NYATSANZA SAMSON R223421B
CHIRUME RUFARO S R228285N
GIJIMA NATASHA R226029V
CHIRIMO SALATIEL R226004V
MUGANHIRI RICHARD M R203832A
MUSAKA TAPFUMA R217538Z
CHIHORO RUTENDO R214994B
MOYO PANASHE R225982X
MURADZIKWA BRIGHT M R228674B
1) Billy Hargreaves
a) Income Statement for the year ending 31 December 2020
$ $
Sales 100 000
Sales Returns (10000)
Sales Turnover 90 000
Cost of Goods Sold
Opening Inventory 60 000
Purchases 40 000
100 000
Closing Inventory (25 000)
(75 000)
Gross Profit 15 000
Expenses
Insurance 2 000
Prepaid Insurance (500) 1 500
Rent 1 000
Rent owing 400 1 400
Salaries and Wages 300
Bad debts? 400
Commission 100
Depreciation: Machinery 500
Office Furniture 300
Motor car 200
Total exp 4 700
Net Profit 10 300
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a)
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Statement of Financial Position as at 31 December 2020
Cost Depreciation Net Book
Value
Fixed Assets $ $ $
Machinery 20 000 (500) 19500,00
Office Furniture 15 000 (300) 14700,00
Motor car 15 000 (200) 14800,00
49000,00
Current Assets
Trade Receivables 5000,00
Irrecoverable debts -400 4 600 4200,00
Prepaid Insurance 500,00
Cash in hand 1000,00
Cash at bank 2000,00
12700,00
Current Liabilities
Trade Payables 2 000 (2 400) (400,00)
Rent owing 400 5 700 6100,00
Total 5700,00
56 000
Equty
Capital 45000
Drawings 700
Net profit 10 300
56000
b. The preparation of financial statements involves the drawing up of a balance sheet which is
pivotal in the success of any business. The balance sheet shiws the company’s financial position
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and provides detailed investments of the company’s asset investments. The balance sheet also
contains also contains the company’s debt and equity levels.
Furthermore, knowing the company’s financial position helps management better understand the
business performance in comparison to others in the same sector and it also enables them to form
proper policies for the company.
More so, if we use the owners approach of managing only a cash schedule, non cash transactions
such as depreciation would be ignored resulting in unfair value of the business performance,
therefore it is more effective and it brings the true financial position of the business to prepare
financial statements even though they are not going to be published rather than preparing a cash
schedule which shows only the movement of cash.
BILLY HARGREAVES
Marginal Cost Statement for Y (2005)
November
Sales $ 000 $000
sales 300
less variable of sales
opening invetory
add marginal cost of production 240
less closing inventory 60
180
add variable selling 36 216
contribution 144
less fixed costs
production overheads 121
selling and administration cost 30 42
Net profit 102
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Absorption costing c/y 2005
November
$000 $000
Sales 360
Less cost of sales
Opening inventory (21,2)
Add cost of production 264.4
Less closing inventory 63.6 190.8
169.2
Less non production costs
Variable selling 36
Fixed selling 30 66
103.2
Fixed overhead
Over absorbed 2.4
Under absorbed -
Profit 101.8
b. Absorption costing is useful to Billy Hargreaves as it provides a company with a more
accurate picture of profitability than variable costing, particularly if all of its products are not
sold during the same accounting period as their manufacture. This is significant if accompany
ramps up production in advance of an anticipated seasonal increase in sales.
However, absorption costing has some limitations that it can skew the picture of a company’s
profitability. In addition, it is not helpful for analysis designed to improve operational and
financial efficiency, or for comparing product lines. Absorption costing fails to provide as good
as an analysis of cost and volume as variable costing. If fixed costs are a substantial part of total
production costs, it is difficult to determine variations in costs that occur at different production
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levels. As the accountant I would urge Billy Hargreaves to pursue marginal costing as it
facilitates various short-term decision making, facilitates managerial decisions on expansion
either internationally or locally. Marginal costing is also used in special circumstances such as
recession, that is use of different selling prices thus increasing profitability to the business.
Cost Per Unit Using Average Based Costing
Cost Drivers:
Cost Pools $
Machinery setup cost 70 000
Machinery running cost 80 000
Delivery costs 30 000
Procurement 20 000
Total costs 200 000
Allocation of overheads for each product
Product A Product B Product C TOTAL
Machinery set up costs 40 000 20 000 10 000 70 000
Machinery running costs 30 000 30 000 20 000 80 000
Procurement costs 15 000 10 000 5 000 30 000
Delivery costs 9 000 6 000 5 000 20 000
Total costs 94 000 66 000 40 000 200 000
Number of units produced 11 130 9170 6670 __
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(A) $ (B)$ (C) $
Overheads cost per unit 1, 80 1, 50 1, 25
Total cost per unit A ($) B($) C ($)
Materials 2, 20 2, 60 1, 80
Labour 2, 70 2, 80 2, 50
Overheads 1, 90 0, 30 o, 45
Totals 8, 45 7.20 6
Selling price 10 6 7, 50
Product A produced in high volume consumes activities in different proportions than product B
and C produced in low volumes. The cost of producing Product A is less than the selling price of
the product hence realizing a profit of $1, 15 per unit. Product C is also making a profit because
of low labour cost as well as overheads cost. Product B is making a loss, this is because the
overhead cost is above the selling price.
Average based costing gives a more accurate costing and also enables to set better selling price
hence helps management in better decision making in terms of profitability. ABC helps focus
attention what causes overheads, which will result in cost savings.
However, ABC not always efficient as it is not always possible to determine the cost driver and it
is time consuming as it requires complex calculations. I would urge Mr Hargreaves to use ABC
where necessary and use traditional absorption costing on the remaining overheads.
