QUESTION 1 (45 marks)
Mbali Creations (Pty) Ltd manufactures high-quality leather handbags. The company has a 31st March financial year-end. The direct materials used in the manufacturing process are leather, fabric lining, metal hardware, and bubble wrap. The manufacturing process occurs in three production departments as follows:
Production Department 1 (Leather and Fabric Preparation):
Large sheets of leather are cut into smaller pieces according to the handbag design. The pieces are then treated and dyed to achieve the desired colour and texture. Each piece is inspected for quality before being transferred to the assembly department.
Rolls of fabric are cut into pieces that will be used as the lining for the handbags. The fabric pieces are sewn together to form the interior compartments and pockets of the handbags. The completed fabric linings are transferred to the assembly department.
Production Department 2 (Assembly):
The prepared leather pieces and fabric linings are stitched together to form the body of the handbag. Metal hardware such as zippers, buckles, and handles are attached. The assembled handbags are then inspected for quality, and any necessary adjustments are made.
Production Department 3 (Finishing):
The handbags are cleaned and polished to ensure they meet the company’s high standards. Glue is applied to the brand logo and attached to each handbag. The completed handbags are then covered in bubble wrap for shipping.
Direct materials:
The leather used for the handbags is imported from India at R120 per square meter (m2), with each handbag requiring 1,5 m2 (square meters) of leather. Fabric lining is locally sourced at R190 per 10- metre roll, and each handbag uses 150 centimetres of fabric. Metal hardware costs R82 per set in a packet, with one set in a packet required per handbag. The bubble wrap used for packing costs R130 per 50-metre roll, and each handbag requires 250 centimetres of bubble wrap.
These prices were fixed for the financial years ending 31 March 2024 and 31 March 2025.
Direct labour and production overheads:
The handbags take 3 hours each to manufacture. The current direct labour cost rate is R28,50 per hour. Variable overhead costs are apportioned to production at a rate of R35 per handbag manufactured. Fixed overhead costs are absorbed at a plant-wide rate of R19,50 per direct labour hour.
Actual overheads and direct labour hours worked for the financial year which ended on 31 March 2025 were as follows:
| Month | Variable Overheads (R) | Mixed Overheads (R) | Fixed Overheads (R) | Total Direct Labour Hours (DLH) |
| April 2024 | 7 836 | 3 810 | 12106 | 802 |
| May 2024 | 8 700 | 3 823 | 12 450 | 876 |
| June 2024 | 9 016 | 3 852 | 12 340 | 908 |
| July 2024 | 9 355 | 3 799 | 12 567 | 945 |
| August 2024 | 9 782 | 3 840 | 12 709 | 980 |
| September 2024 | 11104 | 3 958 | 12 905 | 1104 |
| October 2024 | 8 486 | 3 789 | 12 698 | 859 |
| November 2024 | 7 301 | 3 907 | 12 965 | 751 |
| December 2024 | 4 387 | 3 226 | 12 876 | 485 |
| January 2025 | 6 650 | 3 715 | 13105 | 686 |
| February 2025 | 9 058 | 3 843 | 12 993 | 912 |
| March 2025 | 8 321 | 3 860 | 12 938 | 842 |
| Total | 99 996 | 45422 | 152652 | 10150 |
Mixed costs show a strong positive correlation with direct labour hours worked. The company uses a FIFO method of inventory valuation.
During the year 2 900 handbags were started and completed. All the handbags manufactured were sold
at R565 per handbag.
There was no opening or closing inventory of work-in-progress and finished goods. Other opening and closing inventories were as follows:
Opening inventory 1 April 2024 Closing inventory 31 March 2025
Leather Fabric lining
Metal hardware Bubble wrap
485 mi
65 rolls
280 packets
18 rolls
530 mi
80 rolls
310 packets
10 rolls
MAC1501/103
FINANCIAL YEAR ENDING 31 MARCH 2026
For the financial year ending 31 March 2026, all prices except those of leather and metal hardware will remain unchanged. Due to the declining value of the rand, the cost of leather is expected to increase by 5% in the financial year ending 31 March 2026. Additionally, Mbali Creations (Pty) Ltd plans to switch to higher-quality metal hardware, which will cost R96 per set.
The direct labour cost rate is expected to increase to R30,50 per hour in the financial year ending 31 March 2026. The production overhead absorption rates will remain the same in the financial year ending 31 March 2026.
Anticipated sales for the financial year that will end on 31 March 2026 are 3 050 handbags. Planned production for the financial year that wlll end on 31 March 2026 is 3 200 handbags. It is estimated that the following purchases of direct materials will be made during the financial year that will end on 31 March 2026:
Leather Fabric lining
Metal hardware Bubble wrap
4 600 m2
460 rolls
3 950 packets
190 rolls
Required
Mbali Creations (Pty) Ltd uses a normal costing basis to measure input costs, Briefly explain why this method is the most suitable for the company. (2)
Would the glue used to affix the brand logo be classified as indirect materials or consumables? Motivate your answer. (2)
Calculate the quantity and cost of purchases of leather and fabric lining for the financial year
ended 31 March 2025. (6)
Apply the least squares method to calculate the total actual cost of variable production overheads and the total actual cost affixed production overheads for the financial year that ended on 31 March 2025. (9)
Calculate the amount of the over- or under-absorption of production overheads during the financial year that ended on 31 March 2025. (4)
Calculate for each unit of production the following costs that will be used to prepare the budget for the financial year that will end on 31 March 2026:
Direct materials cost (5)
Conversion cost
Total production cost(3)
(2)
Calculate what the selling prtce for each handbag must be in the 2026 financial year to ensure a mark-up of 40% on cost is maintained. (2)
Calculate the total budgeted cost of materials to be issued to production in the financial year
ending 31 March 2026. (6)
Calculate what the budgeted value of closing finished go6ds will be on 31 March 2026. (2)
Determine the expected gross profit for the year that will end on 31 March 2026. (2)
[45]QUESTION 2 (13 marks)
TopTee (Pty) ltd produces furniture and uses the job costing system. A Trial Balance for the company as of 1 February 2024, is given below:
| Cash | 15 000 |
| Accounts receivable | 40 000 |
| Raw materials | 23 000 |
| Work in progress | 32 000 |
| Finished goods | 55 000 |
| Prepaid insurance | 5 000 |
| Plant and equipment | 500 000 |
| Accumulated deprecation | 85 000 |
| Trade payable | 150 000 |
| Salaries and wages payable | 12 000 |
| Retained earnings | 90 000 |
| Share capital | 300 000 |
The manufacturing overheads are absorbed to jobs based on direct labour cost. The following estimates were made at the beginning of the year for purposes of calculating a predetermined overhead rate for the year. Manufacturing overhead cost, R228 000 and direct labour cost, R190 000. Over-or-under absorbed overhead is closed off against the cost of goods sold.
Summary of transactions of the company for the year is given below:
- Raw materials purchased on credit, R180 000.
- Utility costs incurred in the factory, R57 000
- Salary and wages costs were incurred as follows:
Direct labour Indirect labour
Selling and administrative salaries
R200 000
R90 000
R120 000
- Prepaid insurance for the year, R4 000 (75% related to factory operations, and 25% related to selling and administrative activities).
- Property tax incurred on the factory building, R16 000.
- Advertising costs incurred, R150 000.
- Depreciation recorded for the year, R50 000 (80% related to factory assets, and the remainder related to selling and administratfve assets).
- Other costs were incurred (credit accounts payable): for factory overhead, R30 000; and for miscellaneous selling and administrative expenses, R18 000.
- Manufacturing absorbed to jobs amounted to (R?).
- The closing inventory of work in process inventory amounted to R30 000.
- Sales for the year ended amounted to R1 000 000 (all on credit, the cost of goods sold was (R?).
- The closing balance of finished goods inventory account was R45 000.
- The closing inventory of raw materials amounted to R13 000.
MAC1501/103
Required:
2.1 Calculate the predetermined overhead rate. (2)
2.2
Prepare a statement
31 January 2025.
of the cost of goods manufactured and sold for the year ended
(11)
[13]
QUESTION 3 (10 marks)
The following information is relevant to Baratang {Pty) Limited.
ln the right-hand column below, certain financial ratios are listed. To the left of each ratio is a business transaction or event relating to the operating activities of the company,
| Business transactions | Ratios |
| 1. The inventory was sold for cash at a profit | Debt-to-equity ratio |
| 2. The company paid off some accounts payable | Working capital |
| 3. A customer paid off their overdue account | Average collection period |
| 4. Land was paid for in cash | Earnings per share |
| 5. Property was sold for a profit | Return on assets |
| 6. Obsolete inventory was written off as a loss | Inventory turnover ratio |
| 7. An uncollectable account was written off against the allowance for bad debts | Current ratio |
| 8. Inventory was purchased on credit | Quick ratio |
| 9. The company’s net profit decreased, but long- term debt remained unchanged | Times interest earned |
| 10. The company paid off some accounts payable | Debt-to-equity ratio |
Required:
Indicate the effect that each transaction would have on the ratio listed opposite to it. State the effect in terms of increase, decrease, or no effect on the ratio involved and the reason for your choice.
QUESTION 4 (17 marks)
JollyB (Pty) Limited manufactures and sells a single product. The following information is available to you.
- The budgeted sales values for 2025 are as follows
| March..,………………………………………………,……….. | 350 000 |
| April……………….•……………………………………………………….. | 800 000 |
| May………………………………………………………………………….. | 700 000 |
| June…………………………………………………………………………. | 600 000 |
| July…………………………………………………………………………… | 500 000 |
| August……………………………………………………………………… | 400 000 |
- The budgeted selling price is R200 per unit of finished products.
- 80% of sales are on credit, and are collected in the following pattern:
• 40% in the month of sale.
• 50% in the month following the month of sale.
The remainder in the second month following the month of sale. There are no bad debts. - The company requires the closing inventory offinished goods to be equal to 10% of the following month’s budgeted sales in units.
- Each unit manufactured requires three (3) kilograms of Material X. Raw material is R25,00 per kilogram.
- The company requires its closing inventory of raw material X to be at 20% of the month’s manufacturing requirements. The company had only 1 000 kilograms at the end of February 2025.
- It takes two (2) hours at the rate of RS0 per hour to manufacture each unit of finished goods.
Required:
Calculate the following:
The number of units that must be manufactured in April and May.
The total kilograms of material X needed in April.
The total labour costs for May.
The budgeted cash receipt for June
Answers to Above Questions on Accounting
Answer 1: The method of normal costing to measure input cost is highly effective to Mbali Creations (Pty) Ltd because…
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