direct and absorption costing

kindly help to tackle this question

QUESTION 1 – DIRECT AND ABSORPTION COSTING 40 marks
Mzanzi Manufacturers (Pty) Ltd is a company that produces and sells small glass containers. The following actual statements of comprehensive income have been prepared on a six-monthly basis using absorption costing principles. “First half” refers to the period 1 January to 30 June 2016 and “Second half” refers to the period 1 July to 31 December 2016.
Mzanzi Manufacturers (Pty) Ltd
Statements of comprehensive income for the year ended 31 December 2016
First half Second half
R
R
Sales
1 080 000
720 000
Less: Cost of sales
(600 000)
(400 000)
Opening Inventory
Direct materials
200 000
216 000
320 000
72 000
Direct labour
324 000
108 000
Manufacturing overhead (applied)
180 000
60 000
Less: Closing inventory
(320 000)
(160 000)
Unadjusted gross profit
480 000
320 000
Over/(under) recovered overheads
24 000
(24 000)
Adjusted gross profit
504 000
296 000
Less: Non-manufacturing costs
Fixed distribution costs
(260 000)
(260 000)
Selling and administration costs
(90 000)
(80 000)
Net profit/(loss)
154 000
(44 000)
Additional information:
? Sales and production figures were as follows:
First half
Second half
Sales units
30 000
20 000
Production units
36 000
12 000
? There were neither changes in the product cost per unit from 2015 to 2016, nor within 2016.
? Fixed manufacturing overheads are allocated (applied) based on units produced.
? The members of the management team are concerned about the significant change in profitability between the two six month periods. As a management accountant, you have analysed the data upon which the above actual statements have been produced, with the following results:
MAC2601/104/1/2017
©
UNISA 2017 7
o The actual and the applied manufacturing overhead costs comprises of both a fixed and a variable element. The variable element of the actual manufacturing overhead costs varies with the number of units manufactured. The total fixed element of actual manufacturing overhead costs did not change from the first half to the second half of 2016.
o The distribution costs are fixed. All fixed costs remained constant in total from the first half to the second half of 2016.
o The selling and administration costs comprise of both a fixed and a variable element. The variable element varies with the number of units sold. The total fixed element of selling and administration costs did not change from the first half to the second half of 2016.
? The company uses the high-low method to split semi-variable costs.
Important note: Before you attempt this question, work through the Announcement on myUnisa with the title “Guidance on direct and absorption costing and selected other topics”.
REQUIRED
Marks
(a)
Redo the above actual statements of comprehensive income using direct costing principles.
(27)
(b)
Reconcile and explain the reasons for any differences between the net absorption costing profit/(loss) (given above) and the net direct costing profit/ (loss) that you have calculated in your answer in (a) above. Use separate columns for the first half and the second half of the year. A total column is not required.
(8)
(c)
Calculate the total number of units that will have to be sold to break even for the year.
(5)
Total
40
(CIMA – adapted)