in certain costs, e.g. rent Do not accept Administration cost Advice: Increase units produced to reduce unit cost/Advertise the product better/Diversify the range/Economise on expenses, e.g. rent/water/ electricity 87

9.1.2 Calculate the number of extra doughnuts he must produce and sell to make an additional profit of R15 000. Assume that the unit costs and selling price for 2021 remain unchanged. OR 15 000 P/ 3,00 PP FC Exis NP Extra NP = 5 000 extra units R 64 900 + 100 100 + 15 000 (R8 – R5) R3,00 OR = 60 000 to be made FC = 55 000 x R1,18 – 55 000 currently made = R64 900 (is the rounded off = 5 000 units extra figure) OR To cover = R64 900 + 15 000 Sales 55 000 x R8 = R440 000 = R79 900 COS 55 000 x R5 = R275 000 Units needed = R79 900 / R3 GP = R165 000 = 26 633 (new BEP) Target = R180 000 BEP = 21 667 ÷ Contribution R3,00 Extra needed = 4 966 = 60 000 units (difference due to rounding off) Making 55 000 Additional = 5 000 units 21 667 x 3 = 65 001 (Fixed costs) (65001 + 15 000)/3 = 26 667 26 667 – 21 667 = 5 000 4 9.1.3 Name the product which has been negatively affected by the new competitor. Pies P Comment on how this would have affected the net profit on this product. PP Sales & production decreased (44 000 à 35 000 units) / Ben has had to limit his price (to R12,50) / Reduction in price led to decrease in contribution (R6,15 à R4,20) P Production is less than BEP P This means that a loss will be made on the pies. 5 88

7. EXAMINATION GUIDANCE • Familiarize yourself with the use of fractions, ratios and/or percentages to calculate costs for the different components or departments in a manufacturing environment. • Understand the different cost categories, different stock accounts as well as unit cost analysis. • Be able to calculate the additional units that the business needs to produce to achieve an additional profit by simply using the contribution per unit to arrive at the answer. • Obtain a series of short activities from the previous question papers to make effective calculations determining the additional units required for a projected increase in profit, • You may also make the converse calculation (to the bullet above) by determining the additional profit that will be earned by an increase in units produced and used. • Calculate and comment on the break-even point and the level of production. • Write more informal tests on the interpretation of unit costs and how to use unit costs to identify problems or economies of scale and to predict future results. • You should be able to analyse and interpret information on different products or different financial periods. The objective is to calculate percentage increases or decreases, identify problems and offer practical solutions or advice. • Practice a variety of activities to expose yourself to the different questioning techniques. 89

8. GENERAL STUDY AND EXAMINATION TIPS 1. Note that Accounting is now assessed in TWO papers. • P1 Financial Reporting and Evaluation 150 marks 2 hours • P2 Managerial accounting and internal controls 150 marks 2 hours 2. It is important to be familiar with the specific content for each paper so that you can plan effectively after the Preparatory Examinations. 3. Obtain the 2021 Examination Guidelines, exemplar papers and many past examination papers to form the basis of your study programme. 4. Prepare a functional study timetable and focus on specific topics at different intervals. Align this to time management; exploring short-cuts for calculations, frequently asked predictable questions and recommended responses for interpretive questions. 5. Pay close attention to the language used in past papers such as key vocabulary and action verbs. 6. For calculations, always show all workings – they carry many part marks. 7. Become familiar with the structure and layout of Questions. They follow the same pattern which is: Appetizer, Required, Information. 8. Note that the ANSWER BOOK is a vital part of the Question Paper, as many amounts and details will be included for most Questions. This is a time-saving device. Ensure that you include these amounts in your final answers, where relevant. 9. Always arrive at least 30 minutes before the commencement of the paper. You will then be able to easily take care of all the administration requirements and to make effective use of your 10 minutes reading time. 10. Use the reading time to get a global picture of the paper and identify where you wish to start (according to your strengths). You already have the ANSWER BOOK to assist in this regard. Simply go to the relevant pages for that Question. 11. You can also answer the sub-questions in any order; always inserting what is given, working from the simple to the more challenging. 12. Write legibly and neat; markers must have clear understanding of the answers you provided. 13. Keep your comments short and to-the-point. The mark allocation is your guide about the length of your response. 14. Have your own stationery and a good calculator (even a spare – just in case). 90

ACKNOWLEDGEMENTS The Department of Basic Education (DBE) gratefully acknowledges the following officials for giving up their valuable time and families, and for contributing their knowledge and expertise to develop this this study guide for the children of our country, under very stringent conditions of COVID-19. Writers: Poobie Govender, Mbangwa Shabalala, Beauty Mpanza, Tabile Nobhala, Nosipho Sicwetsha, Vuyisile Deluhlazo and Nomsa Bikitsha. DBE Subject Specialist: Percy Masango The development of the Study Guide was managed and coordinated by Ms Cheryl Weston and Dr Sandy Malapile. 91

MMe a ISBN : 978-1-4315-3490-6 ie High Enrolment Self Study Guide Series » basic education This publication is not for sale. ); pot en © Copyright Department of Basic Education REPUBLIC OF SOUTH AFRICA www.education.gov.za | Call Centre 0800 202 993