TrueTest Limited, manufactures a product for the construction industry, it closes its books and prepares financial statements at the end of each month. The schedule of costs of goods sold for April is as follows: TrueTest Limited for the month ended April Inventory of finished goods 31 March Add cost of goods manufactured Costs of goods available for sale Less inventory of finished goods 30 April Unadjusted cost of goods sold Add under-applied manufacturing overhead Cost of goods sold (adjusted) N$50 000 N$790 000 N$840 000 N$247 000 N$593 000 N$25 000 N$618 000 True Test has a policy of selling its oldest inventory first. The actual cost of direct materials and direct labour is used to value inventories. However, manufacturing overhead is allocated to production at a predetermined rate per ton the product manufactured. It is budgeted that 75 tons of the product will be manufactured per month. The under-applied overhead for April related solely to 6.25 tons of the product manufactured above the budgeted amount. The pre-closing trial balance as at 31 May is as follows: TrueTest Limited pre-closing trail balance 31 May Account Cash and cash equivalents Accounts receivable Direct materials (30 April) work in progress (30 April) Finished goods (30 Apri) Property, plant and equipment Accounts payable Provision for leave pay Eonds payable Ordinary shares Retained earnings Sales Interest received Debit N$ Credit N$ 54 000 210 000 28 000 150 000 247 000 1 140 000 70 000 5.000 595 000 100 000 930 000 1 468 000 2000 Furchases (direct and indirect material) Wages Office salaries Sales salaries Utilities Rent Property taxes Insurance Depreciation Total 525 000 350 000 122 000 66 000 135 000 9000 60 000 20 000 54 000 3 190 000 3 190 000 Additional information • Wages are paid at a rate of N$20 per hour. Cvertime is paid at 1.5 tmes the normal rate. Gross wages relating to direct labourers is N$250 000. Also included in the wage account is the company's contributions of N$20 000 per month to the pension fund and N$10.000 per month to the medical aid. A total of 500 hours were worked overtime during May. Of the gross wages paid, N$5 000 was for leave pay relating to direct labourers. The remainder of the wage expense account relates to the wages of supervisors. ⚫80% of utilities cost is related to the manufacture of the product; the remaining 20% is related to the sales and administrative functions in the office building. All the rent is for the office building. The property taxes are assessed on the manufacturing plant. 60% of the insurance is related to the manufacture the product; the remaining 40% is related to the sales and administrative functions in the office building. ⚫ Depreciation expense includes the following: Manufacturing plant N$20 000 Manufacturing equipment NS30 000 Office equipment N$4000 TrueTest manufactured 78.25 tons of the product during May. The inventory balances at 31 May are as follows: Direct materials Work in progress N$23 000 N$220 000 Finished goods N$175 000 The company has a policy whereby only direct materials are purchased on account. At the end of April the outstanding balance on accounts payable was NS40 000. Payment of N$450 000 was made during May. REQUIRED: Prepare a brief report for the management of True Test Limited, the introduction of the report should explain the production process and the costing related to the product The body of the report should show a a schedule of cost of goods marufactured and sold for TrueTest Limited for May. Finally, conclude your report with a mention of how else the company could treat the under- applied or over-applied manufacturing overhead and summarise the overall performance based on elements of manufacturing costs and how they relate to revenue. End