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3.2.1 Raw material stock: Calculate: The value of the closing stock using the first-in-first-out stock valuation method - NSC Accounting - Question 3 - 2019 - Paper 1
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3.2.1 Raw material stock: Calculate: The value of the closing stock using the first-in-first-out stock valuation method. - The direct material cost: Calculate: Th... show full transcript
Worked Solution & Example Answer:3.2.1 Raw material stock: Calculate: The value of the closing stock using the first-in-first-out stock valuation method - NSC Accounting - Question 3 - 2019 - Paper 1
Step 1
Calculate: The value of the closing stock using the first-in-first-out stock valuation method.
Answer
To calculate the closing stock using the FIFO method, we take the earliest purchases first. The stock balance available is:
- 920 m at R65/m
- 2,480 m at R80/m
- 1,195 m remains to be realized from the 5,200 m purchased in February 2018.
Calculating:
- 930 m (remaining from 1,195 m at R65) = R60,450
- 265 m (remaining balance at R80) = R21,200
Total closing stock value = (930 * 65) + (265 * 80) = R104,900.
Step 2
Calculate: The direct material cost for the financial year.
Answer
Direct Material Cost can be calculated by summing the costs of raw materials purchased:
Raw Material Cost = Total purchases for the year + Closing stock - Opening stock
Where:
- Total purchases = R672,100
- Closing stock = R104,900
- Opening stock = (Stock on 1 January 2018) = 920 m * R65/m = R59,800
Calculating:
- Direct Material Cost = R672,100 + R104,900 - R59,800 = R717,200.
Step 3
Refer to Information C. Calculate the correct factory overhead cost for the year.
Answer
Factory overhead costs should include all costs not accounted for initially, adjusting for allocations:
- Initial overhead already accounted: R84,330
- Additional costs:
- Insurance: R31,200 * 60% = R18,720
- Rent expense: R114,000 * (5/8) = R71,250
- Water and electricity: R7,110 * (5/12) = R2,958.33
The overall overhead calculation: Total Overheads = R84,330 + R18,720 + R71,250 + R2,958.33 = R198,258.33.
Step 4
Provide evidence (figures) to justify his concern. In each case, also give a possible reason for the increase in EACH unit cost, apart from normal inflation.
Answer
The owner's concern stems from:
- Fixed cost per unit: Increased by R8 per unit (22%) from R36 to R44, indicating changes in economics of scale as production decreased.
- Direct labour cost per unit: Increased by R12 per unit (32%) from R38 to R50 due to operational inefficiencies, such as poor supervision and management.
These findings suggest operational inefficiencies and suboptimal use of resources.
Step 5
Step 6
Explain whether or not there was any improvement in the trends of the level of production and the break-even point from one year to the next. Quote figures.
Answer
The production figures indicate a drop from 7,560 to 6,000 units, a decrease of 1,560 units. Consequently, the break-even point also decreased from 1,956 to 1,955 units, showing a need for better cost management despite fewer production issues.
Step 7
Explain how this happened. Provide TWO points. Quote figures.
Answer
- The higher profit this year is due to increased sales price — from R220 to R300 — yielding an increase of R80 per jacket sold, translating to higher revenue despite dropping output.
- With lower production (6,000 units), efficiencies gained from reduced labour cost per unit improved profit margins, with profits from increased per-unit income, yielding a total increase in profits of R4,044.