Applewood Electronics, a division of Elgin Corporation, manufactures two large-screen

television models: The Monarch, which has been produced since 2010, and sells for
R2 000, and the Regal, a newer model introduced in early 2012 that sells for R4 500. Based
on the following Income Statement for the year ended 31 March 2013, senior management
at Elgin have decided to concentrate Applewood’s marketing resources on the Regal model
and to begin to phase out the Monarch model.

Applewood Electronics
Statement of profit or loss and other comprehensive income
For the financial year ended 31 March 2013

Monarch Regal Total

Revenues R19 800 00 R4 560 000 R24 360 000
Cost of goods sold 12 540 000 3 192 000 15 732 000
Gross margin 7 260 000 1 368 000 8 628 000
Selling and administrative expense 5 830 000 978 000 6 808 000
Operating income R1 430 000 R390 000 R1 820 000
Units produced and sold (budgeted and 22 000 4 000
actual)
Net income per unit sold R65 R97.50
Budgeted machine hours (hours) 176 000 16 000 192 000
Actual machine hours (hours) 165 000 22 000 187 000

Primary unit costs for Monarch and Regal are as follows:

Monarch Regal
Direct materials R408 R2 084
Direct manufacturing labour
Monarch (1.5 hours x R50) R75
Regal (3.5 hours x R50) R175
Total primary cost per unit R483 R2 259

The company currently allocates manufacturing overhead costs to products using machine
hours as allocation base. Budgeted total manufacturing overhead of R8 256 000 is
applicable, but actual total manufacturing overhead for the year ended 31 March 2013
amounted to R9 325 000.

REQUIRED:

1. By making use of traditional cost principles, calculate the profitability of Regal and
Monarch models. (5.5)
2. Calculate the over or under allocated overheads and based on your answer also
indicate if the amount calculated should increase or decrease cost of sales. (2)
3. Show with the help of calculations, what caused the above over or under allocation.
(3.5)