Production Cost Statement - Accounting. Study Guide. Grade

Chapter 3: Manufacturing

3.2 Production Cost Statement

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Worked example 1

Example adapted from November 2010 NSC Exam Paper

You are provided with information (balances, transactions and adjustments) relating to Fatima Manufacturers owned by Fatima Fala. The business manufactures shoes.

Required

1. Calculate the value of the raw materials that were issued to the factory for the year ended 28 February 2010. [6] 2. Prepare the following notes to the Production Cost Statement for the year

ended 28 February 2010:

2a) Direct labour cost [5]

2b) Factory overhead cost [16]

3. Prepare the Production Cost Statement for the year ended 28 February 2010. [12] 4. Using the figures in the Production Cost Statement you have just prepared,

calculate the following (show your workings):

4a) Raw materials cost per unit [3]

4b) Total cost per unit [3]

5. You are provided with the number of units produced and the break-even point calculated for the past two years:

2010 2009

Break-even point 19 548 units 11 300 units Number of units produced 20 000 units 24 000 units 5a) Briefly explain what the term break-even point means. [2] 5b) Explain whether Fatima should be concerned about the break-even point for

2010. Quote figures to support your answer. [4]

Information

Fatima Manufacturers

1. OPeNiNG BALANCeS ON 1 MARCH 2009:

Raw materials stock R160 000

Work-in-process stock 158 000

Finished goods stock 120 000

Consumable stores stock: Factory 6 000 Factory plant and equipment at cost 2 225 000 Accumulated depreciation on factory plant and equipment 450 000 This is direct materials cost

Mind the Gap CAPS Grade 12 Accounting chAptEr 3 mAnufActuring 65

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3

2. SuMMARy OF tRANSACtiONS FOR tHe yeAR eNded 28 FeBRuARy 2010:

Purchases of raw materials on credit R1 023 475 Carriage on purchases of raw materials 22 500 Consumable stores purchased for the factory 43 000 Cleaning materials purchased for the office 12 000 Factory plant and equipment purchased on

1 September 2009 250 000

Production wages 723 800

UIF – contribution for factory employees

Salaries: Factory foreman 150 000

Administration 400 000

Sales staff 250 000

Water and electricity 163 000

Sundry expenses: Factory 194 680

Administration 530 000

Sales department 340 000

3. CLOSiNG BALANCeS ON 28 FeBRuARy 2010:

Raw materials stock R259 125

Work-in-process stock 122 900

Finished goods stock 142 500

Consumable stores stock: factory 7 000

4. AdditiONAL iNFORMAtiON ANd AdJuStMeNtS:

a) No entry was made for the transport of raw materials by Pops

Carriers to the factory, R3 750.

b) No entry was made for the following in respect of the production

wages for the last week of February 2010. The entry was omitted (left out) from the wages journal:

Gross wages R6 200

Deductions: Unemployment Insurance Fund 62

PAYE 1 240

The employer contributes 1% to the UIF.

c) An amount of R4 200 was still outstanding on the water and

electricity account for February 2010. Sixty per cent (60%) of all the water and electricity was used in the factory.

d) Depreciation on factory plant and equipment must be brought

into account at 10% per annum, according to the diminishing balance method.

e) During the year 20 000 pairs of shoes were manufactured.

If there are any returns of purchases (creditors allowances), they would be subtracted from purchases.

Production wages for the year + gross wage figure in adjustment B.

As per adjustment B, the UIF contribution is 1% of the R730 000 above.

Opening balance of consumable stores stock + consumable stores

purchases – closing balance of consumable stores stock.

R2 225 000 – R450 000 = R1 775 000 × 10 % = R177 500

R250 000 × 10 % × 6/12 = R12 500

Answers to worked example 1

(see pages 40–41)

1. Value of raw materials issued:

diReCt MAteRiALS COSt

Opening balance of raw material stock R160 000 3

Add: Purchase of raw materials + R1 023 475 3

Add: Carriage on purchases of raw materials + R22 500 3

Add: Transport of raw materials (adjustment A) + R3 750 3

Less: Closing balance of raw material stock – (R259 125) 3

Equals: Raw materials issued to the factory = _{R950 600} [6]

2. NOteS tO tHe PROduCtiON COSt StAteMeNt 2a

diReCt LABOuR COSt R

Production wages (723 8003 + 6 2003) 730 000 3

UIF contribution _{7 300}

737 300

[5] 2b

FACtORy OVeRHeAd COSt R

Salary of foreman 150 000 3

Consumable stores: factory

(6 0003 + 43 0003 − 7 0003) 42 000 Depreciation (177 50033 + 12 50033) _{190 000} Water and Electricity (163 0003 + [4 2003 × 60%]3) _{100 320}

Sundry expenses: factory 194 680 3

677 000

[16]

(Total water and electricity already paid during the year + the amount that still has to be paid as per adjustment C) × only the portion used in the factory (60% as per adjustment C).

Only use FACTORY COSTS on the Production Cost Statement. No administration and selling, and distribution costs appear on this statement.

There are a number of costs that may need to be split between factory, administration and selling, and distribution.

For example: water and electricity could be split in the ratio 3 : 2 : 1.

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PAY SPECIAL ATTENTION

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Mind the Gap CAPS Grade 12 Accounting chAptEr 3 mAnufActuring 67

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3

3. PROduCtiON COSt StAteMeNt OF FAtiMA MANuFACtuReRS FOR tHe yeAR eNded 28 FeBRuARy 2010

tOtAL

Direct materials cost3 _{950 600}

Direct labour cost3 _{737 300}

Prime/direct cost 1 687 900

Factory overhead cost3 677 000

total cost of production 2 364 900

Work-in process at the beginning of the year3 158 0003

2 522 900

Work-in process at the end of the year3 (122 900)3

Total cost of production of finished goods _{2 400 000}

[12]

4. a) Raw materials cost per unit

R950 600 ÷ 20 0003 units = R47,53 [3]

b) Total cost per unit

R2 400 000 ÷ 20 0003 units = R1203 [3]

Direct materials cost + Direct labour cost = Prime costs

This figure comes from the answer in the factory overhead cost note in part 2 of this question.

This final figure provides the accountant with the total cost of making the 20 000 pairs of shoes during the year (see additional information E). This figure comes from the answer you calculated in part 1 of this question.

This figure comes from the answer in the direct labour note in part 2 of this question.

This figure comes from closing balances at the end of the financial year.

This figure comes from opening balances at the beginning of the financial year.

Direct materials costs (see Production Cost Statement) ÷ number of shoes

manufactured as per additional information E.

Total cost of production of finished goods (see Production Cost Statement) ÷ number of shoes manufactured as per additional information E.

It is VERY important to know the format of the Production Cost Statement!

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5. a) It tells you how many items you must make and sell

before you can start making a profit.33 [2]

b) explanation:

Yes,3 she should be concerned as units produced are close3

to BEP; or Yes, as the BEP has increased significantly from the previous year; or No, she is still exceeding the BEP.

Quoting of figures:

Compare 20 0003 units produced to BEP3 of 19 548 or

BEP is 97,7% of total units; or Compare BEP 19 548 to 11 300 of the previous year; or Compare units of 20 000

to 24 000 of the previous year – affects BEP [4]

Do not be afraid to give your own opinion when answering this type of question. Note that there are various possible answers that could be accepted.

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Learn this! Formula to calculate break-even point (BEP): Total fixed costs Selling price per unit – Variable cost per unit PAY SPECIAL ATTENTION

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Mind the Gap CAPS Grade 12 Accounting chAptEr 3 mAnufActuring 69

Chapter

3 Practice task 1

1. Production Cost Statement calculations:

Opening balance of raw material stock

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

[6]

2. NOTES TO ThE PRODUCTION COST STATEMENT

diReCt LABOuR COSt R

[5]

FACtORy OVeRHeAd COSt R

[16]

Photocopy this blank Production Cost Statement and use it to practise doing the worked example 1 again on your own.

Once you have completed the task, compare your answer

to the worked example on the previous

3. PROduCtiON COSt StAteMeNt OF FAtiMA MANuFACtuReRS FOR tHe yeAR eNded 28 FeBRuARy 2010

tOtAL

Primed/direct cost

Total cost of production

Total cost of production of finished goods

[12]

Keep going!

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

topic Paper Question

Costing calculations and

Production Cost Statement November 2008 3 Production Cost Statement November 2009 3 Costing calculations February/March 2010 4 Multiple choice November 2010 3.1 Costing calculations and

concepts February/March 2012 2 Production Cost Statement November 2013 2.1 Break even point November 2013 2.3

Re-do questions 4 and 5 on paper,

for added practice.

In document Accounting. Study Guide. Grade (Page 80-87)