Tom (Pty) Ltd is making a brand of ice cream called “Fruiti ice cream.” The ice cream is sold in two different sizes – a 500ml and 1-liter container. The company expects to sell 2000 units of the smaller 500 ml containers per year and 7 800 units of the 1-liter containers per year. The ice cream is made in batches and then poured into the appropriate sized container, i.e. either a 500 ml container or a 1-liter container. The ice cream is made in batches of 100 liters. The budgeted requirements for a batch of 100 liters are shown below.

Quantity and costs of a batch of 100 liters of ice cream:

		Quantity	Cost	Batch cost
Materials	Milk	200 liters	R2	R400
	Fruit	25 kg	R20	R500
Labour		5 hours	R18	R90
Variable overheads		5 hours	R22	R110
				R1100

	Rands
Fixed overheads	R26 700
Fixed selling costs	R8000

Inventory is valued on the basis of equivalent units of inventory i.e. 2 x 500 ml ice cream is valued the same as 1 liter of ice cream. Variable overheads vary with direct labor hours. Fixed overheads are allocated to products on the number of liters of ice cream produced (all ice cream irrespective of the size of the output).

	500ml	1 litre
The sale price of the containers	R10	R15
Expected inventories (units)	500ml	1 liter
Opening inventory	50	80
Closing inventory	70	170

Required:

1. Prepare a sales budget for the company in both liters and rands.

2. Prepare a production budget for the year (Hint: Manipulate the following: Opening Inventory + Production – Sales = Closing Inventory).

3. Prepare a materials purchases budget for milk and fruit only in both rands and units (Hint: Calculate the equivalent annual output of the two variants in liters first, rather than in 500ml and 1 liter).

4. Calculate the variable costing income statement for the year (Hint: Calculate the equivalent opening and closing stock of the two variants in liters rather than in 500 ml and 1 liter).

5. Calculate the budgeted absorption costing income statements for the year.

6. Reconcile and explain the difference between the variable costing income statement's net profit and the absorption costing income statement's net profit.

Answer rating: 100% (QA)

1 500ml containers Opening inventory 50 containers Production 2000 containers Sales 2000 containers Closing inventory 70 containers 1liter containers ... View the full answer