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QUESTION 1 (30 MARKS)

Lungameni Enterprises (Pty) Ltd (Lungameni Enterprises) manufactures product A, which it sells to local customers at a mark-up of 25%. Lungameni Enterprises currently absorbs its overhead costs on the basis of direct labour hours. During the month of May 2021, production volume for product A was estimated at 1000 units. However, only 80% of production volume was achieved. As a standard practice, each unit of product A requires 0.5 hours at an hourly rate of N$8.50. The 80% production volume was produced at 45 minutes per unit, and at an hourly rate of N$8.00. Lungameni Enterprises buys its raw materials from a local supplier at N$3.50 per kilogram. Each unit requires 1.5 kilograms. Two kilograms were used per unit, and there was no change in price of raw materials. Total monthly budgeted manufacturing overhead costs amounted to N$950, whereas actual monthly manufacturing overhead costs amounted to N$1 200. As a cost reduction measure, Lungameni Enterprises production manager is of the view that manufacturing overhead costs should be absorbed on the basis of direct labour cost. There was no opening inventory and all units produced were sold.

REQUIRED:

For the month of May 2021, on the basis of gross profit/(loss), do you agree with Lungameni Enterprises production managers recommendation? Show all your workings.

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