Department of Management Accounting

MANAGEMENT ACCOUNTING III

(COSTING)

MAC3761

QUESTION BANK 1 of 2

Define tomorrow.
 MAC3761/QB001

© 2022 University of South Africa

All rights reserved.

Printed and published by the University of

South Africa Muckleneuk, Pretoria
MAC3761/QB001/COSTING/0/2022-2022

Compilers:

M Lentsoane
C Leonard
TNE Mantloana
NR Masela
A Matsane
NP Mudau
JM Verster
G Viviers
Y Reyneke

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CONTENT
Page
1 LECTURERS AND CONTACT DETAILS................................................................................ 6
2 CONTENT FORMAT ............................................................................................................... 6
3 QUESTIONS ........................................................................................................................... 7
3.1 DOOLAX (PTY) LTD ............................................................................................................... 7
3.2 DELICIOUS CEREALS (PTY) LTD ........................................................................................10
3.3 MITOLI BYEBOER (PTY) LTD ...............................................................................................12
3.4 PEOPLES’ WAGON (PTY) LTD.............................................................................................16
3.5 JUNIOR SPORTS LTD ..........................................................................................................23
3.6 MEHLARENG (PTY) LTD ......................................................................................................26
3.7 AFRiTECH MOBILE (PTY) LTD.............................................................................................30
3.8 BEANCINO (PTY) LTD ..........................................................................................................37
3.9 HIGH RISE LTD .....................................................................................................................41
3.10 TENNIS BALL (PTY) LTD ......................................................................................................43
3.11 iNKUNZI TYRES (PTY) LTD ..................................................................................................46
3.12 BUMBULO MILLING (PTY) LTD............................................................................................48
3.13 CHEMICAL EXPERIMENTS COMPANY (PTY) LTD .............................................................50
3.14 ENERSOLAR (PTY) LTD .......................................................................................................53
3.15 SENO-MAPHODI (PTY) LTD .................................................................................................58
3.16 PEARS LTD ...........................................................................................................................62
3.17 DELIGHT SPREADS (PTY) LTD............................................................................................65
3.18 TEDDY FRENZY LTD ............................................................................................................68
3.19 ZAMA-ZAMA (PTY) LTD........................................................................................................72
3.20 MULAUDZI INVESTMENTS LIMITED....................................................................................75
3.21 RATA-TEA (PTY) LTD ...........................................................................................................80
3.22 MUFHIRIFHIRI BEEF (PTY) LTD ...........................................................................................82
3.23 IMVULA (PTY) LTD................................................................................................................87
3.24 BRIGHT & SHINE (PTY) LTD ................................................................................................89
3.25 LOOK-LIKE-LEATHER (PTY) LTD ........................................................................................93
3.26 AQUA FIRST (PTY) LTD........................................................................................................99
3.27 ZAMBANI-CHIPS (PTY) LTD ...............................................................................................103
3.28 S’KHOTHANE (PTY) LTD ....................................................................................................108
3.29 TZANEEN TRAMPOLINES (PTY) LTD ................................................................................112

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3.30 UGOGO BAKKER (PTY) LTD ............................................................................................. 118
3.31 AFRiKAN-ROCK CEMENTS (PTY) lTD .............................................................................. 121
3.32 MATAMATIE (PTY) LTD ...................................................................................................... 129
3.33 SAMSONS FAMILY TRUST ................................................................................................ 133
3.34 SCRUMPTIONS SOUTH AFRICAN SOUP (PTY) LTD ........................................................ 138
4 SUGGESTED SOLUTIONS ................................................................................................. 142
4.1 DOOLAX (PTY) LTD ............................................................................................................ 142
4.2 DELICIOUS CEREALS (PTY) LTD....................................................................................... 146
4.3 MITOLI BYEBOER (PTY) LTD ............................................................................................. 150
4.4 PEOPLES’ WAGON (PTY) LTD ........................................................................................... 156
4.5 JUNIOR SPORTS LTD......................................................................................................... 169
4.6 MEHLARENG (PTY) LTD ..................................................................................................... 174
4.7 AFRiTECH MOBILE (PTY) LTD ........................................................................................... 181
4.8 BEANCINO (PTY) LTD......................................................................................................... 190
4.9 HISE RISE LTD .................................................................................................................... 194
4.10 TENNIS BALL (PTY) LTD..................................................................................................... 197
4.11 iNKUNZI TYRES (PTY) LTD ................................................................................................ 201
4.12 BUMBULO MILLING (PTY) LTD........................................................................................... 205
4.13 CHEMICAL EXPERIMENTS COMPANY (PTY) LTD ............................................................ 209
4.14 ENERSOLAR (PTY) LTD ..................................................................................................... 214
4.15 SENO-MAPHODI (PTY) LTD ............................................................................................... 220
4.16 PEARS LTD ......................................................................................................................... 225
4.17 DELIGHT SPREADS (PTY) LTD .......................................................................................... 231
4.18 TEDDY FRENZY (PTY) LTD ................................................................................................ 236
4.19 ZAMA-ZAMA (PTY) LTD ...................................................................................................... 240
4.20 MULAUDZI INVESTMENTS LIMITED .................................................................................. 245
4.21 RATA-TEA (PTY) LTD.......................................................................................................... 252
4.22 MUFHIRIFHIRI BEEF (PTY) LTD ......................................................................................... 258
4.23 IMVULA (PTY) LTD .............................................................................................................. 264
4.24 BRIGHT & SHINE (PTY) LTD ............................................................................................... 269
4.25 LOOK-LIKE-LEATHER (PTY) LTD ....................................................................................... 277
4.26 AQUA FIRST (PTY) LTD ...................................................................................................... 285
4.27 ZAMBANI-CHIPS (PTY) LTD ............................................................................................... 291
4.28 S’KHOTHANE (PTY) LTD .................................................................................................... 296
4.29 TZANEEN TRAMPOLINES (PTY) LTD ................................................................................ 303

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4.30 UGOGO BAKKER (PTY) LTD ..............................................................................................315
4.31 AFRiKAN-ROCK CEMENTS FIRST (PTY) LTD ...................................................................320
4.32 MATAMATIE (PTY) LTD .......................................................................................................331
4.33 SAMSONS FAMILY TRUST .................................................................................................338
4.34 SCRUMPTIONS SOUTH AFRICAN SOUP (PTY) LTD ........................................................346
5 REFERENCES .....................................................................................................................353

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1 LECTURERS AND CONTACT DETAILS

For an effective and efficient turnaround time, refer to MAC3761 site on the myUnisa for the lecturers’
contact details.

You are urged to contact the lecturers should you experience specific problems regarding the content
of this course. Have your study material open when you contact us. Take note that enquiries with
regard to matters not relating to the content of the course (e.g. registrations, non-receipt of study
material, enquiries in respect of exam dates, venues, etc.) must not be directed to your lecturer but
can be e-mailed to the appropriate department’s e-mail address.

Whenever you write to a lecturer, please include your student number to enable the lecturer to help you
more effectively.

2 CONTENT FORMAT

Quesitions in this question bank are accompanied by their suggested solutions. The questions are
contained in section 3 while the related suggested solutions are in section 4. These questions must be
used to improve your examination technique and the undestanding of various topics of the module.
To obtain the most benefit from the questions you must physically do the questions on your own,
unaided and under simulated examination conditions (including time limitations). Thereafter you must
then compare your attempt to the suggested solution. This process will enable you to identify where
you went wrong and understand why you went wrong.

IMPORTANT NOTICE

Take note, regarding the preparation and presentation of the actual statement of profit or loss and
other comprehensive income (income statement) where a company uses the absorption costing
system. According to the prescribed textbook (Willams et al 2020:110), where applicable, the
resulting over-/under allocation of fixed manufacturing overheads can be presented either above or
below the gross profit line. For this module, in line with financial reporting and consistent with this
question bank, it is preferred that you disclose the over-/under allocation of fixed manufacturing
overheads above the gross profit line.

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3 QUESTIONS

3.1 DOOLAX (PTY) LTD 50 Marks

The “Doo” family and the “Lax” family entered into a joint venture on 1 May 2015 to form DooLax (Pty)
Ltd (“DoLax”). DoLax was established to exploit benefits offered by the families’ businesses. The Doo
family business manufactures and sells plastic containers typically used to package liquid laundry
detergents and wall paints, while the Lax family business manufactures and sells domestic-use wall
paints. DoLax’s year-end is 30 April. On 1 May 2019, the beginning of the 2020 financial year, DoLax
changed its costing system from the direct costing system to the absorption costing system. The
company uses the first-in-first-out (FIFO) method to value all its inventories.

DoLax manufactures and sells two types of wall paints of various colours; namely, interior paint
(“Interior-P”) and exterior paint (“Exterior-P”). The paint manufacturing process starts with the adding
together of the primary direct raw materials: solvent, pigment and resins (where applicable) to create
two types of neutral paints: interior-neutral-paint (“iNP”) and exterior-neutral-paint (“eNP”). Secondary
direct material (colourants) are then added to the neutral paint. Lastly, a high-speed paint mixing plant
is used to mix the direct materials to create either Interior-P or Exterior-P. iNP is used to create
Interior-P while eNP is used to create Exterior-P. No losses occur in the manufacturing process. Each
product is sold in units of 25 litres. DoLax sells paints via two channels; namely, the retail store
channel and the online channel (internet-based). 45% of the total sales are made online.

The joint venture agreed on a target profit of R2 800 000 for DoLax for each financial year.

1. EXTRACT FROM THE BUDGETED INFORMATION FOR THE 2020 FINANCIAL YEAR:
1.1. The manufacturing units are 6 000 Interior-Ps and 18 000 Exterior-Ps.
1.2. The sales units are 5 400 Interior-Ps and 16 200 Exterior-Ps.
1.3. DoLax’s budgeted gross profit margin percentage is 30% for both product types.
1.4. Direct material requirements and related costs for the paints are as follows:
Direct materials Costs per litre of Requirements per unit
direct material Interior-P Exterior-P
Solvent and pigment R28 per litre 23 litres 19 litres
Resins* R35 per litre n/a 4 litres
Colourants R10 per litre 2 litres 2 litres
*To ensure Exterior-P’s toughness, durability and protection from sunlight, resins are added to
the manufacturing process. Resins are not required for Interior-P.
1.5. Colourants are hand prepared by direct labourers. The direct labour cost is R21,50 per unit of
paint.
1.6. Variable manufacturing overheads relate to the mixing of the direct materials by a high-speed
paint mixing plant. Budgeted paint mixing plant time is 9 seconds per litre at a cost of R900 per
hour.
1.7. The company’s budgeted fixed manufacturing overheads (FMO) of R3 450 000 for the year are
allocated based on the budgeted paint mixing plant time (see point 1.6. above).
1.8. Each paint is packaged in a plastic container with a cost of R3,50 each.

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2. MANAGEMENT ACCOUNTS EXTRACT FOR THE 2020 FINANCIAL YEAR:
Details Reference Budget Actual
Opening inventory – Interior-P 2.1. R298 200 R284 000
Manufacturing units 1.1. and 2.2. 24 000 19 200
Sales units 1.2. and 2.3. 21 600 16 320
Fixed manufacturing overheads (FMO) 1.7. and 2.4. R3 450 000 R2 880 000
Fixed administrative costs R2 370 000 R2 370 000
2.1. Where applicable, DoLax’s opening and closing inventories relate to finished goods only. The
budgeted opening inventory units were 420 Interior-Ps and the actual opening inventory units
were 400 Interior-Ps. There was neither budgeted, nor actual opening inventory for Exterior-Ps.
Notwithstanding the change of the costing system on 1 May 2019, the opening inventory values
as per the management accounts extract does not reflect this change. In this regard, the FMO for
the 2019 financial year was determined at R120 per unit.
2.2. Actual manufacturing units were 4 800 and 14 400 for Interior-Ps and Exterior-Ps, respectively.
2.3. Actual sales were 4 080 Interior-Ps at R1 200 per unit and 12 240 Exterior-Ps at R1 350 per
unit.
2.4. The actual paint mixing plant time was 9 seconds per litre of each product.
2.5. Actual variable manufacturing costs were R785 per Interior-P unit and R815 per Exterior-P unit.

3. PLANS FOR THE 2021 FINANCIAL YEAR

3.1. Extract from the manufacturing budget
Details Interior-P Exterior-P
Opening inventory units (finished goods only) 1 000 2 000
Closing inventory units (finished goods only) 800 2 300
DoLax budgets to sell 90% of the budgeted units available for sale of each product type during the 2021
financial year while the remaining 10% of each product type will only be sold in the 2022 financial year.

3.2. The possible introduction of the online shopping application (“app”)

DoLax is considering the utilisation of “LaxApp”, an online shopping mobile app, as one of the benefits
of the joint venture. LaxApp is owned by and a patent of the Lax family business. This app will allow
DoLax’s customers to purchase customised paint(s) via the internet. On the app, customers will be able
to select, virtual-mix, order and pay for the paint of their choice without visiting the DoLax business
premises. In return, the Lax family business will contractually earn semi-variable royalties for the
utilisation of the LaxApp for all of DoLax’s online sales. R250 000 of the annual royalties will be fixed
and the variable portion will be R5,00 for each completed online sale.

3.3. Investigation of the possible introduction of the activity-based costing (ABC) system
DoLax is investigating the feasibility of introducing the ABC system for the allocation of the fixed
manufacturing overheads (FMO) to the products. If feasible, DoLax will adopt the ABC system from
1 May 2020. The total FMO budget for the 2021 financial year will be R3 496 500, of which R1 890 000
relates to the paint mixing plant depreciation and the remainder relates to the paint mixing plant set-up
overheads. The paint mixing plant depreciation will be driven by the paint mixing plant time at 9 seconds
per litre of each product. The paint mixing plant is set up after each manufacturing run. Interior-Ps’
manufacturing runs consist of 200 units each while Exterior-Ps’ manufacturing runs consist of 210 units
each.

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REQUIRED

For each question below, remember to:

• Clearly show all your calculations in detail;

• Where necessary, indicate irrelevant amounts/adjustments with a R0 (nil-value);
• Round all your workings to two decimals, except where otherwise stated;
• Ignore all the taxation and time value of money implications.
(a) Calculate DoLax’s budgeted selling prices per unit per product type for the 2020 financial
year. (10)
(b) The following three points relate to answering question 1 (b) only:
1. Assume budgeted contributions of R480 per unit of Interior-P and R530 per unit of
Exterior-P for the 2020 financial year;
2. Ignore all the implications of opening and closing inventories; and
3. Except for points 1. and 2. above, all the other information remains as given in the
scenario.
Calculate the budgeted number of units per product type that DoLax will need to
manufacture and sell to achieve the joint venture’s target profit for the 2020 financial year. (8)
(c) Briefly describe “contribution margin ratio” as a concept and further briefly explain how
DoLax can use it as a useful tool in undertaking cost-volume-profit sensitivity analysis. (3)
(d) Prepare DoLax’s actual statement of profit or loss and other comprehensive income
(income statement) for the 2020 financial year and comment on whether the joint
venture’s target profit was actually achieved for the 2020 financial year.
▪ Where applicable, round time to three decimal places.
▪ Support your commentary with relevant and necessary calculations. (12)
(e) From DoLax’s perspective, briefly discuss and motivate the appropriate cost
classification of the LaxApp royalties. Your discussion must be limited to the “cost
behaviour” and “function” attributes (characteristics) of the LaxApp royalties.
▪ In answering question 1 (e), no calculations are required. (3)
(f) With regard to the introduction of LaxApp, Ms Shirley Smith (DoLax’s Chief Financial
Officer) posed the following question to you: “Why would the budgeted contribution per
unit for the online sales channel be different to the budgeted contribution per unit for the
retail store sales channel despite no changes to the budgeted selling prices?”
State a brief response to Ms Smith’s question above.
▪ In answering question 1 (f), no calculations are required.
▪ Ignore all the implications of opening and closing inventories. (2)
(g) With regard to the possible introduction of the ABC system:
(i) Assist Ms Smith to make an informed decision about the possible implementation
of ABC by briefly explaining three limitations of the ABC system. (6)
(ii) Assuming that DoLax introduces and implements ABC, calculate the budgeted
fixed manufacturing overheads to be allocated to Interior-Ps and to be allocated
to Exterior-Ps for the 2021 financial year. Show all your calculations. (6)

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3.2 DELICIOUS CEREALS (PTY) LTD 50 Marks

Delicious Cereals (Pty) Ltd (DC) is a medium-sized company that produces and sells two types of
cereals, corn cereal (CC) and whole-wheat cereal (WC) to all major retailers. Each of the two types of
cereals are sold to retailers in units of 1kg per box. The company operates from the Centurion area
(Pretoria) with most of its clients situated in and around the Gauteng Province. DC makes use of an
absorption costing system and all its inventory items are valued using the first-in-first-out (FIFO)
method.

The following extracts are from the budgeted and actual results for the year-ended 31 March 2016:
Notes Budget Actual
R R
Sales 1 4 750 000 4 900 000
Opening Inventory at 1 April 2015 2 37 800 37 800
Manufacturing cost for units produced in 2016 3 4 254 170 4 215 352
Selling and administrative cost 4 100 000 107 500

Notes
1. The budgeted annual sales volumes were 100 000 and 50 000 for CC and WC respectively. The
actual annual sales volumes were the same as the budgeted annual sales volumes for both
products. Selling prices were budgeted at R30,00 per unit of CC and R35,00 per unit of WC.
Throughout the year CC units were sold at its respective budgeted selling price and WC units were
sold at R38,00 per unit. The budgeted sales mix was 2:1 for CC and WC.

2. Opening inventory as at 1 April 2015 consisted of 1 000 units of CC and 500 units of WC at the
budgeted cost of R24 600 and R13 200 respectively. The fixed manufacturing overheads were
absorbed at R1,20 per unit for the 2015 financial year-end. For the year ended 31 March 2016, the
company had no opening and closing inventories for all types of raw material and work in progress.

3. The company had budgeted to produce 101 000 CC units and 51 000 WC units during the 2016
financial year. These budgeted units are equivalent to the company’s annual production capacity.
However, the actual annual units produced were 100 500 for CC and 50 300 for WC.

4. Total budgeted selling and administrative cost consists of 70% fixed cost and 30% variable cost.
Fixed costs are allocated at a ratio of 5:3 between the CC and WC. The budgeted variable cost per
unit was R0,20 and the actual variable cost per unit for the 2016 financial year was R0,25.

Additional information

1. The primary ingredient for CC is corn and for WC is wheat.

2. Both CC and WC use the same secondary ingredients (barley, sugar and vitamins). The combined
budgeted cost of the secondary ingredients was R7,00 per unit, and the combined actual cost of
the secondary ingredients was R6,00 per unit.

3. The actual corn cost per kg for the 2016 financial year was R7,80 and the budgeted cost per kg of
corn for the same period was R8,00. Each unit of CC requires 0,5kg of corn. Both the budgeted
and the actual corn usage per unit were the same for the 2016 financial year.

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4. The wheat used in WC is bought in kilograms. The budgeted cost per kg was R15,34. Each unit of
WC requires 0,5kg of wheat. The actual cost per kg was R15,50 and the actual usage was 0,6kg
per unit of WC.

5. Both CC and WC are sold in the same sized customised boxes made from the same soft-
cardboard. The budgeted cost of a customised box was R3,00 per unit. The actual cost of a
customised box was R3,02 per unit.

6. The budgeted direct labour rate was R50,00 per hour. The budgeted direct labour time to produce
each unit is 12 minutes for CC and 10 minutes for WC. Production employees can work
interchangeably between the two products. The actual direct labour minutes per unit were
equivalent to the budgeted direct labour minutes per unit for each of the two products. The actual
direct labour rate per hour was 5% higher than the budgeted direct labour rate per hour.

7. The budgeted and the actual variable manufacturing overheads per unit of each product was R2,00.

8. The budgeted annual fixed manufacturing overheads was R200 000. The actual fixed
manufacturing overheads for the 2016 financial year was R180 000. Fixed manufacturing
overheads are absorbed on the basis of units produced.

FIXED MANUFACTURING OVERHEADS

The company is investigating the possibility of using activity-based costing system for overheads
allocation. An initial analysis of the actual fixed manufacturing overheads established the following
relationships between the overheads and the activities:

Activity area Notes Total cost

R
Direct material ordering i 25 000
Factory rental ii 120 000
Packing process iii 15 000
Quality inspections iv 20 000
Total R180 000

Notes and additional information

i. In total the company orders direct raw material 10 times a month for each of products CC and WC
(i.e. a total of 20 orders per month).
ii. Total factory rental is allocated to products CC and WC in a ratio of 4:3 respectively.
iii. Finished units are packed on custom-made crates (CC-crate and WC-crate). 1 (one) CC-crate is
packed with 8 (eight) CC units and 1 (one) WC-crate is packed with 12 (twelve) WC units. CC units
cannot be packed on WC-crates and vice-versa.
iv. Quality inspections of units are strictly carried out as follows: every 5th unit of CC is inspected and
every 8th unit of WC is inspected.

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REQUIRED

(a) Determine the total budgeted contribution per product type by preparing the budgeted (18)
marginal cost statement of Delicious Cereals (Pty) Ltd for the year ended 31 March 2016
in as much detail as possible. The total column is not required. Round off all your workings
to the nearest rand.
(b) Calculate the total budgeted fixed manufacturing overheads allocated to both the corn (3)
cereals (CC) and whole-wheat cereals (WC) using the current basis of allocation for the
year ended 31 March 2016.
(c) Calculate the actual fixed manufacturing overheads per unit for the year ended (8)
31 March 2016, for both the corn cereals (CC) and the whole-wheat cereals (WC) using
the activity-based costing system.
(d) Assume there are no opening finished inventory units. Calculate DC’s total required (8)
budgeted units for the year ended 31 March 2016, to break-even on the total budgeted
fixed costs for the year.
(e) Calculate the following variances for the year ended 31 March 2016:
(i) Sales price variance for the whole-wheat cereals (WC). (2)
(ii) Direct material wheat usage variance. (3)
(iii) Direct labour rate variance for the corn cereal (CC). (3)
(iv) Fixed manufacturing overheads expenditure variance. (1)
(f) Briefly discuss the difference between quality costs and target cost. (2)
(g) Briefly discuss the difference between direct and absorption costing systems. (2)

3.3 MITOLI BYEBOER (PTY) LTD 50 Marks

Mitoli Byeboer (Pty) Ltd (“MB”) has for five (5) generations farmed bees for the production of an
exclusive brand of honey (“MaMePe”) for sale. The secrets to its long existence are customer centricity,
high moral and ethical standards and being a responsible corporate citizen. The company has a
December financial year-end; uses the absorption costing system and values all its inventories using
the first-in-first-out (FIFO) method. MB’s operations take place in two (2) divisions, namely the Bee
Hives Division (BHD) and the Honey Processing Division (HPD). These two (2) divisions are
managed by independent management teams. BHD farms with the bees for the harvest of “raw-honey”
while HPD processes the raw-honey into MaMePe for sale to the public. Although no formal transfer
price policy currently exists, the BHD sells some of its raw-honey harvest to the HPD at a negotiated
price between the two divisions. The rest of the raw-honey harvest is sold to the external customers.

THE BEE HIVES DIVISION (BHD)

BHD is an exclusive and specialist bee farming operation. The division owns and utilises for farming,
its entire thirty (30) hectares farm. This farm is rich in nectar producing trees (nectar is a natural feed
for bees). To optimise this natural feed around the entire farm and reduce feeding costs, BHD positions
five (5) wooden farming bee-hives (hereafter referred to as “bee-hive(s)”) in each hectare for the
duration of the financial year. This positioning represents the maximum number of bee-hives and yields
three (3) harvests – one in the period ending April, one in the period ending August, and one in the
period ending December – during each financial year. For each of these three (3) harvest periods, the
standard harvest quantity is 24 kg of raw-honey per bee-hive per harvest.

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Extract from the actual results for the four month-period ended 30 April 2019:
Details R
Sales 1.1. ?
Feeding costs 1.2. ?
Fixed farming overheads 1.3. ?
Direct labour cost 1.3. 64 800
Preservation costs 1.4. ?
Other variable farming overheads 14 000
Variable selling & distribution costs 1.5. ?
Additional information relating to the actual results above:
1.1. The total actual harvest for the period was 3 500 kg of raw-honey. No harvest losses occurred
during the period. BHD sold 2 300 kg of the total actual raw-honey harvest to external customers
at R60 per kg. The balance of the actual raw-honey harvest was transferred internally to HPD at
a negotiated price which was 25% below the selling price for external customers.
1.2. The raw-honey yield is dependent on the feed ration. As a standard, the bees are fed a 15 kg
feed ration to yield 1 kg of raw-honey. BHD fed the bees a daily ration of 3 kg of purchased
feed per bee-hive. Despite only a slight increase due to inflation, the feed was bought at R63 per
60 kg, a price that was noticeably higher than the related set standard. The bees were fed on
each of the 120 days during the period. The division had no opening or closing feed inventory
during the period. The bee feed market is currently controlled by a few monopolistic cooperatives.
1.3. The fixed farming overheads are absorbed on the basis of budgeted bee-keeping (farming) hours.
BHD employs three (3) full-time beekeepers each working an eight (8) hours-per-day shift for a
total of 240 days per employee per financial year. The total actual hours for the period under
review were 2 800 hours. The annual budgeted fixed farming overheads of R69 120 for the 2019
financial year would be incurred evenly throughout the financial year. The actual fixed farming
overheads for the period under review were R30 000.
1.4. A special preservative is added to the raw-honey sold to external customers only. The actual cost
of this preservative was R1 per kg of the raw-honey. No preservatives are added to the internally
transferred raw-honey.
1.5. The variable selling & distribution costs, incurred on the external sales only, were R1,05 per kg
of raw-honey.
1.6. BHD insures its bee-hives with KlientTrell Insurers (KTI) at a total fixed monthly cost of R4 000.
On 1 January 2019, three (3) bee-hives with a carrying value of Rnil were stolen and immediately
replaced with new ones. On 20 April 2019, KTI confirmed that they would pay R605 insurance
proceeds for the stolen bee-hives; however, this would only be paid at the end of May 2019.
1.7. BHD has contracted Mapentana (Pty) Ltd (“MapT”) to paint the division’s administrative building
at the beginning of each harvest period. The contract provides for a total painting cost of R12 000
per financial year, incurred evenly throughout the financial year. MapT came highly
recommended, therefore it came as a shock to BHD that MapT is constantly being accused of
shoddy painting work on municipal projects, in the main, dangerous and confusing road markings.
MapT is also known for “painting the town red” every weekend by hosting parties for teenagers
and encouraging underage alcohol use.

1.8. There was no opening or closing inventories of any types.

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NVESTIGATION TO INTRODUCE A FORMAL TRANSFER PRICE POLICY

MB is considering introducing a formal transfer pricing policy to be implemented from 01 May 2019. In
this regard, the budgeted transfer price for the remaining harvest periods of the 2019 financial year will
be based on the actual results of the four-month period ended 30 April 2019 as per above.

For each remaining harvest period, the budgeted raw-honey yield and the external sales will be 3 500
kg and 2 300 kg, respectively. The budgeted raw-honey internal transfer is 1 500 kg per harvest period.

THE HONEY PROCESSING DIVISION (HPD)

HPD owns a processing plant (“plant”) and operates a process costing system to produce MaMePe.

The production process begins with the purchase of HPD’s only direct raw material, raw-honey, from
two (2) sources: (i) the BHD; and (ii) the open market. At the plant, raw-honey is put through the
extraction process that separates honey from the wax to yield “processed-honey”. The processed-
honey is then pumped into filter tanks that remove the remaining solids, such as bee stingers. After the
filtering process, a final product (MaMePe) flows into settling tanks before it is packaged into individual
products for sale, each consisting of 500 grams (g) of the final product.

All the direct raw materials required to produce MaMePe are added at the beginning of the production
process. The direct labour costs and production overheads are incurred evenly throughout the
production process.

The wastage point occurs when the production process is 70% complete. The resulting normal loss is
5% of the input that reaches the wastage point. All loss units are sold as scrap at R2 per kg. One (1)
kilogram of the raw-honey after losses and/or gains yields one (1) kilogram of MaMePe.

Management accounts extract from the actual results of the month ended 30 April 2019:
Details Notes Quantity Amount
Sales – MaMePe 2.1. ?? R783 250
Opening finished goods (MaMePe) 150 units R??
Closing finished goods (MaMePe) ?? units R??
Opening work-in-progress (WIP) – 60% complete 2.2. 1 200 kg R64 800
Closing WIP – 80% complete 750 kg R??
Raw-honey put into production in the current period 2.3. 5 800 kg R331 300
Direct labour costs: current period 2.3. R56 920
Production overheads: current period 2.3. R60 000

Notes relating to the above management accounts:

2.1. MaMePe was sold at R65 per unit throughout the month.

2.2. R10 800 of the opening WIP value relates to the conversion costs and the balance thereof relates
to the raw-honey costs.

2.3. HPD completed and transferred 6 000 kilograms during the month.

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REQUIRED

For each question below, remember to:

• Clearly show all your calculations in detail;

• Where necessary, indicate irrelevant amounts/adjustments with a R0 (nil-value);
• Round all your workings to two decimals, except where otherwise stated; and
• Ignore all the taxation implications.
(a) Calculate BHD’s budgeted annual harvest kilograms for the 2019 financial year. (3)
(b) Prepare BHD’s actual statement of profit or loss and other comprehensive income
(income statement) for the four-month period ended 30 April 2019. (14)
(c) Briefly explain why budgeted fixed production overhead rates should be used in
preference to actual fixed production overhead rates. (2)
(d) Assume the Procurement Manager of BHD provided you with the following variance
analysis information:
1. 55 200 kg actual feed purchases were made @ R63 per 60 kg of feed.
2. Adverse/Unfavourable feed purchase price variance is R6 072.
(i) Calculate the standard feed purchase price per 60 kg of feed. (2)
(ii) Except for the reason(s) already provided in the scenario, provide two (2) possible
reasons for the above feed purchase price variance. (2)
(e) Identify and briefly discuss two (2) ethical concerns regarding MapT that could
potentially harm MB’s reputation through its business association with MapT. (4)
(f) Calculate the budgeted minimum transfer price per kg of raw-honey at which BHD will
be willing to transfer the budgeted required raw-honey to HPD for the harvest period
ending 31 August 2019. (8)
(g) Prepare the actual quantity statement of HPD for the month ended 30 April 2019. (7)
(h) Calculate HPD’s actual closing finished goods value as it would have appeared in the
income statement for the month ended 30 April 2019. (6)
(i) From a process costing perspective, briefly contrast the treatment of a normal loss
value to that of an abnormal loss value in the income statement.
▪ Ignore the implications of scrap value(s). (2)

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3.4 PEOPLES’ WAGON (PTY) LTD 100 Marks

With a considerable financial backing from the Department of Trade (DoT) and financial guarantees
from the national government, a prominent South African entrepreneur, Ms. Caddie Passattz,
started PeoplesWagon (Pty) Ltd (“PW”). Being relatively new to the conventional four-wheeled
passenger motor vehicle industry, PW currently manufactures and sells two (2) motor vehicle
models only: an entry-level model (a Pholo (“PHL”)) and a sports-utility-vehicle (“SUV”) model
(a Tringuard (“TGD”)). PW’s vehicle manufacturing plant is located in the Port Elizabeth area of
the Eastern Cape Province (“ECP”). The DoT’s financial backing was given on the back of PW
meeting a number of requirements, including making a commitment to employ some of the
unskilled youth around Port Elizabeth. PW uses the absorption costing system and values all its
inventory using the first-in-first-out (FIFO) method. PW’s financial year-end is 31 March.

1. Vehicle manufacturing process (“VMP”) and the related costs

The VMP is a combination of labour and machine intensive processes. All the manufacturing
machinery are operated by the technical staff only. All the technical staff are highly-skilled and were
all head-hunted from Germany. The VMP takes place in four areas; (i) a metal fabrication shop,
(ii) an electrical shop, (iii) a seats and upholstery shop, and (iv) an engine assembly and testing
shop. The process starts with the building of the vehicles’ metal body shells followed by the painting
of body shells into various colours. The painted body shells are then transferred to the electrical
shop for all the electrical wiring including the fitting of entertainment centres. Seats are then fitted,
whereafter each vehicle is also fitted with: an engine and the required five (5) wheels (inclusive
of one (1) spare-wheel per vehicle). Lastly, each vehicle is tested for all functionalities. Each vehicle
that undergoes the VMP is always fully completed and thereafter ready for sale.

2. Summarised financial information for the year ended 31 March 2020:

Details Budget Actual

R million Notes R million Notes
Sales 7 680 2.1. 5 278 3.1.
Inventory 0 2.2. 248,61 3.2.
Other direct variable manufacturing costs (DVMC) 3 684 2.3. 2 807,05
Wheels costs 95 2.3. 66,80 3.3.
Fixed manufacturing overheads (FMO) 3 116 2.4. 2 250 3.4.
Distribution costs 38,60 2.5. ? 3.5.
Unskilled staff costs 54,60 2.6. ? 3.6.
Technical staff costs 106,40 2.7. 77 3.4.
Administrative management staff costs 350 2.8. 420 2.8.

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Notes relating to the budget above:
2.1. PW budgeted to manufacture and sell six (6) times as many PHLs as TGDs consistently
throughout the financial year. The company budgeted to manufacture and sell a combined
total of 28 000 vehicles. The related standard selling prices were R250 000 per PHL and
R420 000 per TGD.
2.2. The company did not budget for opening or closing inventory of any type of inventories.
2.3. R816 million and R17 million of the “other direct variable manufacturing costs” and “wheels
costs”, respectively, relate to TGD, while the remainder in each instance relates to PHL.
2.4. The FMO are absorbed based on the budgeted technical staff labour clock hours (see 2.7.
below).
2.5. PW has contracted Truckings (Pty) Ltd to deliver all the sold vehicles to the vehicle
dealerships. The related distribution costs are semi-variable. The variable portion thereof is
R1 200 per vehicle.
2.6. PW employs 400 unskilled staff members permanently on a fixed and consistent budgeted
monthly salary per unskilled staff member. Included in the unskilled staff costs is the
“holiday bonus”. During December, each unskilled staff member is paid a “holiday bonus”
that is equivalent to that staff member’s salary for one (1) month.
2.7. The standard technical staff labour time is 25 clock hours per PHL and 40 clock hours per
TGD, while the standard idle time is 20%. The related standard labour rate is R140 per clock
hour.
2.8. Since PW’s incorporation, the administrative management staff headcount has always been
100 skilled staff members. These staff members are paid a fixed monthly salary.

3. The notes below relate to the 2020 financial year’s actual results:
3.1. 14 000 PHLs and 5 000 TGDs were manufactured. 13 650 PHLs were sold at R246 000 per
unit, while 4 550 TGDs were sold. No losses occurred in the manufacturing process.
3.2. PW did not have any opening inventory. The closing inventory relates to the finished
vehicles only.
3.3. Wheels were bought in accordance with the actual manufacturing requirements. No wheels
losses occurred. R44,8 million relates to PHL while R22 million relates to TGD.
3.4. The actual total technical staff clock hours were 350 000 for PHL and 200 000 for TGD. The
actual idle time was consistently one (1) hour per eight (8) hours actually clocked.
3.5. The fixed distribution costs were R5 million while variable distribution costs were R1 200
per vehicle.
3.6. PW employed 400 unskilled staff members permanently, of which 80% were employed in
the manufacturing plant and 20% were administrative staff. The monthly actual salary per
unskilled staff member was R500 more than the related monthly budget (see 2.6 above).
The actual “holiday bonus” per unskilled staff member was R500 more than the related
budgeted “holiday bonus” (see 2.6 above). All the unskilled staff members were paid the
“holiday bonus”.

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4. Budget information relating to the 2021 financial year:
4.1. As at 31 March 2020, PW had a total headcount of 1 000 employees made up as follows:
40% unskilled staff, 50% technical staff, and 10% administrative management staff.
According to PW, some of the challenges experienced in the budgeting process are
excessive administrative management staff remuneration, as well as unskilled staff’s:
endemic absenteeism; reluctance to learn from the technical staff; necessary but
overreaching labour-law protection and protracted trade union engagements. Each
technical staff member works 45 hours per week during PW’s 42-work-week financial year.
Although skilled to work on both models, each technical staff member can only work on one
(1) model at a time. PW will maintain a total headcount of 1 000 for the foreseeable future.
In line with the country’s imperative to reduce youth unemployment, the DoT instructed PW
to, as from 1 April 2020, increase its unskilled staff force to 60% of its total headcount. Amid
PW’s strong pushback, they agreed to implement this headcount reconfiguration. The
administrative management staff headcount will however not be impacted by the
reconfiguration.

4.2. Stemming from point 4.1. above, PW’s Management Accountant (Mr. Goelf Nine) is
envisaging the possibility of constrained manufacturing resources for PW to fully meet the
2021 financial year demand for the vehicles. He subsequently started but failed to complete
the following manufacturing resource analysis for the entire 2021 financial year:

Details Body shells Technical staff

metal clock hours
in tonnes
PHL TGD PHL TGD
Manufacturing resource requirements per vehicle 0,5 0,8 25 40
Manufacturing resources needed to fully meet the
demand for vehicles for the 2021 financial year 12 300 3 280 ? ?
Available manufacturing resources 12 500 3 300 ? ?

5. Potential acquisition of SuperTricks Wheels (Pty) Ltd (“SW”)

5.1. PW currently purchases all its wheels exclusively from iNkunzi Tyres (Pty) Ltd (“NT”). After
PW’s hostile takeover of NT failed dismally, PW is now considering to acquire NT’s closest
competitor, SuperTricks Wheels (Pty) Ltd (“SW”). SW is a family-owned and family-
managed company. There are strong allegations that if it was not for its illegal-drugs-selling
business, SW would have gone belly-up by now. PW’s management has, however, seen
this as an opportune time to acquire SW and immediately establish the “PSW Group” that
includes a Head Office and two divisions, the current PW company as PW Division (“PWD”)
and the acquired SW company as the other division (“SWD”). Post the acquisition, SW’s
management team ferociously lobbied that the two divisions must operate autonomously
with separate management teams within the PSW Group.

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5.2. The following information was gathered by PW’s management from SW’s due diligence:
5.2.1. SW’s annual maximum manufacturing capacity is 180 000 wheels for entry-level models
(ELMs) and 30 000 wheels for SUV models, while the related annual external market
demand of the wheels is 150 000 and 48 000 for ELMs and SUV models, respectively.
5.2.2. Under the PSW Group, SWD will fully supply PWD with all PWD’s wheels requirements and
will, to the extent that it is possible, still supply some of its historical external customers with
wheels.
5.2.3. External selling prices and costs per one (1) wheel are as follows:

Details Notes ELMs SUV models

External selling price (i) ? ?
Rim and tyre costs (ii) R150 R200
Variable manufacturing overheads (VMO) (iii) R50 R100
Fixed manufacturing costs n/a R3,50 R3,50
External distribution costs n/a 1,5% of the selling price

(i) No information is available from SW. However, PW currently buys from NT at R680 per
ELMs wheel and R950 per SUV models wheel. It subsequently emerged that SW’s
wheels are 10% more expensive than NT’s. No selling price changes are expected.
(ii) After interviewing a notable number of SW’s customers, it emerged that the
manufacturing materials being used by SW are of suspiciously low quality. One
customer said, “the warranty you get from SW is 3 months only, well below the industry
norm of 12 months.” This fact was ferociously denied and concealed by SW’s
management team.
(iii) Among other items included in the VMO, is indirect labour costs. SW’s indirect labourers
are predominately underage children who are paid considerably lower wages in
comparison to the market, and sometimes, not paid all.
5.3. As part of the due diligence, the following information and financial forecast in relation to the
performance measurement for the first year (Year 1) of the PSW Group was gathered:
5.3.1. The Head Office (HO) will primarily be used as an administrative hub, as such, all the
administrative functions will be the exclusive responsibility of the HO. All the HO’s
administrative costs will be allocated to the two divisions.
5.3.2. The group will introduce a staff loan scheme for all the unskilled staff members. Although
the financial records of the staff loans will be maintained in the respective divisions, the
related applications will be received, processed and approved exclusively by the HO.
Furthermore, all the terms and conditions of the staff loans are solely determined by the HO.
5.3.3. Each division will be responsible for its working capital management.
5.3.4. The divisions will be responsible for all the non-current assets and the long-term loans
decisions.
5.3.5. Unless otherwise stated, the HO and the divisions will be fully responsible for their
respective operational decisions.

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5.4. Financial forecast for the first year (Year 1) of the PSW Group is as follows:

Details Notes HO PWD SWD

Cost of capital rate per annum 5.4.1. ? ? ?
Net profit before interest and tax 5.4.2. R265m R949,5m R30,9m
(R million(m))
Administrative costs (R million) 5.4.3. R540m ? ?
Interest income on staff loans (R million) R125m R3m
Bad debts write-off (R million) 5.4.4. R120,5m R4,5m
Interest expense on long-term loans 5.4.2. R297,5m R8,5m
(R million)
Controllable profit (R million) R1 037m ?
Residual income/(loss) (R million) 5.4.1. (R1,4m) ?
Non-current assets (R million) R16 380m R1 995m
Current assets (R million) 5.4.5. R6 350m R77m
Long-term loans (R million) R3 500m R100m
Current liabilities (R million) 5.4.6. R5 750m R30m
Controllable investments (R million) R12 980m ?
Return on investment (ROI) 7,99% ?

5.4.1. The group expects to maintain the same cost of capital rate per annum throughout the year
for all the divisions.
5.4.2. In the determination of net profit before tax, the only item that still needs to be accounted
for is the interest expense on the long-term loans.
5.4.3. The allocation of the HO’s administrative costs to the divisions is to be unilaterally decided
by the HO based on a presumed administrative work time of 45 minutes in each 1 (one)
work hour for PWD and 15 minutes in each 1 (one) work hour for SWD.
5.4.4. Included in SWD’s bad debts write-off is R1,5 million that is expected to be written-off for
the staff loans which will not be recovered. The remaining bad debts write-off relates to trade
debtors only.
5.4.5. Included in SWD’s current assets is R12 million in staff loans and the remainder relate only
to trade debtors and bank & cash.
5.4.6. The current liabilities relate to trade creditors only.

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 MAC3761/QB001
REQUIRED

For each question below, remember to:

• Clearly show all your calculations in detail;
• Where necessary, indicate irrelevant amounts/adjustments with a R0 (nil-value);
• Round all your workings to two decimals, except where otherwise stated; and
• Ignore all the taxation implications.
(a) With reference to PW’s vehicle manufacturing process (VMP):
List three (3) different costs that are included in PW’s other direct variable
manufacturing costs (DVMC), and briefly explain the rationale behind classifying
these costs as DVMC. (4)
(b) During the 2020 financial year budget presentation, Ms. Passattz posed this
question to the management staff: “In line with market demand, it makes sense
that we planned to manufacture and sell six (6) times as many PHLs as TGDs.
However, explain this to me, if the market demand is six (6) times as many PHLs
as TGDs, why can’t we just manufacture and sell PHLs only? I suspect it’s
something to do with break-even point units?”
(i) Briefly comment on the correctness of Ms. Pasattz’s suspicion that the
reason why PW cannot “just manufacture and sell PHLs only” has something
to do with break-even point units. (3)
(ii) Calculate PW’s sales units budget per vehicle model for the 2020 financial
(2)
year.
(iii) Calculate PW’s budgeted break-even point in units for both PHL and TGD
for the 2020 financial year. (10)
(c) Assuming the following two points for question (c) only, calculate the below four (4)
standard costing variances for the 2020 financial year:
1. A standard costing system was in place at PW.
2. Where applicable, the standard gross profit is R19 300 per PHL and R40 200
per TGD.
i. Sales mix variance per vehicle model and in total. (4)
ii. Wheels purchase price variance for vehicle model PHL only. (3)
iii. Idle time variance for technical staff in total. (3)
iv. Fixed manufacturing overheads expenditure variance. (2)
(d) Assume the following two points for question (d) only for the 2020 financial year:
1. The budgeted fixed manufacturing overheads absorption rate is R3 850 per
technical staff clock hour.
2. Except for point 1. above, all the other information remain as given in the
scenario.
Prepare PW’s actual statement of profit or loss and other comprehensive income
(income statement) for the year ended 31 March 2020.
▪ Only the Total column is required. (14)

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(e) When asked about why he was unable to complete the manufacturing resource
analysis and subsequently determine PW’s budgeted optimum manufacturing mix
for the 2021 financial year, Mr. Goelf Nine said: “Whilst busy with it, it appeared
like I would eventually need to resort to what is called the “linear programming
technique” – unfortunately I was off sick the day “linear programming” was done in
class”.

(i) Briefly define linear programming. (1)

(ii) Mention to Mr. Nine as to under which circumstances it is best to resort to the
linear programming technique for determining optimum manufacturing mix. (1)
In answering (e)(iii) only, assume the following two points for the 2021 financial
year:
1. Except for the budgeted information as per point 2 below, all the other budgeted
information remain as given in the scenario.
2. Some of the budgeted information for PW’s 2021 financial year:
Details PHL TGD Total
per unit per unit R million
Selling price R254 000 R420 000 ?
Variable manufacturing costs R150 500 R260 500 ?
Variable distribution costs R1 500 R1 500 ?
Fixed manufacturing costs R95 000 R150 000 ?
Total fixed distribution costs n/a n/a R5
Total administrative management staff n/a n/a R550
costs

(iii) Calculate PW’s budgeted optimum manufacturing mix in units per vehicle
model for the 2021 financial year. (14)
(iv) Briefly discuss five (5) qualitative factors that PW will need to consider in the
implementation of the headcount reconfiguration as instructed by the DoT. (5)
(f) As part of finalising SW’s due diligence:
(i) Identify and briefly discuss five ethical, social and/or business qualitative
factors that PW will need to consider in its assessment of whether or not to
acquire SW. (10)
Assume that the wheel market is not perfectly competitive; the plan to establish
the PSW Group is brought to fruition; and that PWD’s annual vehicle market
demand for the 2021 financial year is 21 600 PHLs.

(ii) Calculate the minimum transfer price per ELM wheel at which SWD will be
willing to transfer the total required wheels for the 21 600 PHLs to PWD for
the 2021 financial year. (9)

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 MAC3761/QB001
(g) With regard to the performance measurement for the first year of the PSW Group:
(i) Using applicable information from PWD, calculate the cost of capital rate per
annum. (2)
(ii) Calculate SWD’s forecasted residual income (RI) and SWD’s forecasted
return on investment (ROI) for Year 1. (11)
(iii) Mr. Nine was heard saying: “Forget the residual income, it is neither important
nor an appropriate divisional performance measure. In this regard, a review of
both controllable profit and return on investment clearly indicates that PWD is
forecasted to exceptionally outperform SWD, and that is a fact.”

By reference to the applicable given information and the calculations in g(ii) above,
comment on the correctness of the above statement by Mr. Nine. (2)
Total marks [100]

3.5 JUNIOR SPORTS LTD 50 Marks

Junior Sports Ltd has numerous divisions, each specialising in specific sports codes. The financial
manager of Junior Sports Ltd recently resigned and the management team needs the advice of a cost
accountant for important business decisions that they face.

TENNIS DIVISION

The Tennis Division currently sells two types of tennis racquets for children – a Wilson racquet and a
Babolat racquet. The Babolat racquets are becoming increasingly popular. The sales forecast for July
2015 of the Tennis Division, based on 400 Babolat racquets and 200 Wilson racquets are as follows:
Babolat Wilson
(R) (R)
Selling price per unit 550 350
Variable cost per unit 400 220

Common (indirect) fixed costs for these two racquets for June 2015 amounted to R35 200. The common
fixed costs can only be avoided if neither of the two racquet types are sold as they relate to the cost of
common facilities. It is expected that the fixed cost will increase by 7,5% in July 2015.

Management of the Tennis Division is considering discontinuation of the Wilson racquets. If they
discontinue the Wilson racquets, they forecast the sales for the Babolat racquets for July 2015 to
increase to 600 racquets. The Babolat racquet will then be sold at a 10% discount.

GYMNASTICS DIVISION

The Gymnastics Division uses a highly automated manufacturing process with no human intervention
(and therefore no labour) to produce unique gymnastic equipment. This division makes use of a direct
costing system.

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 MAC3761/QB001
The standard cost for one of its products, the Gym-indoor, for the month of June 2015 was as follows:

The standard cost per unit of product Gym-indoor:

Material Kg requirement Cost per kilogram Cost
(kg) (R) (R)
X 4 30 120
Y 2 16 32
Z 2 8 16
8 168

Total budgeted fixed production overheads R725 000

In order to arrive at the budgeted selling price per unit Gym-indoor, the Gymnastics Division applies
a 80% mark-up on the standard variable cost. The division budgeted to manufacture and sell 10 000
units of Gym-indoor during June 2015. There was no budgeted opening or closing inventory of product
Gym-indoor.

The actual results for product Gym-indoor for June 2015 were as follows:

Material Material purchased and issued to Cost

production
(kg) (R)
X 40 000 1 260 000
Y 18 000 288 000
Z 22 000 165 000
80 000

Actual production and sales (units) 10 200

Actual selling price per unit R305
Total fixed production overheads for June 2015 R778 000

RUGBY DIVISION

The Rugby Division uses a unique machine that stretches the leather for the different types of leather
rugby balls they sell. The Rugby Division is planning their production levels for July 2015 for the different
types of rugby balls.

The following information is provided relating to the sales forecast for July 2015:

XTreme ball AveJoe ball Intro ball

Selling price per ball R675 R400 R280
Variable cost per ball R260 R250 R120
Machine minutes required per ball 30 18 15
Sales demand (no of balls) 200 1 000 800

It is not possible to increase the machine hours of the Rugby Division’s leather-stretching machine
beyond 540 operating hours per month in the short term.

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 MAC3761/QB001
REQUIRED

(a) (i) Calculate the total budgeted breakeven sales value of the Tennis Division for July
2015. Ignore the possibility of discontinuing the sales of the Wilson tennis racquets. (8)
(ii) Calculate the budgeted breakeven sales value of the Tennis Division for July 2015
assuming that management decide to discontinue production of the Wilson tennis
racquets. (4)
(iii) Advise management whether it would be a good business decision to discontinue
the sales of the Wilson tennis racquets or not. Assume that the respective forecast
sales levels are accurate.
(Support your answer with appropriate calculations and comments regarding the
different options. Also consider a non-financial factor). (5)
(b) Prepare a statement reconciling the budgeted profit to the actual profit in respect of the
Gymnastics Division for June 2015 in as much detail as permitted by the information
provided.
You need not calculate any material mix variances or material yield variances. Assume
that the combined material mix variances, in total, amount to R16 000 favourable
(consisting of a R32 000 favourable variance for Material Y and an adverse variance of
R16 000 for material Z) and that the combined material yield variance is R33 600
favourable in total.
Your total reconciliation should clearly indicate the relationship between the following:
• the budgeted profit
• the standard profit
• the actual profit
• material purchase price variance (per material type and in total)
• material usage variance (per material type and in total)
• all other applicable variances (22)
(c) Provide possible reasons for the following variances:
(i) Total material price variance (2)
(ii) Total material mix variance (2)
(d) Calculate the total budgeted contribution of the Rugby Division for July 2015 based on
the optimum product mix. (7)

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3.6 MEHLARENG (PTY) LTD 50 Marks

Mehlareng (Pty) Limited (aka Mehlareng Group [MG]) is a family owned company that operates from
the Tzaneen area of the Limpopo Province. The group operates two divisions, the Tree Plantation
Division (TPD) and the WoodWorkx Division (WWD). These divisions are managed by autonomous
management teams. The group uses a direct costing method.

MG’s financial year-end is 30 April. Inventory is valued using the first-in-first-out (FIFO) method. Cost
of capital is 12,5% per annum for the TPD and 13,0% per annum for the WWD. The target return on
investment (ROI) for each division is the respective cost of capital percentage plus (+) 1,5%. All
investment decisions/proposals are quantitatively assessed against the target ROI. All depreciable
assets are depreciated at 20% per annum on a straight-line basis.

TREE PLANTATION DIVISION (TPD)

The TPD owns a five-hectare forestry farm which is subdivided into five plantation sites of one hectare
each. The division’s total plantation capacity for the five hectares is 12 500 trees. At any given point in
time, all the trees within one site are of the same age, however the ageing is different from one site to
the next. For example, when trees in site 1 are all two years old, then site 2 trees are all seven years
old. Only 20-year-old trees are harvested and only one site is harvested at a time. Irrespective of the
site being harvested, the harvest always yields the same number of output (trees). It takes the whole
year to fully harvest a site, and once harvested the trees then cut into logs. Each harvested tree
produces two logs of approximately the same size (length and width) and weight.

The production and sales of the logs is as follows:

Selling price to external customers per log R270

Total variable cost per log R125
Total fixed cost per annum R1 250 000

Currently the TPD sells 85% of its annual log production to the external customers, however, if it were
to sell the logs to the WWD, it will save R2,50 per log on the variable selling cost. WWD requires 4 000
logs per annum for which MG is faced with the following two procurement options for its operations:

(i) WWD can buy the logs exclusively from an outside supplier at a purchase price of R275 per log.
This supplier is willing to offer an 8% discount on the purchase price if more than 3 500 logs per
annum are bought from them, or

(ii) WWD’s required logs are internally transferred from the TPD, who in turn will need to sacrifice
their existing annual sales to external customers accordingly.

WOODWORKX DIVISION (WWD)

In the WWD, the logs are processed and converted into two types of products (wood); TopNotch (TN)
wood and Mashaya-shaya (MS) wood. TN and MS woods are sold to furniture manufacturing
companies.

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 MAC3761/QB001
The following financial information was extracted from the management accounts for the respective
financial years.

Financial year-ending 30 April 2016 30 April 2017

Details Actual per unit Budget (Total)
TN MS Total TN MS
R R R R
Sales ? ? 11 137 500 5 657 850 6 789 420
Less: Variable cost of sales (267,50) (222,50) (4 226 125) (5 495 213)
Opening inventory ? ?
Direct raw material 195,00. 170,00. 3 281 250 3 676 875
Direct labour 45,00. 30,00. 937 500 894 375
Variable manufacturing cost 25,00. 20,00. 625 000 695 625
Less: Closing inventory ? ?
Variable selling cost 2,50. 2,50. 34 925 52 388
Contribution ? ? ? 1 431 725 1 294 207
Less: Fixed cost 1 692 623
Manufacturing overheads 1 278 000
Allocated head office cost 320 325
Selling cost 94 298
Net profit before tax ? ? ? ? ?

1. Information relating to WWD’s 2016 financial year-end actual results:

1.1. An extract from the 2016 financial year end management accounts reflected the following actual
results:
Detail TN MS Total
Opening inventory units: 1 May 2015 4 100 6 800 10 900
Total units produced 12 500 15 900 28 400
Sales R5 062 500 R6 075 000 R11 137 500
Controllable investment (depreciable assets at cost) R2 700 000

1.2. The division operated at 80% of its full production capacity throughout the 2016 financial year.
2. The following information relates to WWD’s 2017 financial year budget:
2.1. The basis for the 2017 financial year budget is the 2016 financial year-end’s actual results.
2.2. The budgeted sales volumes are 13 970 and 20 955 for TN and MS respectively, while the unit
selling price is set to increase by 8% for each of the two products. The sales mix is expected to
remain unchanged at 2:3 for TN and MS respectively.
2.3. The division is expected to operate at full production capacity throughout the financial year.

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2.4. Direct raw material, direct labour and variable manufacturing overheads will each increase by
R15 per unit for each type of wood.
2.5. The variable and fixed selling costs per unit are expected to remain unchanged.
2.6. The total fixed manufacturing overheads (which also includes the annual depreciation charge)
are projected to increase as follows; a 50% probability that the increase will be 10%, a 30%
probability that the increase will be 11% and a 20% probability that the increase will be 8,5%.
2.7. Head office will allocate an additional R129 675 to the division.
2.8. Fixed selling costs are expected to remain at R38 328 and R55 970 for TN and MS respectively.
2.9. There are no plans to buy or sell any depreciable asset(s).

3. Proposal to change MG’s costing method for the 2017 financial year-end.
At the 2017 financial year-end budget presentation meeting the board ratified the following proposal:

3.1 MG should adopt International Financial Reporting Standards (IFRS) as its primary reporting
framework effective from 1 May 2016, the start of the financial year, and change its costing method
to the absorption costing method.
3.2 In line with IFRS, WWD’s fixed manufacturing overhead absorption rate per unit on 30 April 2016
was retrospectively calculated at R45 per unit. The budgeted absorption rate per unit for the 2017
financial year end is expected to increase to R49,50.
3.3 WWD’s allocated head office expenses are expected to be apportioned to products based on the
budgeted production volumes for the 2017 financial year.
3.4 All other information applicable to the budget will remain the same as in direct costing method.

BLACK INDUSTRIALIST DEVELOPMENT PROGRAMME (BIDP)

During the 2016 Black Industrialist Indaba (conference), MG was provisionally requested by the Minister
of the Department of Trade and Industry (DTI) to accept an invitation to join the Black Industrialist
Development Programme. The Minister immediately commissioned the Auditor-General (SA) to
undertake a feasibility study on MG to ascertain its suitability for the programme.
The feasibility study concluded that should MG accept the invitation from the Minister, the following
operational terms and conditions will apply to the arrangement:
(i) Each division is expected to retain their decision-making autonomy with regards to depreciable
assets and operational funding.
(ii) WWD is expected to buy four (4) additional depreciable assets at R250 000 per machine. These
machines will be bought and brought into use on 1 May 2016.
(iii) The DTI will provide unconditional funding of R1 500 000 to the TPD to increase its controllable
investment (depreciable assets) base to R3 200 000. The new assets will be bought and brought
into use as from 1 November 2016.
(iv) The allocated head office cost for the 2017 financial year is budgeted at R175 000 for TPD. The
budgeted head office cost are allocated to both divisions at the discretion of the head office.

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REQUIRED
In respect of the Tree Plantation Division (TPD)
(a) Assume that MG decides to adopt procurement option (ii). Calculate the total number
of logs that the TPD will have to sacrifice from its existing external customers in order
to fully supply WWD’s log requirements. (2)
(b) Advise which one of the two procurement options will be the most beneficial from the
group’s (MG) perspective. Ignore qualitative factors. (5)
(c) List and briefly explain the transfer pricing method(s) which can be used for
intermediate products that have a perfectly competitive market. (2)
In respect of the WoodWorkx Division (WWD)
(d) Prepare the production budget in units for the 2017 financial year. (5)
(e) Briefly explain the concept of “computerised budgeting” and list two types of
software that are useful in the planning and control functions of the budget. (3)
(f) Briefly explain the margin of safety concept. (2)
(g) Based on the 2017 financial year budget. Calculate the margin of safety percentages
for each of the two products (TN and MS). Ignore the implications of both opening
and closing inventories. Ignore the proposal to change the costing method for the
2017 financial year-end. (8)
(h) Briefly explain why the proposal to adopt IFRS would require a change in the costing
method from direct costing to absorption costing method. (3)
(i) Assume the production budget for the 2017 financial year is as follows:
TN MS
Sales 12 600. 18 400.
Plus: Closing inventory 3 000. 1 400.
Units required 15 600. 19 800.
Less: Opening inventory (2 200) (3 700)
Units produced 13 400. 16 100.

Draft the budgeted income statement for the 2017 financial year based on the
absorption costing method. Present each of the two products separately and the
Total column is not required. (10)
In respect of the “Black Industrialist Development Programme” (BIDP)
(j) A total budgeted net profit before depreciation and tax for the 2017 financial year of R718 950
for the TPD and R775 450 for the WWD was confirmed by the feasibility study.
(i) Calculate the budgeted return on investment (ROI) for the 2017 financial year for each of
the two divisions and advise MG if they should accept an invitation to join the BIDP. Ignore
qualitative factors. (6)
(ii) Calculate the budgeted residual income (RI) for the 2017 financial year for each
of the two divisions. (4)

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3.7 AFRiTECH MOBILE (PTY) LTD 100 Marks

Azania Zondo’s AfriTech Mobile (Pty) Ltd (“ATM”) started trading on 01 April 2018 with the hope of
revolutionising the low-cost mobile phone market. Currently ATM assembles and sells one type of
mobile phone (AzaMobi). AzaMobi’s three key components (a cover-shell, a processing unit and a
battery) are all imported from Lee Telecoms, a supplier from China. During the assembly process, one
processing unit is covered with one cover-shell and then one battery is fitted to produce one AzaMobi.
AzaMobi uses solar-energy technology to charge the battery; therefore, it is sold without a battery-
charger. ATM’s inventories are valued using the first-in-first-out (FIFO) method and the company uses
the variable costing system. ATM’s financial year-end is 31 March each year.

ATM’s business plan, accompanied by the related budget (see the “ATM’s financial reports” and
“Additional information” below), was presented to the National Empowerment Fund (“NEF”) for the
start-up capital request. The NEF provided a R100 million long-term loan to ATM from its “uMnotho
Fund” at a fixed interest rate of 6,50% per annum effective from 01 April 2018 to start ATM. The NEF
approved this long-term loan under the following conditions:

(a) The budget as reflected in the financial reports below is applicable to ATM for each of its first two
financial years and must be met;

(b) ATM must submit their audited annual financial statements annually to the NEF for review; and

(c) The NEF is entitled to immediately call-on the full repayment of the long-term loan if ATM's actual
annual net profit before tax is less than the related budgeted annual net profit before tax.

In her first review meeting with the NEF, Ms Zondo said:

“Unfortunately, contrary to what I had initially envisaged, ATM struggled to successfully penetrate the
low-cost mobile phone market during our first year of operation. This left me with little choice but to
actually sell AzaMobis at 25% less than I had budgeted to. Furthermore, the actual costs of each
of the three key components were 20% more than their budgeted price – mainly due to the
weakened R:$ exchange rate. I am the sole-leader of the company; the buck stops with me. I could
have done things differently, but I did not. As a result, ATM’s actual financial performance for the 2019
financial year is regrettably way off what was budgeted for. Besides this poor financial performance, I
am also concerned about the possibility of the loan being called upon. These issues/factors severely
compromised ATM’s ability to generate positive cash flow and also the ability to pay any performance
related bonus”

ATM’s FINANCIAL REPORTS

Statement of financial position (balance sheet) as at 31 March 2019
Details Budget Actual
R R
Ordinary share capital 100 100
Retained income/(loss) 1 324 500 ?
Long-term loan: NEF 100 000 000 100 000 000
Property, plant and equipment 80 000 000 80 000 000
Bank and cash equivalents 20 784 600 0

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ATM’s FINANCIAL REPORTS (continued)
Statement of profit or loss (income statement) for the year ended 31 March 2019
Details Budget Actual
R R
Bank overdraft 0 7 650 900
Finished goods inventory as at 31 March 2019 ? ?
Sales 29 100 000 ?
Variable production costs ? 19 575 000
Sales commission ? ?
Distribution costs 980 500 278 000
Fixed production overheads 300 000 395 000
Office building rental expense ? ?
Interest on long-term loan: NEF 6 500 000 6 500 000
Administrative employee costs 2 100 000 ?

Additional information relating to the above financial reports:

1. Sales, purchases and production for both budget and actual units occur evenly throughout each
financial year. ATM’s maximum annual production (hereafter referred to as either “production” or
“assembly”) capacity is 200 000 AzaMobi units. The company budgeted to produce at 75% of its
maximum annual production capacity.
2. The actual units sold were 5 000.
3. 135 000 cover-shells, 135 000 processing units, and 135 000 batteries were actually bought
and all issued to production at costs of R12 per one (1) cover-shell, R60 per one (1) processing
unit, and R18 per one (1) battery. No losses were incurred during the actual production process.
4. ATM’s direct labour relates to the assemblers of the AzaMobis. The standard assembly time is
1,50 clock hours per unit at R20 per hour. The actual assembly time was 1,40 clock hours per
unit at R25 per hour. The standard and actual idle time allowance were 10% and 7%,
respectively.
5. The actual variable production overheads were R20 per unit. The related standard variable
production overheads is R15.
6. The budgeted closing inventory was 4 500 units. At the end of each financial year, the closing
inventory only relates to the finished goods ready for sale. No other types of inventories are held.
7. Sales commission per unit was budgeted for at R0,01 for each R1,00 of the selling price while the
actual sales commission was 1,20% of each R1,00 of the selling price.
8. The distribution costs are semi-variable. ATM has a three-year courier contract with EyeBlink
Couriers for the distribution of each unit sold. ATM’s standard and actual variable distribution
cost per unit was R5.
9. At the start of ATM, the company entered into a 5-year-lease to rent an office building for all its
administrative functions at a fixed budget rental expense of R12 000 per month. The monthly
actual payments were made as per the related budget. It is ATM’s policy to recognise the rent
expenses in the income statement monthly on a straight-line basis. This lease agreement does
not fall within the ambit of IFRS 16*.

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10. Administrative employee costs relate to fixed staff costs as well as Ms Zondo’s remuneration.
This includes Ms Zondo’s budgeted fixed annual remuneration of R1 200 000 and the provision
for her performance related bonus of R600 000. The performance bonus is based on ATM
achieving its budgeted annual net profit before tax. This performance bonus accrues evenly
throughout the financial year and is only earned as and when production and trading activities
take place. Except for the performance bonus that was wholly not actually paid, all the other
administrative employee costs were actually paid as budgeted for.
11. For this entire question, ignore depreciation and finance costs (interest expense) on the bank
overdraft.

BUSINESS RESCUE PROPOSALS

Immediately after the end of the 2019 financial year, a number of local entrepreneurs approached Ms
Zondo with various business rescue proposals. With her limited experience in business rescue and/or
turnaround strategy, Ms Zondo approached your audit firm for guidance. During the period 01 April
2019 to 30 June 2019, your audit firm undertook the preliminary assessments of all the business rescue
proposals submitted to Ms Zondo. During this assessment period, ATM was closed for business,
and although the non-discretionary administrative employee costs and contractual costs were
incurred and paid, none of the production and trading activities took place. All the proposals are
mutually exclusive. Irrespective of the selected proposal, the expectation is for ATM to resume the
2020 financial year’s production and trading activities on 01 July 2019. After successfully
completing the preliminary assessments, your audit firm short-listed and presented the following two
(2) proposals to Ms Zondo for further investigation and possible due diligence:

PROPOSAL 1: EQUITY TAKE-OVER

Majakathata Group Limited (“MG”), a Johannesburg Stock Exchange (JSE) listed telecommunications
company, proposed to buy 90% of Ms Zondo’s 100% stake in ATM. MG is 80% owned by a German-
based telecommunications company, whereas a local BEE consortium, consisting primarily of local
politicians, owns the other 20%. If this proposal is accepted, ATM would henceforth operate as one of
MG’s subsidiaries. With their extensive experience in business rescue and turnaround strategy, and
some political influence in the Department of Telecommunications, MG’s proposal for the 2020
financial year budget of ATM entailed the following:

1. MG will affect the equity take-over with: (i) an immediate and full settlement of the NEF long-term
loan, and (ii) an equity cash injection of R30 000 000, both effective on 01 July 2019.
2. After a once-off increase of 20% from the 2019 budget monthly level, AzaMobi’s budgeted
monthly sales units are expected to remain constant on a monthly basis. The selling price is to
increase by R12 per unit from the 2019 budgeted price. The main driver being sales to various
government departments and institutions.
3. ATM to adopt an absorption costing system with a fixed production overheads absorption rate
of R2 per unit for both the 2019 and the 2020 financial years.
4. Renegotiation of the purchase prices of the three key components back to the 2019 budget level.
5. The budgeted finished goods opening inventory units and the related rand-value as they relate to
the variable production costs are equivalent to the 2019 financial year’s actual closing inventory
units and the related rand-value, respectively. Finished goods closing inventory is budgeted at 0
(nil) units as at 31 March 2020.

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6. Ms Zondo’s will earn a performance related bonus if ATM achieves its budgeted annual net profit
before tax. The bonus accrues evenly throughout the financial year, and it is only earned as and
when production and trading activities take place.
7. Except where otherwise stated, all other 2019 budget information and/or policies of ATM are
expected to equally apply to ATM’s 2020 financial year.
8. MG’s commitment is that, if accepted, its proposal will generate a net profit before tax of at least
R5 500 000 per financial year for ATM.

PROPOSAL 2: REFINANCING OF THE LONG-TERM LOAN

BetKoin Incorporated (“BKn”), a private equity house, proposed to refinance the current NEF long-term
loan with a R120 000 000 long-term loan at a fixed interest rate of 4,75% per annum. The proposed
commencement date of the BKn loan is 01 July 2019. A once-off capital repayment of the BKn loan is
scheduled for 30 June 2025. BKn’s proposal for the 2020 financial year budget of ATM entailed the
following:

1. ATM is to utilise the R120 000 000 to:

1.1. Fully settle the long-term loan from NEF on 01 July 2019.
1.2. Purchase the office building it currently leases. The purchase date and price is 01 July
2019 and R5 000 000, respectively. ATM will incur a R60 000 once-off lease termination
costs.
1.3. Partially settle the balance of the bank overdraft.
2. An introduction of a second product (AzaSmart), a low-cost smart mobile phone. AzaSmart’s key
components includes the same cover-shell used for AzaMobi. AzaSmart’s other standard
production costs are: (i) processing unit at R350; (ii) electrical rechargeable battery at R16; (iii)
battery-charger at R12; (iv) direct labour assembly costs and variable production overheads at
R36 and R15, respectively. Although ATM’s existing direct labour assemblers will also be used to
assemble AzaSmarts, AzaSmart’s standard direct labour assembly time is expected to be 20%
more than that of AzaMobi.
3. The budgeted sales and production of AzaSmarts will occur evenly throughout the financial year,
both at 7 275 units per month. AzaSmart’s budgeted selling price is R600 per unit.
4. EyeBlink Couriers confirmed that, while they will also distribute the AzaSmarts. There will be no
changes to the fixed portion of their quoted distribution costs and that the AzaSmart’s variable
distribution costs will be R5 per unit.
5. The standard sales commission for the AzaSmart is R3 per unit.
6. Establishment of a divisionalised structure with two production divisions, AzaMobi Division
(“AmD”) and AzaSmart Division (“AsD”), and the head office. The head office will be
responsible for all the company’s long-term financing, leasing, and capital investment
decisions.
7. AzaMobi’s budgeted opening inventory is to equal the actual closing inventory as at 31 March
2019. Sufficient additional AzaMobis will be produced to meet the budgeted sales units of
130 950.

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8. Lee Telecoms indicated that, resulting from the new export limitations, there is a strong possibility
of cover-shells export limitations into the future. No other supplier is able to supply ATM with the
required cover-shells.
9. As one of the long-term loan conditions required by BKn, each of ATM’s production divisions is
required to generate a return on investment (ROI) of at least 14,50% for the 2020 financial year.
10. A budgeted net profit before tax of R1 250 000 is expected for AsD; this amount is before
correcting any error(s) and it is after all the allocated budgeted non-production expenses.
11. The allocated budgeted non-production expenses include the following four items: (i) lease
termination costs; (ii) office building rental expenses; (iii) the interest on the long-term loans, which
accrues on a monthly basis; and (iv) general allocated head office expenses of R625 000. The
allocated non-production expenses are distributed equally between the AmD and AsD.
12. The budgeted administrative staff costs for the 2020 financial year were erroneously not taken
into account in the calculation of the budgeted net profit before tax as per point 10 above. These
amounts were R1 950 000 and R375 000 for AmD and AsD, respectively.
13. The total annual fixed production overheads budget of R982 500 was correctly accounted for in
the calculation of the budgeted net profit before tax as per point 10 above.
14. AsD’s budgeted statement of financial position as at 31 March 2020 reflects the following
amounts: trade debtors at R36 250 000; bank overdraft at R1 005 000; property, plant and
equipment at R15 000 000; the R60 000 000 allocated portion of the BKn long-term loan; and
trade creditors at R4 500 000.
15. Except where otherwise stated, all other 2019 budget information and/or policies of ATM are
expected to equally apply to ATM’s 2020 financial year.
16. Unless otherwise stated, each division is fully responsible for all its operational and working capital
management decisions relating to its business.

PROPOSAL 2 IMPLICATIONS ON THE FIXED PRODUCTION OVERHEADS

On 30 June 2019 your audit firm received the below e-mail:

Azania Zondo
From: azondo@atm.co.zarr
Sent: 30 June 2019
To: auditmanager@yourauditfirm.co.za
Subject: Allocation of the fixed production overheads for the 2020 financial year
Good day “bean-counters” ☺☺

Thank you very much for the impeccable job your audit firm did on the business rescue proposals. I
was already having sleepless nights about my arrangement with the NEF. Anyway, that is no longer
a pressing matter now.

The business rescue Proposal 2 has unearthed an unintended fixed production overheads (FPO)
allocation challenge for me. This proposal requires an adoption of the absorption costing system and
an introduction of a new product line (AzaSmart). My concern is, I have little insight on how to allocate
the FPO to the two product types and this could negatively affect our pricing and possibly, competitive
advantage.

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Azania Zondo
From: azondo@atm.co.zarr
Sent: 30 June 2019
To: auditmanager@yourauditfirm.co.za
Subject: Allocation of the fixed production overheads for the 2020 financial year
However, after an intensive analysis and investigation, our trusted management accountant, Ms
Paarusha Moodley, managed to establish that: testing activities; quality inspection activities; and the
utilisation of the productive factory floor-space are the three main activities that will drive the FPO
budget for the 2020 financial year.

Of the total FPO budget for the 2020 financial year, R307 500 relates to testing activities, R390 000
relates to quality inspection activities and the remainder relates to the utilisation of the productive
factory floor-space. Our factory floor-space measures 2 000m2, 5% of which relates to the “common
space” which is exclusively used by the assemblers for tea and lunch breaks while the remainder
relates to the productive floor-space.

At ATM, we guarantee customer satisfaction and quality products each time, every time. Therefore,
to minimise the quality costs during the 2020 financial year, every 25th AzaMobi and every 10th
AzaSmart will be tested as a preventative measure while a total of 2 500 and 100 quality inspections
will be performed for AzaMobi and AzaSmart, respectively. We expect to utilise 1 520m2 of the
productive factory floor-space for AzaMobis while the remainder will be used for AzaSmarts.

Once again, Ms Moodley is of the view that the only way to address the matter of allocating the FPO
to the products, is for ATM to adopt what she terms an “activity-based costing (ABC) system”.
Although I have full confidence in her suggestion, I would appreciate an independent view on her
suggestion, and supported by calculations where possible.

Should there be a need for further information, please do not hesitate to contact either me directly or
Ms Moodley on pmoodley@atm.co.zaro.

Kind Regards,

Azania Zondo
ATM Chief Executive Officer
015 123 45678
089 123 45678
azondo@atm.co.zaro

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REQUIRED
(a) With regard to Ms Zondo’s first review meeting with the NEF, address the following:

(i) From a financial perspective only, list and briefly discuss two (2) indicators evident
from the scenario in support of the view that ATM struggled to successfully
penetrate the low-cost mobile phone market.
▪ In answering this question, no calculations are required.
▪ No matters relating to the business rescue proposals must be listed and/or
discussed. (4)

(ii) In your view and evident from the scenario, identify the single most obvious but
critical factor that could have led to ATM’s struggles to successfully penetrate the
low-cost mobile phone market during the 2019 financial year. (1)

(b) Calculate ATM’s budgeted contribution per unit for the 2019 financial year. (9)

(c) Assume that ATM’s budgeted net profit before tax for the 2019 financial year is
R1,45 million.
Advise Ms Zondo as to whether or not the NEF is entitled to call-on the full repayment
of the R100 million long-term loan as at 31 March 2019. Motivate your advice with
relevant and necessary calculations.
▪ In your calculations, you must ignore all possible standard costing variances. (6)

(d) Ms Zondo has heard that standard costing variance analysis can assist her in obtaining
an increased understanding of the factors that influence ATM’s results.
Calculate the following variances for the 2019 financial year to assist Ms Zondo:

(i) Sales price variance. (3)

(ii) Direct material purchase price variance for the cover-shells only. (2)

(iii) Direct labour idle time variance. (4)

(iv) Sales commission expenditure variance. (2)

(e) With regard to Proposal 1, Ms Zondo approached you and your audit firm to provide
assistance with the following questions as part of the proposal’s due diligence:

(i) “I do not understand why this proposal would require ATM to change its costing
system from variable costing to absorption costing. Briefly explain the necessity
thereof to me?” (2)

(ii) Prepare ATM’s envisaged budgeted statement of profit or loss (income statement)
for the 2020 financial year and briefly comment on whether or not the calculated
budgeted net profit before tax is consistent with the commitment by MG. (12)

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(e) Draft a report to Ms Zondo in which you list and briefly explain four (4) qualitative
factors that she should consider as part of assessing the acceptance or non-
acceptance of MG’s equity take-over proposal. (10)

(f) With regard to Proposal 2:

Assume the following two (2) points for answering question (f)(i) only:
1. Lee Telecoms confirmed that a maximum of 1 100 sets of AzaMobi’s key
components and 66 000 sets of AzaSmart’s key components will be made available
to ATM for the 2020 financial year; and
2. ATM’s total direct labour assembly time is limited to 118 155 hours for the 2020
financial year.
(i) Calculate ATM’s budgeted optimal production mix in units for the 2020 financial
year. (15)

(ii) Calculate AsD’s budgeted return on investment (ROI) for the 2020 financial year
and briefly comment on whether AsD is budgeted to achieve BKn’s ROI loan
condition. (10)

(g) With regard to Proposal 2 assume the following two (2) points for question (g) only:
1. Proposal 2 presents ATM with a 70% probability of R5,85 million target profit and
a 30% probability of R6,10 million target profit for the 2020 financial year.
2. Assume there are no opening and no closing inventories of any type.
Calculate the budgeted number of units per product that ATM will need to produce
and sell to achieve the company’s 2020 financial year target profit. (11)

(h) With regard to Proposal 2, assume that ATM’s budgeted production units for the
2020 financial year is 145 000 AzaMobis and 65 000 AzaSmarts.
(i) Respond to Ms Zondo’s email by calculating the total budgeted fixed production
overheads to be allocated to AzaMobi and AzaSmart for the 2020 financial year in
accordance with the costing system proposed by Ms Paarusha Moodley. (7)

(ii) Briefly define the term “quality costing” and classify ATM’s testing overheads and
inspection overheads each into an appropriate “quality cost category”. (2)

3.8 BEANCINO (PTY) LTD 50 Marks

Beancino (Pty) Ltd manufactures coffee products. The company has two divisions, managed by
independent management teams, namely the Coffee division, which manufactures instant coffee that
is sold to grocery retailers, and the Cappuccino division which manufactures instant cappuccino that is
sold to vending machine providers. Both the instant coffee and the instant cappuccino are sold in
powder form.

The Cappuccino division currently acquires the instant coffee from an external supplier at a purchase
price of R40 per kg. The company is investigating the possibility of transferring the instant coffee needed
by the Cappuccino division from the Coffee division. The Cappuccino division will save R3 per kg
procurement costs if the instant coffee is transferred internally.

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CAPPUCCINO DIVISION - BUDGET INFORMATION

The division manufactures three types of products namely regular cappuccino (RCAP), flavoured
cappuccino (FCAP) and unsweetened cappuccino (UCAP) and uses 250g of instant coffee to
manufacture 1kg of cappuccino, regardless of the type of cappuccino manufactured.

The division is considering the discontinuance of the FCAP product and using this manufacturing
capacity to increase the production of RCAP and UCAP.

You are given the following budgeted data for the coming year.

Product RCAP UCAP FCAP Total

Production and sales

(in kg) 319 000 285 000 196 000 800 000

R R R R
Revenue 15 950 000 14 250 000 10 192 000 40 392 000

Costs 13 955 700 12 044 000 10 272 800 36 272 500

Direct material 8 294 000 7 125 000 5 880 000 21 299 000
Labour 2 073 500 1 881 000 1 470 000 5 424 500
Advertising 1 100 000 1 100 000 1 100 000 3 300 000
Depreciation of
manufacturing machines 95 700 85 500 58 800 240 000
Other overheads 2 392 500 1 852 500 1 764 000 6 009 000

Profit/(loss) R 1 994 300 R 2 206 000 (R 80 800) R 4 119 500

1. The budget assumes that:

• the Cappuccino division will run at 100% capacity;
• all units manufactured will be sold;
• all losses in the manufacturing process may be regarded as immaterial.

2. The allocation of the total labour cost between fixed and variable is as follow:
Details RCAP UCAP FCAP Total
R R R R
Fixed labour 957 000 855 000 588 000 2 400 000

Variable labour 1 116 500 1 026 000 882 000 3 024 500

Total R 2 073 500 R 1 881 000 R 1 470 000 R 5 424 500

The abovementioned fixed labour cost relates to fixed management and supervisor cost and has
been apportioned to each product on the basis of kilograms manufactured.

3. The Cappuccino division has signed a three-year marketing campaign contract with Extreme
Marketing. The amount due to Extreme Marketing for the budgeted period is R3 300 000 and the
cost is shared equally between the products.

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4. The manufacturing machines can be used on any of the product lines therefore the depreciation
charge is apportioned to the products based on budgeted kilograms manufactured.

5. Ten percent of the other overhead costs for each product is fixed, while the remaining overhead
costs are variable.

6. Ceasing the manufacturing of the FCAP will eliminate 60% of the fixed labour charge relating to
FCAP and 50% of FCAP’s fixed overhead costs. The fixed overhead costs not eliminated will be
apportioned equally between RCAP and UCAP and the labour cost allocation basis will remain as
is.

7. The manufacturing of RCAP will be increased to 490 000kg and UCAP to 310 000kg, in order to
utilise the spare capacity created by the discontinuation of FCAP.

8. The selling price of UCAP will remain unchanged as the increased production will be absorbed by
the existing market demand. There will be no increase in the variable labour rate per unit as well
as the variable overhead rate per unit for UCAP.

9. RCAP’s selling price will decrease to R47 per kg in order to sell the increased product available
and the variable labour rate will increase with 20%. There will be no increase in RCAP’s variable
overhead cost per unit.

COFFEE DIVISION - BUDGET INFORMATION

The Coffee division has a maximum manufacturing capacity of 2 200 000kg instant coffee and is
budgeting to run at 95% capacity during the budget period. The budget assumes that all instant coffee
manufactured will be sold to external clients at a price of R50 per kg.

The budgeted variable manufacturing cost per kg amounts to R20. The division incurs additional
budgeted costs of R8 per kg to package and deliver the instant coffee to all external customers.

BEANCINO (PTY) LTD - CURRENT YEAR INFORMATION

The company is evaluating the current year performance of the divisional chief operating officers, based
on the divisional return on investment. The company’s cost of capital is 18% per annum.

The head office is responsible for all long-term financing agreements and also determines the rate and
the method of allocating the head office administration fees.

While the Cappuccino division is responsible for their own procurement function including negotiations
with suppliers, the Coffee division’s procurement function is managed by the head office, due to a
breakdown in Coffee division’s procurement function.

Head office delivers training services, at a standard tariff, to the divisions at the request of the divisional
management.

Each division is responsible for their own credit management of debtors, non-current assets investment
decisions, day to day cash management and other sundry expenses.

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The following actual financial results for the year were obtained from the respective divisional trial
balances:

Coffee division Cappuccino division

R'000 R'000
Revenue 100 000 36 700
Net income 28 200 9 400
Non-current assets 43 000 14 000
Debtors 10 800 3 600
Creditors 6 600 2 200
Bank overdraft 1 200 400
Long-term loan 7 500 1 400

Net income was determined before the following income and expenses were taken into account:
Coffee division Cappuccino division
R'000 R'000
Interest paid on long term loan 800 100
Interest paid on bank overdrafts 55 15
Training services 2 160 720
Discount received from creditors 65 25
Discount allowed on debtors 80 30
Depreciation 1 200 450
Head office administration fee 2 000 734
Sundry expenses 10 800 3 600

REQUIRED

(a) Ignore the possibility of the internal transfer of instant coffee. Advise the
Cappuccino Division based on the budgeted information if the FCAP product should
be discontinued or not. Ignore all qualitative factors. Show all your calculations. (15)
(b) Briefly discuss five qualitative factors that should be considered before the
discontinuation of the FCAP product decision is taken. (5)
(c) Ignore the discontinuation decision and determine:
i. The minimum price per kg the Coffee division will be willing to transfer the
instant coffee at, and
ii. The maximum price per kg the Cappuccino division will be willing to pay for the
instant coffee. (12)
(d) List four non-financial measures that can be used to evaluate the divisions’
performance in terms of the quality and efficiency of the manufacturing process. (4)
(e) Compare the performance of the two divisions’ actual results based on:
i. Return on investment (round your answer to 1 decimal place) and
ii. Residual income (14)

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3.9 HIGH RISE LTD 50 Marks

High Rise Ltd is an investment company with a 100% shareholding in both Fine Pine Ltd and CAS Ltd.
These companies operate in two different industries.

FINE PINE LTD

Fine Pine Ltd (Fine Pine) is a South African company that specialises in the manufacturing of wooden
office furniture. The company has received an order from ABC Ltd to design and manufacture 20
wooden office tables. The tables will be completed over two months and delivered at the end of June
2015.

One wooden table requires:

• 3 metres of varnished wood

• 25 gram packet of nails
• 3 litres of glue

1. Fine Pine will not have the necessary internal capacity to design the required office tables. The
company will contract a designer for this order at a total cost of R5 000.
2. The varnished wood for these tables will be purchased from a local supplier at the current purchase
price of R100 per metre. The wood will be varnished at the suppliers’ premises at an additional
cost to Fine Pine of R20 per metre. The varnishing will be done by two experienced workers from
the supplier who each earn a salary of R4 000 per month.
3. 200g Nails are in inventory at present. The cost of these nails was R1 000 per kilogram at the time
that they were purchased. Nails are used in all of the tables, and the current wholesale price is R1
200 per kilogram.
4. Fine Pine manufactured tables 9 months ago that required similar special glue, and they currently
have the exact quantity that is required of the special glue. The glue will expire within three weeks
of the tables being completed and will become toxic after the expiry date. The glue will have to be
disposed of in a manner currently required by legislation. The glue in inventory originally cost the
company R3 000 and will be disposed of at a cost of R5 000 if it is not used in this order.
5. The company bought a saw machine two years ago at a cost of R500 000, to cut wood into the
required sizes. The machine has an estimated useful life of 5 years. The machine will undergo its
normal annual maintenance, a month after the special order at a cost of R40 000. This scheduled
annual maintenance will not affect the delivery date of the tables.
6. In order to meet the deadline three casual employees will be hired to work on the contract at a cost
R2 500 each per month. These employees will be supervised, in addition to his normal
responsibilities, by the company factory supervisor who earns a monthly salary of R10 000.
7. Fine Pine owns the manufacturing facility. The company pays the local municipality monthly rates
of R3 000. Completed tables will be stored at a warehouse which the company leases at a monthly
cost of R2 500. The lease agreement is for the next five years.
8. The monthly fixed factory manufacturing overheads are normally R55 000, but it is expected to
increase to R58 000 over the next two months, due to additional cash expenditure being required
as a result of this order.

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CAS LTD
CAS Ltd is a manufacturer of computers as well as computer parts. These are manufactured in two
separate divisions that are managed by two separate management teams. The company management
is investigating the possibility of transferring computer parts between the two divisions. Currently
Division A manufactures motherboards and then sell these to the external customers. Division B
assembles computer parts to produce completed computers. Division B currently acquire motherboards
from an external supplier.

You have been provided with the following budgeted trial balances for the financial year ending 30 April
2016. The budgets were prepared without taking into consideration the possibility of transferring
computer parts between the divisions:

Division A Division B
Number of units produced and sold 10 000 6 000
R R
Sales 8 800 000 21 000 000
Direct materials 2 740 000 8 200 000
Direct labour 2 000 000 9 800 000
Variable manufacturing overheads 430 000 580 000
Fixed manufacturing overheads 400 000 1 200 000
External variable selling costs 450 000 220 000
Fixed selling costs 70 000 180 000
Head office allocated administration overheads 300 000 400 000
Finance costs 100 000 100 000
Controllable investment 3 000 000 4 000 000

Additional information:
1. Division A has an annual production capacity of 10 000 units. The division currently sells 80% of
its annual production capacity to export clients and the balance is sold to local clients. After the
budget was completed, the Rand has severely weakened, against all of the major export
currencies. CAS Ltd prices their computers in foreign currencies to their export clients.
2. Division B produces 6 000 completed computer units, using parts which it currently purchases from
an outside supplier. Management of High Rise Ltd are considering the possibility to instruct Division
A to transfer 4 000 motherboards to Division B. These parts are currently bought from the outside
supplier at a cost of R880 per unit. If the transfer system is implemented, Division B will save
delivery cost amounting to R5 per computer unit and an ordering costs of R2 per computer unit in
respect of the transferred units.
3. The company’s weighted average cost of capital is 10%. High Rise’s head office is responsible for
all the financing decisions, and the respective companies may not use their own discretion on how
they borrow funds. The head office administrative overheads are allocated to the divisions at the
discretion of the head office.

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REQUIRED
In respect of Fine Pine Ltd:
(a) Determine the total minimum price for the 20 tables that should be charged for the order
from ABC Ltd. Clearly indicate all the costs that should and should not be considered for
the special order and the reasons for their inclusion/ exclusion. Ignore VAT. (15)
(b) Briefly discuss five other factors that Fine Pine should take into consideration before
accepting the order from ABC Ltd. (5)
In respect of CAS Ltd:
(c) Determine the minimum transfer price per unit that Division A will be willing to transfer
at to Division B. (6)
(d) Determine the maximum transfer price per unit that Division B will be willing to pay for
units transferred from Division A. (4)
(e) Determine whether the management of Division A would be willing to transfer 4 000
motherboards to Division B as opposed to selling to their export clients, given the recent
weakening of the Rand against major export currencies, and assume the agreed transfer
price is R825 per unit. Motivate your answer and show all calculations. Compare
contribution from selling externally and contribution from transferring. (11)
(f) Determine the budgeted return on investment of Division B. Ignore the internal transfer. (5)
(g) Determine the budgeted residual income of Division B. Ignore the internal transfer. (4)

3.10 TENNIS BALL (PTY) LTD 50 Marks

Tennis Ball (Pty) Ltd currently makes use of a direct costing system. The company manufactures
and sells two types of tennis balls, Deuce and Ace.
Both Deuce and Ace balls consist of rubber, fabric cover and other materials which can be regarded as
immaterial. The International Tennis Foundation (ITF) requires that certain standards are met in order
for tennis balls to get approved for use in tournaments. Deuce balls are low compression balls, which
is aimed at enhancing the enjoyment of the sport as they are designed to play "slower" and thereby
allow greater opportunity for players to rally. Ace balls are slightly harder, fast-speed balls which are
intended for use on “slower” court surfaces. Immediately after manufacturing the tennis balls, they are
sold to other companies who then test, grade and pack the balls into pressurised tins or tubes which
maintain the ball pressure whilst stored.

ACTIVITY-BASED COSTING SYSTEM

The chief financial officer (CFO) is considering implementing an activity-based costing system as this
system recognises the complexity of manufacturing and its multiple cost drivers, and helps with cost
management. Total budgeted fixed manufacturing overhead costs for June 2016 amounted to R21 000
using machine hours as basis (traditional approach).
The manufacturing overheads were further analysed for June 2016 and the following main activities
and cost drivers were identified as well as the manufacturing information for the same period:

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Manufacturing
overhead cost
Activity Cost driver R
Crushing and extrusion of core Crushing and extrusion machine hours 5 808
compounds
Adding glue Tumbling machine hours 1 484
Fabric covering Number of production runs 3 795
Branding of balls Branding machine hours 3 220
Quality inspections Number of inspections 6 693
R21 000

Deuce Ace
*Budgeted production volume (tennis balls) 860 1 040

Tennis balls manufactured per production run 20 40

Crushing and extrusion machine minutes per tennis ball 12 18

Tumbling machine minutes per tennis ball 15 9

Branding machine minutes per tennis ball 3 3

Quality inspections of units are performed as follows: every 10th Deuce ball and every 20th Ace ball is
inspected.
*The actual production volume for June 2016 was in line with the budgeted production figures.

STANDARD REQUIREMENTS PER TENNIS BALL ARE AS FOLLOWS:

Deuce Ace
Direct material: Rubber (grams) 49 50
Direct material: Fabric cover (grams) 9 6
Direct labour (minutes) 18 15
Overall machine time (minutes) 30 30
BUDGETED DATA FOR JUNE 2016

Deuce Ace
Sales volume (number of balls) 800 1 000
Selling price per ball (R) 40 35
Direct raw material: Rubber (per gram) 16c 16c
Direct raw material: Fabric cover (per gram) 8c 8c
Direct labour recovery rate (per direct labour hour) R20 R20
Variable overhead recovery rate (per direct labour hour) R2 R2

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ACTUAL DATA FOR JUNE 2016

Deuce Ace
Sales volume (number of balls) 860 1 040
Actual sales R33 540 R39 520

Purchased and used direct raw material: Rubber - 90 kg for R13 500
Purchased and used direct raw material: Fabric cover - 10,8kg for R7 020
Direct labour rate: R18 per direct labour hour
Variable overhead rate: R1,80 per direct labour hour
Total fixed manufacturing overheads R25 000

JULY 2016 BUDGET

The production manager has the following information available for July 2016:
1. The budgeted units to be produced for July 2016 is 930 Deuce tennis balls and 1 260 Ace tennis
balls respectively.
2. The required minutes per product in terms of direct labour will remain the same as in June 2016.
3. The contribution per Deuce tennis ball will be R30,36 and the contribution per Ace tennis ball will
be R27,62.

REQUIRED

(a) Calculate the total budgeted manufacturing overheads allocated per product type for
June 2016 using an activity-based costing (ABC) technique to assign the manufacturing
overhead costs. Round your activity rates to two decimal places. Round your final
allocated amounts to the nearest Rand. (14)
(b) Calculate the budgeted contribution per tennis ball for both Deuce and Ace product type
for June 2016 according to the direct costing system. (9)
(c) Calculate the sales price variance per product and in total for June 2016. (3)
(d) Calculate the sales volume contribution variance per product and in total for June 2016. (5)
(e) Calculate the sales mix variance per product and in total for June 2016. (5)
(f) Discuss the significance of the sales mix variance and give two possible reasons for a
favourable sales mix variance. (4)
(g) If direct labour hours for July 2016 is limited to 550 hours and it is the only expected
constraint, calculate how many Deuce and Ace tennis balls should be produced for July
2016 in order to maximise contribution for Tennis Ball Ltd. Round all your workings to 2
decimal places. (8)
(h) Advise the production manager how you would determine the optimum production
program if the rubber raw material also becomes a scarce resource in addition to the
limited direct labour hours (2)

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3.11 iNKUNZI TYRES (PTY) LTD 50 Marks

Mzwandile Nkunzi founded i-Nkunzi Tyres (Pty) Ltd (i-Nkunzi) in 2015, the year the company also
started operating in the South African motor-vehicles tyre industry. For the first two years of its
operation, the company planned to manufacture and distribute its tyres in the Western Cape region
only, after which the management team would prepare and evaluate a country-wide business feasibility
study based on the results of the Western Cape region.

The company only manufactures one type of motor-vehicle tyre called “Black-Beast” (“BB”).

COMPANY’S GENERAL INFORMATION

1. i-Nkunzi’s management team consists of the following individuals:

Name Designation Qualification(s)

Mzwandile Nkunzi Chief Executive Officer/Founder (CEO) Entrepreneur
Siyabonga Cele Production Director (PD) Industrial Engineer
Lerato Morake Chief Operating Officer (COO) CA(SA) and MBA
Chantelle Smith Chief Financial Officer (CFO) CA(SA) and CGMA
Ahmed Naidoo Planning & Strategy Director (PSD) MBA

2. The company’s financial year-end is 31 March and it operates for all the twelve months of the year
split into two periods, period 1 (April to September) and period 2 (October to March).
3. i-Nkunzi operates an absorption costing method.
4. The company’s annual normal production capacity is 6 000 units. Production and sales occur
evenly throughout the year during each financial year.
5. The company’s after-tax cost of capital is 12,50% per annum for both the 2016 and 2017 financial
years.
6. All of i-Nkunzi’s inventory items are accounted for on a first-in-first-out (FIFO) basis.

MANUFACTURING INFORMATION
7. At the management team meeting held on 1 April 2016, Chantelle Smith presented a budgeted
cost-volume-profit (CVP) analysis report for the 2017 financial year showing that i-Nkunzi should
earn a total budgeted net profit of R320 000 for the 2017 financial year if the company produced
and sold 5 000 units.
8. The budgeted product cost of each BB tyre for the 2017 financial year is R750 per unit, and is
made up as follows:
R
Direct raw material – 6kgs per unit 150,00
Direct labour 75,00
Variable manufacturing overheads 112,50
Fixed manufacturing overheads 300,00
Selling and administration cost 112,50
Total R750,00
8.1. The selling and administration costs are 60% fixed and 40% variable.
8.2. The weight of each BB tyre is 5 kilograms.

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9. Throughout each financial year, the company will absorb its fixed manufacturing overheads based
on a predetermined rate as per point 8 above, and all over- or under- recovery of fixed
manufacturing overheads are treated as a period cost at the end of each six-month period of the
respective financial year and not as a product cost.
10. At the end of the 2017 financial year, an extract of the actual manufacturing and trading results
for each of the two periods reflected the following movements in finished inventory:
Financial year 2017
Period 1 2
Months Apr 2016 to Sept 2016 Oct 2016 to Mar 2017
Units Units
Opening inventory 500. 1 275.
Production 3 150. 2 000.
Available for sale 3 650. 3 275.
Less: Closing inventory (1 275) ( 900)
Sales 2 375. 2 375.
10.1. Except for the above finished inventories, the company had no other inventory items either at the
beginning or at the end of each of the 2016 and the 2017 financial years.
10.2. The actual variable manufacturing cost of each BB tyre during the 2016 financial year was R300
per unit and the fixed manufacturing overhead recovery rate for the same period was R290 per
unit.
10.3. The actual product cost of each BB tyre for the 2017 financial year was R750 per unit and is also
made up in the same proportion as the budgeted product cost of each BB tyre (refer to point. 8
above). The total actual fixed manufacturing overheads was proportionally calculated based on
the normal production capacity units.

REQUIRED
(a) Calculate the budgeted selling price per unit of BB tyre for the 2017 financial year based
on the CVP analysis report as presented by the CFO on 1 April 2016. (10)
(b) Briefly explain the difference between break-even point and margin of safety. (4)
Calculate the budgeted break-even sales units for the 2017 financial year based on the
(c) CVP analysis report as presented by the CFO on 1 April 2016.
Ignore the implications of the opening and closing inventory values. (9)
(d) Assume the actual selling price of each BB tyre is R860 per unit throughout the 2017
financial year. Prepare the actual income statements for each of the two six-month
periods for the 2017 financial year based on the absorption costing method.
The total column is not required. (12)
(e) Assume the actual selling price of each BB tyre is R860 per unit throughout the 2017
financial year. Prepare the actual income statement for Period 1 only of the 2017
financial year based on the direct costing method. (8)
(f) Reconcile and briefly explain the difference in Period 1’s reported net profit between
the income statement in (d) and the income statement in (e). (4)
(g) On the 25 February 2016, the Minister of Finance announced the introduction of new tyre
tax (levy) of R2,30 per kilogram on every new tyre sold effective from 01 October 2016.
Briefly advise i-Nkunzi about the possible implications of the tyre tax on its business. (3)

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3.12 BUMBULO MILLING (PTY) LTD 50 Marks

Bumbulo Milling (Pty) Ltd (Bumbulo) is a maize milling company in the Rustenburg area of the North
West Province. The company is 100% owned by the Bumbulo Family Trust established by Mr Farmer
Brawn, a sole representative of the trust on Bumbulo’s management team. The milling site is well
situated as the company can easily access maize corn from the farming community of both Gauteng
and the North West provinces. The company uses the direct costing method for inventory valuation.

THE MILLING SITE

The milling site has a maximum processing capacity of 1 000 tons of maize corn per month. A Miller is
fully responsible for the entire milling site’s operation. At the site maize corn is delivered by farmers,
where it is weighed, tested for moisture and then stored in silos. Water is then added at the beginning
of the milling process to separate the corn into different products. The milling process yields three (3)
separately identifiable products namely: Maize bean, Chop and Chaff (the outer layer of the corn).

The actual results for the month ended 31 May 2017 were as follows:
A total of 800 tons of maize corn were processed at the plant. The actual yields from these tons were
Maize bean (60%), Chop (35%) and Chaff (5%). The actual costs incurred in the milling process were
as follows:
R per ton
Maize corn purchase price 4 900
Delivery cost of maize corn 100
Offloading and pre-cleaning cost 80
Water and electricity cost 150
Processing and grading cost 60
Direct labour cost 100
R
Total fixed selling and administration costs 220 000

Additional information:
1. The maize bean is further grinded into maize meal at a cost of R80 per ton. Vitamins are also added
into the grinding process. Each ton of maize meal requires 200 grams of vitamins, at R1 per gram
of vitamin. The added vitamin grams do not increase the weight (tons) of the maize meal. The
maize meal is packed at a cost of R20 per ton. The selling price per ton of the maize meal was R8
900 in May 2017 and the related selling and administration cost was R15 per ton.

2. At the moment Chop does not undergo any further processing. Chop is packed at a cost of R20
per ton. The entire Chop production is usually sold to the external animal feed processors. The
actual selling price per ton of Chop in May 2017 was R6 900 and its related selling and
administration cost per ton was R15.

3. Chaff is also not processed any further. The company sells Chaff to local traditional chicken
breeders at a selling price of R500 per ton. The company delivers Chaff to these breeders at a cost
of R100 per ton. There are no other costs relating to Chaff incurred.

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PERFORMANCE MEASUREMENT
Mr Farmer Brawn and the management team have decided to expand their operations by investing in
an animal feed processing plant. This plant will produce animal feed for the livestock industry. To
maintain consistency across the group, the performance of this plant manager will also be measured
on the basis of return on investment (ROI). Based on this performance measurement technique,
Bumbulo’s manager(s) are entitled to receive a bonus if they meet or exceed the target return on
investment. The newly appointed animal feed processing plant manager (Kabelo Bupi), has however,
raised concerns about the fairness of the performance measurement system currently in place.

The following information has been gathered with regard to the proposed operational expansion:
1. Kabelo Bupi was appointed at an annual cost to the company of R550 000. He will take full
management responsibility of the plant‘s operations, long-term investment decisions, human
resource and the procurement functions.
2. New processing machinery will be bought at a cost of R7,2 million. The machinery will have an
initial processing capacity of 150 tons per month. All the tons processed will be sold. The estimated
useful life of this machine is 10 years from date of purchase.
3. An Animal feed specialist will be hired at an annual cost of R300 000. The specialist will be
responsible for the entire animal feed production process.
4. In addition to the already available delivery trucks, the company will invest in a 3-ton truck at a cost
of R350 000. This truck will be used 60% in the animal feed processing plant and 40% in the Milling
site. The truck will have an estimated useful life of 5 years.
5. Animal feed’s direct material (Chop) will either be purchased from the Milling site or from external
suppliers. At the moment the purchase price per ton of Chop in the market is R6 900. Additional
direct material required will cost R300 per ton.
6. Bumbulo will appoint three (3) full time general workers to work at the plant at a monthly total cost
to the company of R6 500 each.
7. Variable manufacturing overheads cost per ton will be R400.
8. Other fixed manufacturing overheads, excluding depreciation, related only to the animal feed
processing plant will be R50 000 per month.
9. The company’s annual target return on investment is 20% per annum.
10. The financing of the machinery and the truck will all be arranged by Bumbulo’s management team.
The initial indications are that the interest rate per annum will be 13%.
11. Animal feed will be sold to the retailers at a selling price of R9 900 per ton and the related selling
costs per ton will be R15.

TRANSFER PRICING
Bumbulo’s management team is considering the introduction of a transfer pricing system. The team
believes that the introduction of a transfer pricing system will benefit the company in the long run. This
will involve the transfer of Chop from the Milling plant to the Animal feed processing plant.

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REQUIRED

For each question below please remember to:

• Clearly show all your calculations in detail;
• Where necessary, indicate irrelevant amounts with a R0 (nil-value); and
• Round all your workings to two decimals.

(a) Briefly discuss the characteristics, classification and the treatment of product Chaff in
the management accounting records of Bumbulo Milling (Pty) Ltd. (4)
(b) Prepare the actual direct costing income statement of Bumbulo Milling (Pty) Ltd for the
month ended 31 May 2017. Joint costs are apportioned to joint products on the basis of
net realisable value (NRV) at split-off point method. The total column is required. Show
all your workings. (20)
(c) On the basis of return on investment determine if the animal feed processing plant
manager will receive a bonus or not. Show all your workings on an annual basis. (15)
(d) Based on Bumbulo Milling (Pty) Ltd’s entire operational activities and its management
structure briefly discuss whether or not you consider return on investment to be a fair
tool of performance measurement. (4)
(e) List the purposes of a transfer pricing system with reference to Bumbulo Milling (Pty)
Ltd. (4)
(f) Briefly discuss the possible implications of the proposed transfer pricing system on the
current performance measurement system of Bumbulo Milling (Pty) Ltd. (3)
Total [50]

3.13 CHEMICAL EXPERIMENTS COMPANY (PTY) LTD 50 Marks

The Chemical Experiments Company (Pty) Ltd, a company based in Gauteng, has a divisional
organisational structure which consists of a Head Office and two divisions, namely Normal Division
and Extraordinary Division. Both divisions make use of a direct costing system and value their
inventory using a FIFO (first in first out) method.

Under the current transfer pricing policy, at the split-off point, the Normal Division transfers all the joint
products they produce to the Extraordinary Division at the current prevailing market prices. As transfer
prices impacts the profit (and thus performance measurement) of both divisions, Head Office feels it is
important to determine the most beneficial transfer pricing policy for the group as a whole.

NORMAL DIVISION: MAY 2017

Normal Division produces two joint products from the electrolysis of brine process, namely, chlorine
(Cl2) and sodium hydroxide (NaOH). A by-product, hydrogen (H2) is also produced from this process.
Notwithstanding the fact that currently all joint products are transferred to the Extraordinary Division,
the joint products can also be sold externally.

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Normal Division currently operates at full production capacity. The budgeted joint costs for the month
of May 2017 were R480 000. The budgeted output for May 2017, representing a normal month, from
the input of brine undergoing the electrolysis process was as follows:

Product Kilogram
Cl2 607 000
NaOH 684 000
H2 17 000

A regular market exists at split-off point for the full output of the by-product after being further packaged
into cylinders at a cost of R1,15 per kilogram.

The expected market selling prices for the products in May 2017, at split-off point are as follows:

Product Expected market selling

price at split-off point
R/kg
Cl2 2,24
NaOH 2,20
H2 8,85

EXTRAORDINARY DIVISION

In the Extraordinary Division, Cl2 and NaOH (inputs from Normal Division) are further processed into
super crazy chlorine (SCC) and top-secret sodium hydroxide (TSSH) respectively. The further
processing of the input of Cl2 and NaOH results in a 10% normal loss that occurs at the beginning of
the process. The weight of one unit of product SCC and one unit of TSSH is equal to one kilogram (1kg)
each. You may therefore assume that the amount per kilogram will be equal to the amount per unit for
both products.

1. EXTRAORDINARY DIVISION MAY 2017 INFORMATION

1.1 The budgeted/standard further processing cost and the expected market selling prices for the
products in May 2017 are as follows:

Product Variable further Market selling price

processing cost
R/unit R/unit
SCC 0,75. 5
TSSH 2,80* 8

*Included in the budgeted variable further processing cost of R2,80 per unit of TSSH is direct
labour costs of R1,44 per unit. The standard direct labour requirement per unit of TSSH is 8 clock
minutes per unit. The idle time provision is 10% of the clock time.

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1.2 The budgeted sales volume was equal to the budgeted production volume.

1.3 Extract of actual results for May 2017:

1.3.1. The sales volume was equal to the production volume.
1.3.2. Additional information relating to the month:

SCC TSSH
Sales volume (units) 558 500 610 750
Selling price per unit (R/unit) 4,85 8,04
Direct labour @ R1,45/clock minute R4 049 125 R6 478 600

1.3.3. The factory foreman indicated that productive hours were 8% less than the actual hours clocked
during the month of May 2017.

2. EXTRAORDINARY DIVISION JUNE 2017 BUDGETED INFORMATION

The following information relates to the month of June 2017:

2.1 The sales demand for SCC and TSSH is expected to be 600 930 units and 584 820 units
respectively. The selling price of SCC and TSSH is expected to increase with 10% and 12%
respectively from their expected market selling prices of May 2017.

2.2 The standard variable further processing cost per unit of SCC and TSSH is expected to decrease
with 5c per unit and 8c per unit respectively from the May 2017 budgeted costs.

2.3 The direct labour requirement per unit of SCC and TSSH is 5 clock minutes, and 8 clock minutes
per unit respectively. The direct labour hours for June 2017 is limited to 100 000 clock hours as
staff members have indicated their intention for industrial action and will thus not be available as
initially expected.

SUGGESTED TRANSFER PRICING PRICE CHANGE IMPOSED BY HEAD OFFICE

It has been suggested by Head Office that Normal Division should transfer their full output of Cl2 and
NaOH to Extraordinary Division using a transfer price equal to actual variable cost. This has led to
quite a lot of unhappiness and numerous fiery debates within the company. The Normal Division saves
10c per kilogram of Cl2 transferred and 5c per kilogram of NaOH on administrative costs as a result of
transferring these products to Extraordinary Division instead of selling it to the external customers.

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REQUIRED

For each question below please remember to:

• Clearly show all your calculations in detail;
• Where necessary, indicate irrelevant amount(s) with a R0 (nil-value);
• Round all your workings to two decimals, except where otherwise stated.
Question (a) relates to Normal Division
(a) Calculate and allocate the budgeted joint cost to product Cl2 and product NaOH for
May 2017 if Normal Division uses the physical measures method to allocate joint cost. (5)
Question (b) should be answered from the perspective of the Chemical Experiments
Company (Pty) Ltd
(b) Determine whether the product Cl2 and product NaOH should be sold to the external
market by the Normal Division at split-off point or be further processed into products
SCC and TSSH in Extraordinary Division and then sold to the external market.
Base your calculations on budgeted figures. (12)
Question (c)-(g) relates to Extraordinary Division and products SCC and TSSH
(c) Calculate the sales price variance per product and in total for May 2017. (3)
(d) Provide two (2) reasons for a possible favourable sales price variance. (2)
(e) Calculate the sales volume contribution variance per product and in total for May 2017. (5)
(f) Calculate the idle time variance for product TSSH for May 2017. (6)
(g) Calculate the budgeted contribution for Extraordinary Division for June 2017 based on
the optimum production mix. (12)
Question (h) – (i) relates to the transfer pricing policy and the new suggested transfer price
(h) From the viewpoint of the manager of the Normal Division, briefly discuss the issues
arising from the suggested transfer price by Head Office. (4)
(i) Calculate the maximum transfer price per kilogram of Cl2 at which Normal Division
would ideally want to transfer to Extraordinary Division if they were not forced to
transfer their products at actual variable cost. (1)

3.14 ENERSOLAR (PTY) LTD 50 Marks

Enersolar (Pty) Ltd (Enersolar) is a Limpopo-based wholly-owned subsidiary of Maatla Energy Solutions
Ltd (a well-known South African energy group of companies). Enersolar has two divisions, namely the
Solar Panel division which manufactures solar panels, and the Energy Turbines division, which
manufactures energy turbines. The group makes use of the absorption costing system and all its
inventory items are valued using the first-in-first-out (FIFO) method.

SOLAR PANEL DIVISION

The Solar Panel division manufactures three types of solar panels which are sold to retailers across the
country.

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During the budget presentation meeting, the group’s Chief Financial Officer (CFO) expressed concerns
about the Solar panel division’s allocation of the fixed manufacturing overheads and the impact thereof
on the budgeted gross profit percentages. She immediately ordered an investigation into the activities
that drives the allocation of these fixed manufacturing overheads.

1. Solar Panel division budgeted information for the month ending 31 March 2017 is as follows:

Product REGULAR SUPER HYPER TOTAL

Production and sales units 5 000 3 000 2 000 10 000

R’000 R’000 R’000 R’000

Revenue 80 000 55 500 48 000 183 500

Less: Costs of sales 75 200 53 700 49 400 178 300

Direct raw materials 29 000 19 500 20 000 68 500
Direct labour 24 700 20 700 18 400 63 800
Variable manufacturing overheads 16 500 10 500 9 000 36 000
Fixed manufacturing overheads 5 000 3 000 2 000 10 000

Gross profit/(loss) 4 800 1 800 (1 400) 5 200

Less: Non-manufacturing overheads
Variable selling costs 60
Fixed head office allocated costs 125
Fixed salary costs 261
Net profit before tax 4 754
Gross profit percentage 6,00% 3,24% (2,92%) 2,83%

Additional budgeted information relating to the month ending 31 March 2017:

1.1. The total budgeted units of panels are equivalent to 100% monthly manufacturing capacity. All
losses in the manufacturing process may be regarded as immaterial.

1.2. The budget assumes that all panels manufactured during the month will be sold. The division had
no budgeted work in progress, opening and closing inventory for all types of panels.

1.3. The direct raw materials used in the panels manufacturing process are mainly steel and other
components. The division currently makes use of the just-in-time (JIT) procurement technique for
the acquisition of the direct raw materials.

1.4. The fixed manufacturing overheads are expected to be absorbed by the three panels on the basis
of a pre-determined fixed manufacturing overheads absorption rate.

1.5. The variable selling costs are budgeted at R6 per unit for each type of panel.

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1.6. The fixed head office allocated costs represent corporate sponsorship to the Department of
Energy’s golf week-end event. This amount is allocated monthly to all the companies within the
group on an arbitrary basis.

1.7. The fixed salary cost represents monthly salaries for five (5) administrative employees of the Solar
Panel division.

2. Investigation results of the allocation of the fixed manufacturing overheads

The investigation established that the current blanket allocation of the fixed manufacturing overheads
is not appropriate and should be revised. The proposal is to allocate these overheads on the basis of
the activities that drive these overheads, see below:

Fixed manufacturing
overheads
Activity driver Notes R
Number of production runs 2.1 1 485 000
Machine hours 2.2 1 599 600
Number of purchase orders 2.3 828 900
Number of quality inspections 2.4 6 086 500
R 10 000 000

2.1. Panels are manufactured in production runs. Regular’s production run contains 250 panels,
Super’s production run contains 200 panels, and Hyper’s production run contains 200 panels.

2.2. The division’s manufacturing process is predominately performed by specialised machines. The
machine time to manufacture each panel is 15 minutes for Regular, 30 minutes for Super and
57 minutes for Hyper.

2.3. The budget assumes a total of 20 working days for the month. Direct raw material purchase orders
as per the JIT manufacturing schedule will be placed every 3rd working day for the Regular panels,
every 5th working day for the Super panels and every 8th working day for the Hyper panels.

2.4. Quality inspections occur as follows: every 500th Regular panel is inspected, every 100th Super
panel is inspected, and every 20th Hyper panel is inspected.

3. The following is an extract of the actual results for the month-ended 31 March 2017 for
product Hyper only:

3.1. Actual production schedule based on absorption costing system:

Hyper panels Number of panels R

Opening inventory: 1 March 2017 70 R1 715 000
Production 2 200 ?
Sales 2 150 ?
Closing inventory: 31 March 2017 ? ?

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3.2. The opening inventory value of R1 715 000 included fixed manufacturing overheads absorbed at
a rate of R800 per unit and the related variable manufacturing costs per unit is equivalent to the
March 2017 budget.

3.3. An end-of-range sale was held in March 2017 whereby the Hyper panels were sold at 2% less
than the budgeted selling price.

3.4. The actual direct raw materials and direct labour actual price/rate were 5% higher than the
budgeted price/rate.

3.5. The actual variable manufacturing overheads per unit and variable selling costs per unit rates
were the same as the related budgeted unit prices.

3.6. The actual total fixed manufacturing overheads and the actual fixed salary costs were R1 950 000
and R55 500 respectively.

ENERGY TURBINES DIVISION

The Energy Turbine division has a monthly manufacturing capacity of fifty (50) turbines, thirty-five (35)
of which represent the current monthly existing external market. The selling price to the external market
is R3 800 per turbine and the related total variable costs are R2 600 per turbine.

The division was approached by Agrie SA (an agricultural conglomerate situated in Mpumalanga) to
prepare a quotation for a tender of twenty-five (25) high tech energy turbines.

Further details regarding the quotation:

1. The manufacturing of the proposed twenty-five turbines will require the installation of one (1)
Component A per turbine. Component A is regularly used by the division. The required
components are all available in inventory and were purchased at R1 500 per component. Each
component has a resale value and a current replacement cost of R1 550 and R1 700 respectively.

2. In addition to Component A, each of the proposed twenty-five turbines will require three (3) high
tech components (Component Z). Component Z’s can only be bought in batches of fifty (50) high
tech components per batch. The total cost per batch is R20 000. Although Component Z’s are in
regular use, the division does not currently have them in inventory.

3. The machine time to manufacture each turbine is 40 minutes and the cost is R300 per machine
hour. The machine was purchased 2 years ago with a R8 000 000 loan at 10,50% interest per
annum. The machine is depreciated over its intended economic useful life of 8 years.
4. The normal direct labour time to manufacture each high-tech turbine is 16 minutes. Due to
specialised nature of these high-tech turbines overtime will be worked on only 12 of the 25
turbines. The normal direct labour rate is R180 per hour, and the overtime rate is 1,5 times the
normal rate. The direct labour is variable in nature.

5. The divisional manager attended the initial tender briefing at Agrie SA’s offices and had
subsequently re-visited their offices three (3) times at a cost of R1 200 per return-trip.

6. The fixed manufacturing overheads are allocated to the turbines on the basis of a pre-determined
fixed manufacturing overheads absorption rate of R1 500 per turbine. No additional fixed
manufacturing overheads will be incurred due to the manufacturing of these high-tech turbines.

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7. The division’s pricing policy is to add 20% mark-up on the total relevant costs for such quotations.

REQUIRED

For each question below please remember to:

• Clearly show all your calculations in detail;
• Where necessary, indicate irrelevant amount(s) with a R0 (nil-value);
• Round all your workings to two decimals, except where otherwise stated.
(a) Determine the total budgeted number of each panels required by the Solar Panel
Division for the month of March 2017 to break-even. (12)
(b) Briefly discuss two (2) benefits to the Solar Panel Division of using the just-in-time
(JIT) direct raw materials procurement technique. (2)
(c) Assume a budgeted controllable investment of R250 000 000 for March 2017.
Calculate the Solar Panel Division’s annualised budgeted return on investment (ROI)
for March 2017. (2)
(d) Assume that Solar Panel Division implements the proposal to revise the allocation of
the fixed manufacturing overheads. Calculate the revised budgeted gross profit
percentage of each type of panel.
The Total column is not required. (10)
(e) The group’s CFO is of the opinion that the direct costing system could provide
meaningful information for assessing the economic performance of the Solar Panel
Division. Prepare the March 2017 actual income statement for product Hyper only
based on the direct costing system. (8)
(f) Determine the total price to be quoted by the Energy Turbines Division for the twenty-
five (25) high tech energy turbines as per Agrie SA’s request.
Give a reason for inclusion or exclusion of all items. Show all your calculations. (12)
(g) Briefly discuss four (4) qualitative factors which the Energy Turbines division should
consider before quoting the tender price to Agrie SA. (4)

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3.15 SENO-MAPHODI (PTY) LTD 50 Marks

Seno-Maphodi (Pty) Ltd (“SM”) is a family-owned soft-drinks manufacturing company operating in a

fiercely competitive market. Its market share is only 2% primarily because it only offers two (2) soft-
drink product types, an orange-flavoured soft-drink (FizzyOrange) and a traditional cola soft-drink
(FizzyCola). Consistent with its competitors, SM offers soft-drinks in three packaging variations: a
330 millilitres (ml) can (“can”), a 450 ml plastic-bottle (“buddy”) and a 1,25 litres glass-bottle
(“jumbo”). SM values all its inventories using the first-in-first-out (FIFO) method. SM uses the variable
costing system for internal reporting purposes. The company’s expected rate of return and the cost of
capital is 10,50% and 9,00% per annum, respectively, for both the 2019 and 2020 financial years.

1. THE SOFT-DRINKS MANUFACTURING PROCESS AND CAPACITY

SM’s soft-drinks manufacturing process is a closely-guarded secret. However, at a generic level, the
manufacturing process involves adding sugar, sodium and colourants (primary ingredients) to the
prepared water. The resulting mixture is then heated and subsequently cooled to form a soft-drink. Due
to their dissolving effect, the three (3) primary ingredients do not increase and/or decrease the volume
of the prepared water that is put into the manufacturing process. The same prepared water is used for
both soft-drink product types.

SM’s maximum manufacturing capacity is based on the availability of the prepared water. SM buys the
prepared water exclusively from Hubbly-Bubbly (Pty) Ltd (“Hubbly”) at R1,00 per litre. A maximum of
2 400 000 litres of prepared water is made available to SM by Hubbly during each financial year. At the
beginning of the manufacturing process, 5% of the prepared water put into the process is lost due to
normal spillage. Each litre of the prepared water that is not lost yields one (1) litre of soft-drink.

2. FINISHED GOODS BUDGET FOR THE YEAR ENDING 31 MAY 2019:

Product types FizzyOrange units FizzyCola units Total

Packaging variations Can Buddy Jumbo Can Buddy Jumbo units
‘000
Opening inventory 275 000 180 000 27 000 850 000 300 000 56 000 1 688
Manufacturing 450 000 320 000 25 000 3 450 000 2 100 000 12 200 6 357,2
Closing inventory 185 000 140 000 16 000 1 000 000 200 000 10 000 1 551
Sales 540 000 360 000 36 000 3 300 000 2 200 000 58 200 6 494,2

Manufacturing and the selling of units are expected to occur evenly throughout the financial year.

2.1. IN-HOUSE VARIABLE MANUFACTURING COSTS (iVMC)

Due to the different packaging variations, SM resolved to set the standard manufacturing costs based
on the requirements of a one (1) litre soft-drink.

Standard costs per litre of some items of the in-house variable manufacturing costs are as follows:
Details Standard costs
per litre
FizzyOrange FizzyCola
Sugar @ R12,00 per kg R1,44 R2,40
Sodium @ R8,00 per kg R0,64 R0,80
Colourant R0,80 R0,60
Direct labour R1,20 R1,20
Variable manufacturing overheads R2,00 R2,00

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2.2. STANDARD SELLING PRICES

SM’s standard selling prices for the 2019 financial year for both product types are as follows: R6,80 for
a can; R8,70 for a buddy; and R14,75 for a jumbo.

2.3. OTHER MANUFACTURING AND DISTRIBUTION COSTS (not included in the iVMC above)

Other manufacturing costs relate to the purchases of custom-made empty containers from external
suppliers. The standard costs of these empty containers for both product types are as follows: a 330 ml
can is R0,55; a 450 ml plastic-bottle is R0,80; and a 1,25 litre glass-bottle is R2,00. SM has outsourced
its entire distribution function to Skilpad Vervoer (Pty) Ltd. The distribution agreement provides for
budgeted fixed distribution costs of R50 000 per month and budgeted variable distribution costs of:
R0,10 per can; R0,15 per buddy; and R0,35 per jumbo. 60% of the fixed distribution costs specifically
relates to FizzyOrange and 40% specifically relates to FizzyCola.

2.4. OTHER BUDGETED FIXED COSTS

All of SM’s administrative functions are carried out from a 850 square-metre leased building. This
building is leased at a fixed rate of R100 per m2 per month. During each financial year, this rental
expense is allocated equally between FizzyOrange and FizzyCola. It is, however, not practical to
allocate the rental expense among packaging variations.

FizzyCola and FizzyOrange’s specific budgeted fixed manufacturing overheads are R2,5 million and
R1,7 million, respectively, for the 2019 financial year.

2.5. OTHER INVENTORY TYPES

Except for the finished goods, SM does not hold any types of inventory.

3. EXTRACT FROM THE ACTUAL RESULTS FOR THE YEAR ENDED 31 MAY 2019:

Product type FizzyOrange

Packaging variations Can Buddy Jumbo
Sales units 405 000 207 500 18 000

4. BUDGET INFORMATION FOR THE 2020 FINANCIAL YEAR:

4.1. MANUFACTURING BUDGET AND STANDARDS

Product FizzyOrange units FizzyCola units
Total units
types
Packaging Can Buddy Jumbo Can Buddy Jumbo
variations
Manufacturing 465 000 295 000 27 000 3 400 000 2 200 000 10 000 6 397 000
units
The standard manufacturing input quantity requirements will remain the same as in 2019.

4.2. PROPOSAL TO IMPLEMENT THE ECONOMIC ORDER QUANTITY (EOQ)

SM proposes the use of the EOQ technique to manage all its sugar requirements. Currently, sugar is
purchased from one supplier only; Mohammed Sugar Milling (“MsM”). MsM sells the sugar only in
quantities of 50 kilograms (kg) packaged into one (1) fabric sack. For this proposal, the budgeted cost
of placing one (1) order is expected to be R375 throughout the 2020 financial year. MsM quoted a sugar
purchase price of R12,60 p/kg for the entire 2020 financial year. SM expects to incur holding costs
(excluding the required annual return on investment in inventories) of R2,50 p/kg of sugar per annum.

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4.3. REQUEST FOR TENDER FOR THE 2020 FINANCIAL YEAR

In preparation for the upcoming by-elections in the hotly-contested Polokwane ward, the National
Federal Executive (NFE) of a recently formed political party, Democratic Fighters for African Land
(“DFAL”) approved and placed the following advertisement in a prominent national newspaper:
DEMOCRACTIC FIGHTERS FOR AFRICAN LAND (DFAL)
TENDER FOR THE PROVISION OF 450ml “buddy’ REFRESHMENTS DURING A 3-MONTH
ELECTION CAMPAIGN
Tender number: 01/02ecr/2019
Tenders are invited for the provision of 5 000 packed cases of refreshments, with each packed
case consisting of a half-dozen buddy’s of the traditional cola soft-drinks. An electronic version of
this tender request is available from the following website.
https://dfal/tender01/02ecr/2019.org.zar
All tenders must be submitted electronically at the above web address or placed in the tender box
(located at the DFAL headquarters) no later than 16h00 (CAT) on 31 July 2019. Tenders with
incomplete document(s) will not be considered.
Enquiries to: Marc “Leadership” Brown: 015 114 456 or 080 123 45678 or leadership@dfal.org.zar

The following three (3) key specific tender requirements were provided by Mr. Marc Brown:

(i) All the soft-drinks to be delivered must be branded with the DFAL’s official emblem and slogan.
(ii) The winning company must commit to employ at least ten (10) youths for the entire duration of the
election campaign. If at least ten (10) youths are employed, DFAL will subsidise their stipend at
R3 500 per youth per month. If less than ten (10) youths are employed, the R3 500 subsidy will be
reduced by 65%. The subsidy will take effect for the full duration of the election campaign.
(iii) All the related distribution costs will be borne by DFAL.

If SM were to tender for the DFAL’s request, the following information would be applicable:

(i) A high-speed soft-drink bottling plant with a useful life of 5 years must be bought. The plant’s cost
of R1 500 000 will be fully financed by a loan from Ned-Tec Bank at an interest rate of 7,75% per
annum. Although the plant will be sold immediately at the end of the election campaign, the Ned-
Tec Bank loan will only be repaid in three years’ time. At the end of the election campaign, the
book value and the resale value of the plant are expected to be R1 425 000 and R1 480 000,
respectively. SM’s plants are depreciated on the straight-line basis over their useful life.
(ii) Affixing the DFAL’s emblem and slogan will cost SM R0,50 per unit of “buddy”.
(iii) SM will employ eight (8) youths at R4 000 per month per youth for the duration of the election
campaign.
(iv) Each applicable unit variable cost is expected to increase by 5% from the 2019 financial year
budgeted level.
(v) The maximum “buddy” units that can be manufactured during the 2020 financial year is 2 200 000.
This is equivalent to the budgeted annual sales units in the main market. DFAL is not part of SM’s
main market.
(vi) Expected contributions on sales to external customers (main market) of FizzyCola for “can”,
“buddy” and “jumbo” are R3,95 per unit, R4,20 per unit and R1,55 per unit, respectively.
(vii) SM’s mark-up on similar tenders is 35% on total relevant cost(s) of the tender.

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REQUIRED
(a) Comment on whether or not the available prepared water would have been sufficient
for SM to fully meet its 2019 financial year manufacturing budget for all units of both
product types.
▪ Support your commentary with necessary and relevant calculations.
▪ Where applicable, round your calculations to the nearest litre/millilitre. (6)
(b) For question (b) only, assume that for the 2019 financial year, the budgeted required
after- loss prepared water for the “buddy’s” is 1 089 000 litres, however only 1 008 000
litres after-loss are available for the “buddy’s”.
Calculate SM’s 2019 financial year budgeted optimal manufacturing mix per product
type for the “buddy” packaging variation only.
▪ Where applicable, round your calculations to three (3) decimal places. (11)
(c) In answering question (c) only, assume the following two (2) points:
1. Budgeted contributions per unit for the FizzyOrange are as follows:
Product type FizzyOrange
Packaging variations Can Buddy Jumbo
Contribution per unit R3,60 R4,30 R1,50
2. Ignore the implications of opening and closing inventory.
(i) Calculate SM’s budgeted contribution value at break-even point for FizzyOrange’s
“cans” packaging variation only for the 2019 financial year. (8)
(ii) Calculate the FizzyOrange sales mix variance for the “jumbo” packaging variation
only for the 2019 financial year. (2)
(d) Assume that the proposal to implement EOQ is accepted. Calculate the number of
fabric sacks per order, which MsM will need and use to package the supply of SM’s
budgeted sugar requirements for all the budgeted manufacturing units of the
“FizzyCola” product type, during the 2020 financial year. (8)
(e) Upon your enquiry as SM’s Chief Financial Officer, Mr. Marc Brown said this to you:
“myLeader, I hope your phone is not tapped. Between me and you, DFAL’s NFE has
officially approved the “buddy” tender price at R650 000. I know you will work your magic
on the numbers for SM to tender way below the R650 000. After bagging this one, me
and you will definitely get our “smaller-nyana” share of the “facilitation fee””.
(i) As a CA (SA), identify four (4) ethical dilemmas apparent from your telephonic
enquiry with Mr. Marc Brown that could potentially threaten your professional
integrity. (4)
(ii) From a quantitative perspective only, advise SM if it should tender for the “DFAL”
request or not.
▪ Motivate your advice with relevant and necessary calculations. (11)

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3.16 PEARS LTD 50 Marks

Pears Ltd (Pears) is a JSE listed telecommunications group of companies. Currently the group consists
of Division PearMobile (DPM), which produces PearMobile (PM) smart-phones only, and Division
PearTablet (DPT), which produces PearTablets (PT) only. In line with the latest technological trends,
Pears is also planning to expand its product offering to include smart-watches. DPM’s manufacturing
plant is in Polokwane while DPT’s manufacturing plant is in Cape Town. Pears have 20 retail outlets
across the country from which its products are sold to the public. The annual normal production
capacity is 20 000 PM’s and 12 000 PT’s. Both the production and sales of units occur evenly
throughout each financial year.

Although the group makes use of an absorption costing system for external reporting purposes, it
also uses a direct costing system for internal reporting purposes. All types of inventory are valued
using the first-in-first-out method. Fixed manufacturing overheads are absorbed at a predetermined
absorption rate based on the annual normal production capacity. The resulting over-/under recovery
is treated as period cost.

Pears’ cost of capital rate is prime-linked at 0,50% below the prime lending rate. The annual target
return on investment (ROI) is 11,00% for DPM and 11,50% for DPT.

1. ANNUAL GENERAL MEETING (AGM) FOR THE FINANCIAL YEAR ENDED 31 AUGUST 2016
These resolutions/items were passed with no objections at the AGM held on 30 November 2016:

1.1. Head office will pay each division a performance bonus equal to 1,75% of their respective actual
2017 financial year sales figure only if such division meet or exceed its target ROI.
1.2. The values of inventory items as at 31 August 2016:
Inventory Item Units Inventory value
PM 550 R2 475 000
PT 1 200 R9 000 000

1.3. With reference to the inventory valuation as at 31 August 2016, 70% of the total manufacturing
costs of each product are variable in nature and the balance thereof is the absorbed fixed
manufacturing overheads.
1.4. The appointment of Dinatla Auditors RA(SA) as the groups’ external auditors. The divisional
managers have no influence on the appointment, including the fee negotiations, of the external
audit services.
1.5. The launch of the smart-watches (PearWatch) during the 2018 financial year.

2. EXTRACT OF THE ACTUAL RESULTS FOR THE FINANCIAL YEAR ENDED 31 AUGUST 2017
2.1. The actual annual units produced (production) were 85% and 90% of the annual normal
production capacity for PM’s and PT’s respectively.
2.2. 16 800 units of PM’s and 11 000 units PT’s were sold at R7 200 per unit and R9 800 per unit
respectively.
2.3. The unit variable manufacturing cost increased by 6,00% for each product whereas the fixed
manufacturing overhead absorption rate increased by 2,00% for each product from the 2016
financial year actual amounts.

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2.4. The actual variable selling cost per unit were R12,00 and R14,00 for PM and PT respectively.
The actual fixed selling cost amounted to R980 000 for PM and R420 000 for PT.
2.5. Pears was found guilty of price-fixing and fined R80 000 000 by the Competition
Commission (CC). The allocation of fines to the divisions is approved by the head office. Pears is
only be liable for 50% of the fine imposed while its board of directors are personally and severally
liable for the other 50%. The head office paid Pear’s allocated portion of the fine and then
apportioned this portion 60% to DPM and 40% to DPT.
2.6. The actual legal fees paid by Pears in relation to the CC matter (see point 2.5 above) was
R7 500 000. The head office allocated the legal fees equally between the divisions. As a policy
of the group, all of Pears’ legal matters including the related legal fees are the sole responsibility
of the head office.
2.7. The head office allocated R250 000 audit fees to each of the two divisions for the annual external
audit by Dinatla Auditors RA(SA).
2.8. Controllable investments as at 31 August 2017 were R350 000 000 and R220 000 000 for DPM
and DPT respectively.
2.9. The South African Reserve Bank governor (Mr. Lesetja Kganyago) announced the adjustment to
the prime lending rate from 10,25% per annum to 10,50% per annum effective 18 March 2016.
The prime lending rate remained unchanged subsequently.

3. BUDGET INFORMATON FOR THE 2018 FINANCIAL YEAR

The following are an extract of the group’s approved budget for the 2018 financial year:
3.1. The demand and sales units for PM and PT is expected to be 18 000 and 12 000 units
respectively.
3.2. The launch of the smart-watches
Pears will take-over Dom-lex Pty Ltd (a struggling but promising smart-watch producing company
from Nelspruit). Dom-lex will be converted into a new division “Division PearWatch (DPW)” to
produce and sell unisex wrist smart-watches (PearWatch (PW)). DPW is expected to start selling
PW’s from 01 March 2018.
3.3. Product testing time
All of Pears’ products are hand-tested at the centralized warehouse in Johannesburg before they
are made available for sale. Pears’ testing capacity is based on its seven (7) permanent
employees (testers). The clock hours and productive hours of each tester is eight (8,00) hours
and six-and-a-half (6,50) hours respectively per workday. During a 240-day working year, each
tester is required to take 20 working days compulsory annual leave. It takes one (1) tester 15
minutes to test one PM, 30 minutes to test one PT, and 12 minutes to test one PW. Although
qualified to test any of the three products, each tester can only test one of the products at a time
3.4. Additional product information:
Details Division Division Division
PM PT PW
Demand and sales (units) ? ? 3 000
(R) per unit (R) per unit (R) per unit
Selling price 7 800 10 400 4 700
Variable manufacturing cost 4 950 8 100 3 200
Variable selling cost 14 16 5

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3.5. The group budgeted R42 000 000 for annual fixed manufacturing overheads and R16 850 000
for annual fixed selling costs.

REQUIRED

(a) Calculate the actual closing inventory as at 31 August 2017 by completing the table
below:
Details DPM DPT
units units
Sales ?? ??
Closing inventory 31 August 2017 ?? ??

Units required ?? ??
Opening inventory 01 September 2016 ?? ??

Units produced ?? ??
(2)
(b) Briefly discuss four (4) reasons as to why Pears would use an absorption costing
system for external reporting, but also use a direct costing system for internal reporting.
(4)
(c) Prepare the actual income statement for DPM only for the 2017 financial year based
on the absorption costing system.
Ignore the possibility of the performance bonus. (10)
(d) Based on the actual results, assume that the actual profit before tax and performance
bonus for the financial year ended 31 August 2017 is R18 520 000 for DPM and R7 800
000 for DPT.
(i) Calculate the actual residual income for DPT only for the financial year ended 31 (5)
August 2017.
(ii) Calculate the performance bonus, if any, that the head office will pay to DPT only
for the financial year ended 31 August 2017. (4)
(e) Calculate the budgeted margin of safety percentage for each of the three products for
the financial year ending 31 August 2018.
Ignore the impact of any possible constraints. (10)
(f) Calculate the group’s optimum number of products that can be available for sale based
on the 31 August 2018 budgeted information. (11)
(g) List four (4) qualitative factors that Pears would have considered when the decision to
centralize all the testing functions at a Johannesburg warehouse was made. (4)

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3.17 DELIGHT SPREADS (PTY) LTD 50 Marks

Delight Spreads (Pty) Ltd (DS) is a small enterprise that produces and sells two types of macadamia-
nut spreads; macadamia natural spread (MNS) and macadamia sweet spread (MSS). The losses which
occur in the production process are considered immaterial. Each type of spread is packed and sold in
a glass bottle containing 250g of spread. These bottled-spreads are mainly sold at food markets and
other flea markets.

DS is the brainchild of three friends, Ester, Parusha and Sibongile. Ester and Parusha are mainly
responsible for the production function while Sibongile is responsible for the marketing, procurement,
finance and administrative functions. The three friends approved the following budget:

1. ANNUAL BUDGET FOR THE FINANCIAL YEAR-ENDING 31 OCTOBER 2017:

MNS MSS Total
R R R
Sales 1 795 200. 1 305 600. 3 100 800.
Less: Manufacturing cost of sales (1 532 500) (1 016 860) (2 549 360)
Direct raw material 889 440. 560 320. 1 449 760.
Direct labour 204 000. 152 320. 356 320.
Variable manufacturing overheads 228 480. 163 200. 391 680.
Packing material (glass bottles) 39 168. 26 112. 65 280.
Fixed manufacturing overheads 171 412. 114 908. 286 320.

Gross profit 262 700. 288 740 551 440.

Less: Administrative and selling costs (357 040)

Computer depreciation 16 000.
Insurance premiums 46 000.
Cleaning contract fees 50 000.
Administrative employee costs 60 000.
Selling costs (note 1.6) 155 040.
Sundry fixed costs 30 000.

Net profit before tax R 194 400.

The 2017 financial year budget was prepared on the basis of the following assumptions:
1.1. The selling prices were budgeted at R55 for MNS and R60 for MSS per unit. The budgeted sales
mix was 1,5:1 for MNS and MSS.
1.2. DS budgeted to produce 32 640 units of MNS and 21 760 units of MSS. All units produced are
expected to be sold in the same financial year.
1.3. Production and sales for both products occur evenly throughout the financial year.
1.4. No opening and closing inventory were budgeted for all types of inventories.
1.5. Fixed manufacturing overheads were allocated on the basis of budgeted production units.
1.6. The budgeted variable selling costs were R89 760 for MNS and R65 280 for MSS.

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1.7. The spread manufacturing machine produces 10kg of MNS per one machine hour and 10kg of
MSS per one and half machine hours. This machine has a total annual production capacity of
1 900 hours. The machine can only produce one type of spread at a time.
1.8. The following direct raw material standard cost and standard usage data relates to the
production of 1 kilogram spread. For example, 200g of honey will be used in the manufacturing
of 1kg of MSS spread at a cost of R16 for 200g of honey.
Details MNS 1kg MSS 1kg
Direct raw material Grams R Grams R
used used
Macadamia nut chips and pieces 900 99 700 77
Macadamia nut oil 100 10 100 10
Honey 200 16
Total 1 000g R109 1 000g R103
1.9. The direct raw material and selling prices are expected to remain constant throughout the financial
year.
1.10. Sibongile used the unadjusted 2016 financial year actual prices for the 2017 direct raw material
budget.

2. GRAHAMSTOWN ARTS FESTIVAL

2.1. The results of the 2016 market research conducted by Sibongile indicated that should DS
showcase their spreads at the annual Grahamstown Arts Festival, the annual budgeted demand
for the MNS and the MSS spreads will increase to 40 000 units and 30 000 units respectively,
mainly due to the exposure to the new Eastern Cape market.
2.2. The total annual production capacity for the spread manufacturing machine will remain at 1 900
hours.
2.3. Although the recent severe drought negatively affected the supply and availability of the direct
raw material, it is still expected that DS will have access to all the required quantities of the direct
raw material to fully meet the increased annual demand for both spreads.

3. ACTUAL RESULTS FOR THE QUARTER ENDING 31 JANUARY 2017

Details MNS MSS
Sales (units) 9 000 7 000
Production (units) 9 100 7 200
Selling price per unit R 55 R60
Macadamia nut chips and pieces purchased 2 093kg at a total cost 1 224kg at a total cost
and issued to production of R251 160 of R146 880
Macadamia nut oil purchased and issued to 182kg at a total cost of 144kg at a total cost of
production R20 020 R15 841
Honey purchased and issued to production 432kg at a total cost of
R30 240
Variable manufacturing overheads R72 800 R50 400
Direct labour rate and hours per unit for the quarter were as per the standards used in the budget.

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4. ACTIVITY BASED COSTING (ABC) METHOD
As part of the youth month celebrations Ester attended the African Farmers Association conference.
An ABC-session at the conference prompted her to table a proposal to investigate the possibility of
implementing ABC at DS. The investigation established the following relationships between the
budgeted fixed manufacturing overheads and the related activities:
Activity area Notes Total annual cost
R
Direct raw material ordering i 68 800
Quality inspections ii 52 500
Factory rental iii 165 020
Total budgeted fixed manufacturing overheads R286 320

i. Sibongile places three raw material orders for MNS and two orders for MSS per week. Assume
DS operates for 40 weeks of the year.
ii. Parusha is responsible for conducting the spreads quality inspections. For the 2017 financial year
a total of 6 528 and 7 253 quality inspections are expected to be conducted for MNS and MSS
respectively.
iii. The factory is used 20% for administrative purposes, 45% for the production of MNS and 35% for
the production of MSS.

REQUIRED
(a) Based on the current budget, the three friends are of the view that the company has the
capacity to achieve a target profit of R350 000.
Calculate the budgeted number of units per spread type that DS will need to produce and
sell to achieve the target profit of R350 000 for the 2017 financial year. (10)
(b) Determine the optimum production mixture that will maximize DS’s budgeted profit for the
2017 financial year based on the impact of the Grahamstown Arts Festival market research.
For this question only, round all your workings (excluding Rand amounts) to 4 decimal
places. (8)
(c) Briefly discuss how DS can improve on its budgeting process so as to closely align it to
the actual results. (6)
(d) By reference to the 2017 financial year budget, identify the type of costing method used
by DS. Provide at least one reason for your answer. (2)
(e) Calculate the following variances for the quarter ending January 2017:
(i) The macadamia nut chips and pieces purchase price variance for MNS only.
(3)
(ii) Direct raw material mix variance for the MSS. (For the purposes of this variance
round your percentages to two decimal places). (5)
(iii) Variable overheads expenditure variance per product and in total. (3)
(f) Briefly discuss the possible reasons for the macadamia nut chips and pieces purchase
price variance. (4)
(g) Calculate the total budgeted fixed manufacturing overheads for both MNS and MSS for
the 2017 financial year on an activity-based costing method. (6)
(h) Briefly contrast ABC with traditional costing method. (3)

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3.18 TEDDY FRENZY LTD 50 Marks

Teddy Frenzy Ltd (TF) is one of the largest manufacturers and online sellers of teddy bears in South
Africa. The company has a divisionalised structure and there are two (2) divisions within the company,
namely the Budget Bears division (BB) and the Exclusive Bears division (EB).

BUDGET BEARS DIVISION (BB)

BB manufactures and sells one (1) type of teddy bear called Fuzzy Wuzzy (FW). BB budgeted to sell
5 000 FW teddy bears each month. Sales are expected to take place evenly throughout the year.
Although BB has capacity to manufacture 5 600 FW teddy bears each month, they have an external
demand of 5 000 of these teddy bears each month. BB manufactured 4 880 units in October 2017.

Direct Material

The direct material that BB use in the manufacturing of their teddy bears is fake fur fabrics, synthetic
leather, embroidery floss and plastic buttons for the eyes, glue and fiber for stuffing the teddy bears.
BB makes use of a mix of two different fibers for stuffing their teddy bears in order to arrive at the ideal
density that makes the teddy bear squeezably soft.

1. Extract from the standard direct material requirements of one (1) Fuzzy Wuzzy teddy bear:

Details R
Fake fur fabrics (R20 per metre) 10,00
Synthetic leather (200mm) 8,00
Plastic buttons (R0,50 per button) 1,00
Fiber
- Very fine fiber (100 grams) 12,40
- Thick wavy fiber (250 grams) 15,00
Other (embroidery floss and glue) 0,50

2. The following actual information relates to the direct material and was extracted from the
management accounts for the month of October 2017:
2.1 BB purchased 1 100 meters of fake fur fabrics at a total cost of R24 200 and 980 meters of
synthetic leather at a total cost of R37 240.
2.2 BB did not buy any plastic buttons, embroidery floss or glue in October 2017 as it still had enough
in inventory for all the FW teddy bears manufactured in October 2017. The actual quantities of
these direct material issued to manufacturing were in line with the standard.
2.3 BB obtained discounted prices when they purchased fiber from one of their suppliers as a result
of purchasing the fiber bales in bulk. See details below:

Very fine fiber 520 kilogram for R61 360

Purchased
Thick wavy fiber 1 250 kilogram for R54 272
Very fine fiber 475 kilogram
Issued
Thick wavy fiber 1 275 kilogram

3. The cost of placing an order for the plastic buttons amounts to R100 per order. The all-inclusive
inventory holding costs of the plastic buttons amount to R0,02 per plastic button.

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Direct labour: machine-related
The budgeted direct labour rate was R50 per hour for October 2017. The budgeted and actual direct
labour time to produce one FW teddy bear was 15 minutes. The actual direct labour rate per hour for
October 2017 was 8% higher than the budgeted direct labour rate per hour for the same period.

Direct labour: temporary sewing workers

Each temporary worker sews two FW teddy bears per workhour. Every temporary worker was paid
R54 per clock hour in October 2017. The expected and actual idle time allowance for October 2017
was 10%.

Manufacturing overheads
From the period July 2017 to October 2017, BB incurred manufacturing overheads as per the
observations indicated in the information below. These costs were not in direct relation to the volume.

Period Number of FW teddy Manufacturing

bears manufactured overheads
R
Jul-17 5 020 20 450
Aug-17 5 180 20 580
Sep-17 5 010 20 400
Oct-17 4 880 19 980

The budgeted number of FW teddy bears expected to be manufactured for November 2017 is 5 000.

New stuffing machine

The chief operations officer (COO) of TF Ltd is considering investing in a new stuffing machine and
replacing the current one. The new high-quality stuffing machine uses considerably less electricity than
the current machine, is safer to use as it releases less airborne fluff and is expected to improve the
cuddliness of the teddy bears. Although the sales price per FW teddy bear is expected to increase as
a result of the improved cuddliness of these teddy bears, the budgeted production and sales volumes
will remain the same for both of these machines.

The following information is available regarding the two (2) machines:

Current stuffing New high-quality
machine stuffing machine
Total expected sales over the next 4 years: R9 000 000 ?
10% probability R9 050 000
40% probability R9 030 000
50% probability R9 020 000
Current resale value of the machine R5 000 -
Original cost price of the machine R50 000 R80 000
Accumulated depreciation to date R10 000 -
Estimated total variable costs per year R25 000 R10 000
Annual electricity and other fixed operating costs R8 000 R6 000
Remaining useful life 4 years 4 years

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Selling and administrative cost

The total actual amount of selling and administrative costs incurred during the month of October 2017
was R30 000. The actual variable portion was R1,50 per FW teddy bear, which was equal to the
budgeted amount. One-third (⅓) of the variable selling and administrative costs are only incurred on
sales to the external customers.

EXCLUSIVE BEARS DIVISION (EB)

New proposed range: Glitter Glam (GG) teddy bears

The management of TF Ltd suggested that EB launches a new product range, called Glitter Glam (GG)
teddy bears using the FW teddy bears that BB manufactures and further converting them into an
exclusive new teddy bear adding costumes, ribbons and other accessories before packaging the bears.
EB plans to exploit the market by charging high initial prices to take advantage of the novelty appeal of
GG teddy bears.

Quality costs

EB believes that in today’s global environment, strategic goals should focus on quality, cost and time.
In order to pursue quality as a strategic goal, a good quality cost measuring system is needed. The
COO recently read that quality costs can be classified into four categories, namely prevention,
appraisal, internal failure and external failure costs. The following quality costs are incurred by EB:

Quality cost item Description

Reworking costs EB incurs costs to rework defective teddy bears that are discovered.
Fibers are sometimes caught in the seams of teddy bears or stiches are
missed.
Quality inspection costs EB pays a salary to a quality inspector that applies the final "hug test" to
evaluate the satisfactory cuddliness and provide quality control.
Warranty repair costs EB offers a one (1) year warranty to their customers for repairing defects
discovered by customers.
Training costs EB incurs costs for training their fabric cutters, sewing workers, stuffing
machine operators, bear surgeons, bear groomers and bear dressers.

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REQUIRED

For each question below please remember to:

• Clearly show all your calculations in detail;
• Where necessary, indicate irrelevant amount(s) with a R0 (nil-value);
• Round all your workings to two decimals, except where otherwise stated.
(a) Calculate the following direct material variances of BB for the month of
October 2017:
(i) Fake fur fabrics purchase price variance for FW teddy bears. (2)
(ii) Synthetic leather purchase price variance for FW teddy bears. (2)
(iii) Fibre material mix variance per type of fibre and in total for FW teddy bears.
(5)
(b) Provide two (2) reasons for a possible total favourable fibre material mix variance. (2)
(c) Determine the optimum number of orders of plastic buttons that BB has to place in
order to meet the annual expected demand for FW teddy bears. (4)
(d) Determine the actual total machine-related direct labour charge of BB for
October 2017. (2)
(e) Determine the actual total direct labour charge of BB for October 2017 for the
temporary sewing workers. (3)
(f) Based on the manufacturing overheads observations and using the high-low method
calculate the total budgeted manufacturing overheads for BB for November 2017.
(5)
(g) Advise the COO of TF Ltd whether to purchase the high-quality stuffing machine
or not. Consider both quantitative and qualitative factors.
Limit your qualitative factors to only two (2). Ignore the time value of money. (10)
(h) Assume that the external selling price is R150 and the related contribution is R56,50
per FW teddy bear.
Ignoring the possible replacement of the stuffing machine, calculate the minimum
transfer price per FW teddy bear which BB would be willing to accept if they are
(7)
required to transfer 1 000 of these bears to EB.
(i) Categorise each of the quality costs incurred by EB into the correct quality cost
category. (4)
(j) Identify the pricing policy that EB intends to apply with their new proposed range of
GG teddy bears and indicate which stage these teddy bears are in the product life
cycle. Supply one (1) reason for each of your answers. (4)
Total marks [50]

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3.19 ZAMA-ZAMA (PTY) LTD 50 Marks

Zama-Zama (Pty) Ltd (Z-Z) is an established mining company situated in the Randfontein area of the
Gauteng Province. The company’s operations are divided into two divisions managed by two
independent management teams. The divisions are Open-cast mining and Ready mixture. The
company operates a transfer pricing system whereby the Open-cast mining division transfers some of
its production to the Ready mixture division. The company’s financial year-end is 31 December. An
absorption costing system is used, and inventory is valued on a first-in-first-out (FIFO) basis.

Z-Z’s head office makes all the long-term borrowings decisions and it also allocates corporate expenses
at its discretion. All other decisions are made by the respective divisional managers.

The company’s budgeted after-tax cost of capital for the 2017 financial year is 12% per annum.

OPEN-CAST MINING DIVISION

The Open-cast mining division produces two products, uranium, which is used in the energy industry
and clay, which is used in the manufacturing of ceramic tiles.

The following budgeted information was extracted for the month of January 2017 as prepared by the
management accountant:

Details Uranium Clay Total

R R R
Sales 5 445 000 3 430 000 8 875 000
Direct labour 2 475 000 1 568 000 4 043 000
Inspection and quality control 150 000 112 000 262 000
Total manufacturing overheads 2 556 000
Administrative employees’ salaries 120 000
Allocated corporate expenses 200 000
Total selling and distribution costs 510 000
Non-current assets 12 800 000
Trade receivables 3 600 000
Long-term borrowings 2 600 000
Trade payables 2 000 000

Additional information relating to the budget for the month of January 2017
1. The division’s budgeted monthly production, at full capacity, is 500 tonnes of uranium and 400
tonnes of clay. All the losses in the open-cast mining process are considered immaterial. There
were no opening inventories.

2. The budgeted monthly sales volumes are 495 tonnes of uranium and 350 tonnes of clay. The
external monthly demand for clay is limited to 350 tonnes.

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3. The mined products are subjected to inspection and quality control before being delivered to
customers.
4. Manufacturing overheads
4.1 The manufacturing overheads are semi-variable in nature and are allocated to products
based on the total monthly budgeted production tonnes.
4.2 The manufacturing overheads budget is based on the observations for the activity levels as
extracted from the 2016 financial year-end’s actual information as indicated in the Table
below.
Assume that the variable manufacturing overheads per unit will not change.

Total manufacturing overheads observation for the activity levels:

Month Total manufacturing Total tonnes

overheads produced
December 2016 R2 300 000 800
November 2016 R1 840 000 600
October 2016 R1 610 000 500
September 2016 R1 863 000 610

5. The total budgeted variable selling and distribution costs for uranium is R60 000 and for clay is
R49 700. Variable selling and distribution costs are only incurred on sales to external customers.
The other selling and distribution costs are fixed in nature.

READY MIXTURE DIVISION

The Ready mixture division manufactures a ready-mix (cement used in the tiles manufacturing process)
and uses a process costing system. In the Ready mixture division, the clay (input) is added at the
beginning of the process and then crushed and grinded (converted) into a ready-mix (output). The
conversion process results in a 2% normal loss per tonne of the input. The finished ready-mix is packed
in cement bags and sold to various ceramic tiles manufacturers. Ready-mix’s total budgeted monthly
manufacturing output is 245 tonnes and the related total monthly manufacturing capacity is 270 tonnes.

The following budgeted information was extracted for the month of January 2017 as prepared by the
management accountant:
R
Sales 3 864 000
Direct raw material 2 445 000
Direct labour 617 400
Variable manufacturing overheads 122 500
Fixed manufacturing overheads 200 000
Packaging costs 75 950
Administrative employees’ salaries 60 000
Selling and delivery costs 30 000

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Additional information relating to the budget for the month of January 2017:
1. The division had no opening inventories of finished ready-mix or direct raw material.
2. The budgeted ready-mix sales volumes for the month are 230 tonnes at a selling price of R16
800 per tonne.
3. The direct raw material (clay) purchase price from the external suppliers is R9 780 per tonne.
Each direct raw material order cost R10 per tonne to place.
4. Unless otherwise stated, all sales transactions attract both selling and delivery costs that are
independent of each other. These costs are variable in nature and their respective proportional
split is 45% selling cost and 55% delivery cost.

PROPOSAL FROM MOLEFEE (PTY) LTD

Molefee (Pty) Ltd, currently not a customer of the Ready mixture division, approached the division with
a special proposal to purchase 15 tonnes of the ready-mix. The Ready mixture division’s pricing policy
for similar proposals is to add a 10% profit on the total relevant costs. As per Ready mixture division
pricing policy, the costs of delivering all special/once-off orders are for the customer’s own account.
REQUIRED

(a) In the absorption costing system there are two methods of allocating fixed
manufacturing overhead to products.
Identify Z-Z’s current method of allocating the fixed manufacturing overheads and
briefly compare the identified method to the other (second) method. (3)
(b) Calculate the total budgeted fixed manufacturing overheads allocated to the uranium
and clay products respectively, for January 2017. (5)
(c) Determine the budgeted residual (RI) income for the Open-cast mining division for
the month ending 31 January 2017. Ignore the internal transfer. (8)
(d) Determine the budgeted return on investment (ROI) for the Open-cast mining division
for the month ending 31 January 2017. Ignore the internal transfer. (1)
(e) Briefly discuss the purposes of a transfer pricing system within the context of Z-Z. (4)
(f) Assume the Ready mixture division will purchase all its budgeted clay requirements
from the Open-cast mining division.
Calculate the budgeted minimum transfer price per tonne that the Open-cast mining
division will be willing to accept for the transfer of the tonnes required by the Ready
mixture division. (8)
(g) Calculate the budgeted maximum transfer price per tonne that the Ready mixture
division will be willing to pay for the tonnes transferred from the Open-cast mining
division. (1)
(h) Based on the budget information of the Ready mixture division and the special
proposal to purchase 15 tonnes ready-mix by Molefee (Pty) Ltd, calculate the total
price that the Ready mixture division should charge for the 15 tonnes.
Clearly indicate all the costs that should and should not be considered for the proposal
and the reasons for their respective inclusion/exclusion. Ignore VAT. (10)
(i) Briefly discuss five (5) qualitative factors that the Ready mixture division should take
into consideration before accepting the proposal from Molefee (Pty) Ltd. (10)

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3.20 MULAUDZI INVESTMENTS LIMITED 70 Marks

Mulaudzi Investments Ltd (“MULA”) holds various investments across several industries. The
company’s investment appetite is limited to the Southern African Development Community (SADC)
member countries. MULA’s reporting currency is the South African Rand (ZAR). MULA uses the
absorption costing system and values its inventories in accordance with the first-in-first-out (FIFO)
method. Each company within MULA’s divisionalised organisational structure is autonomous, has an
independent management team and has a 31 October financial year-end.

1. MULA’s WHOLLY-OWNED INVESTMENTS AND ANNUAL TARGETS FOR BOTH THE 2020
AND THE 2021 FINANCIAL YEARS
1.1. MULAs investment portfolio:
Investment Industry
territory Hospitality & Tele- Logistics Electronics
Leisure communications
South Africa East-Coast Hotel Tablet (Pty) Ltd Far & Wide (Pty) Ltd Tronix (Pty) Ltd
Zimbabwe ZMB Game Reserve – Border Crossing Ltd –
Namibia – NamiMobi Ltd – –

1.2. MULA’s performance targets per company per industry within its investment portfolios:
Targets Industry
Hospitality & Tele- Logistics Electronics
Leisure communications
Return on investment (ROI) 8% 4,50% 11,60% 6,20%
Residual income (RI) R11 million R20 million R15 million R0,25 million
Gross profit margin 12% 15% 18,50% 6%

2. TABLET (PTY) LTD (“TAB”)

TAB manufactures and sells two types of tablets, a basic-home tablet (“BhT”) and a professional tablet
(“PfT”). The main manufacturing component of each tablet is a central processing unit (CPU) and all
TAB's CPUs are bought internally, and exclusively from Tronix (Pty) Ltd ("TRONIX"). One BhT uses
one basic-CPU (“BCU”) while one PfT uses one professional-CPU (“PCU”).

The information in the following two tables was extracted from TAB’s management accounts:

Financial year (FY) FY 2020 FY 2019

Details BhT PfT BhT PfT
Budgeted manufacturing units 300 000 75 000 240 000 60 000
Budgeted sales units 288 000 72 000 240 000 60 000
Actual manufacturing and sales units n.a n.a 238 000 59 000
Standard assembly clock hours per unit 2,5 3,2 3,0 3,6
Actual assembly clock hours per unit n.a n.a 3,0 3,6
Actual assembly work hours per unit n.a n.a 2,64 3,5

Financial information per unit (p/u) BUDGET 2020 ACTUAL 2019

Details BhT PfT BhT PfT
Selling price R2 995 R3 825 R2 900 R3 500
CPU transferred from TRONIX R1 200 R2 000 R1 000 R1 650
Assembly costs (direct labour only) R175 R224 R135 R162
Other variable manufacturing costs R875 R1 580 R875 R1 140

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Additional information relating to the above management accounts:

2.1. No opening inventory of any type is budgeted for the 2020 financial year.
2.2. As part of its investment strategy, MULA continuously monitors the gross profit margins of each
company within its investment portfolio. It was noted with concern that TAB’s actual gross profit
amount for each product type was 20% lower than the related budgeted gross profit amounts
throughout the 2019 financial year.
2.3. In each financial year, the standard idle time allowance for the direct labourers is 10%. The total
direct labour cost budget for the 2019 financial year was R31,104 million for BhT and R9,3312
million for PfT.
2.4. TAB’s fixed manufacturing overheads (FMO) are allocated based on the budgeted assembly clock
hours. The pre-determined FMO allocation rate for the 2020 financial year is R150 per clock hour,
up by R30 per clock hour from the 2019 financial year’s pre-determined FMO allocation rate.
Furthermore, for the 2020 financial year, the fixed administrative costs are budgeted for at
R23,5 million.
2.5. TAB’s selling costs are mixed costs. For the 2019 financial year, the actual variable selling costs
were R6 per unit for both products while the total actual fixed selling costs were R500 000. The
total budgeted selling costs for the 2020 financial year is R3,4 million, and this was determined
based on variable selling costs of R8 per unit per product.
2.6. TAB’s target profit before tax for the 2020 financial year is R15,6 million.

3. TRONIX (PTY) LTD (“TRONIX”)

3.1. Budget information for the 2020 financial year:
TRONIX manufactures and sells two types of central processing units (CPUs) used in the
manufacturing of tablets, namely, a basic-CPU (“BCU”) and a professional-CPU (“PCU”). TRONIX’s
annual maximum manufacturing capacity is 600 000 CPUs of which 400 000 are BCUs and 200 000
are PCUs. As part of the divisionalised organisational structure, MULA has unilaterally determined that
TRONIX must prioritise the supply of the CPUs to TAB. In this regard, for each product type, 40% of
the manufactured CPUs are currently sold to the external market while 60% are sold internally to TAB.
No opening inventory and no closing inventory are budgeted for. Each financial year MULA would
determine the transfer price between TRONIX and TAB as a price equal to TRONIX’s total unit
manufacturing costs. However, for all external sales, a 35% markup is added on TRONIX’s total unit
manufacturing costs.

The composition of TRONIX’s budgeted total unit manufacturing costs is as follows: (i) 25% relates to
direct material costs; (ii) 60% relates to direct labour costs; (iii) 10% relates to variable overheads; and
(iv) 5% relates to fixed overheads. TRONIX’s budgeted selling and distribution costs on all external
sales are R25 per unit.

The following statement was appended to the management report of TRONIX’s 2019 financial year:
“We (TRONIX) are of the view that the current transfer price between TRONIX and TAB, as determined
by MULA, is a cause of conflicts and thus not in the best interest of MULA. Our BCUs have an active
external market; therefore, the minimum transfer price appears to be the best suited budgeted
transfer price for the 2020 financial year”

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3.2. Investigation to possibly discontinue (close-down) TRONIX:
Over the past few years, TRONIX’s direct labour costs have progressively increased at an alarming
rate. This is mainly due to trade union pressures, industrial action settlements, and amendments to
some aspects of labour legislations. In the past, MULA had continuously engaged with the relevant
authorities about the volatile labour environment being an impediment to maintain a flourishing business
in the country. However, its cries were met with ferocious attacks and anger. In one of the engagements,
MULA was told to “either shape-up, or ship-out”. As a result, MULA is considering the possibility to
discontinue TRONIX effective 1 November 2020 and, on the same day, possibly acquire an 85% equity
stake in Electro X (Pty) Ltd (“ELX”), a Namibian company owned by one of Namibia’s wealthy families,
and whose operations is similar to that of TRONIX. In this regard, MULA has already started negotiating
favourable labour conditions with Namibian authorities to formalise an agreement on fixed low wages
for the next five years, amongst others. Within the SADC region, acquisitions of this nature require
various co-operations and approvals – in the main from (i) the relevant competition commissions; (ii)
the respective revenue authorities; (iii) trade unions; (iv) Common Market treaties; and (v) Free Trade
areas – approvals from South Africa, Namibia and from the SADC.

In the instance that TRONIX is discontinued, the following will be applicable:

3.2.1. TRONIX’s non-current assets (administrative buildings and the factory) will be sold for cash on
1 November 2020. On this day, the book value of administrative assets will be Rnil (zero) while
the related resale value will be R75 000. The proceeds from the sale of the factory property (with
a book value of R50 million) will be R55 million. The annual depreciation on administrative assets
was determined at R0,2 million.
3.2.2. A 2,0% sales commission on the selling prices will be payable for the sale of the non-current
assets as per 3.2.1.
3.2.3. Retrenchment costs will be R20 million. The normal annual salary bill of R528 million is already
included in the loss for the financial year as per 3.2.6. below. At the start of the 2021 financial
year, all of TRONIX’s employees together will have accumulated 350 leave-days at a cost of
R400 per day. Accumulated leave is only paid out upon involuntary termination of employment.
The retrenched employees will sign a non-disclosure agreement relating to the operational
secrets and the appalling working conditions they experienced at TRONIX. None of TRONIX’s
employees will be kept and/or redeployed within MULA’s organisational structure.
3.2.4. TRONIX will pay R2,5 million in penalties and fines for breaching employment contracts because
of winding up.
3.2.5. Winding up costs of R1,5 million will be paid together with a settlement of R32 million for
liabilities.
3.2.6. For the 2021 financial year, if operations continue normally, the loss (excluding non-cash items)
from normal operations is expected to be R0,625 million.

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4. PROPOSAL TO ACQUIRE 85% EQUITY STAKE IN ELECTRO X INCORPORATED (“ELX”)
In the instance that MULA acquires the 85% equity stake in ELX, the following information will be
applicable:

4.1. Information extracted from ELX’s audited financial statements:

Details Notes 2020 2019 2018 2017
R’000 R’000 R’000 R’000
Net profit/(loss) after tax (i) 13 000 3 600 (4 800) 17 600
Dividends paid (ii) 1 950 540 0 2 640
Notes relating to the above financial information:

(i) Included in the net profit/(loss) after tax for 2019 and 2018 is R20 million (pre-tax) and R28 million
(pre-tax), respectively, for penalties and fines (exceptional items) for breaching various labour
legislations. The corporate tax rate applicable to ELX is 25%.
(ii) The company’s dividend payout ratio is expected to be maintained into the future.

4.2. ELX’s year-end is 31 October.

4.3. The average earnings-yield of electronics companies listed on the Johannesburg Stock Exchange
(JSE) is 25%.

4.4. Within the SADC region, on average, unlisted shares trade at 12% below listed shares.

4.5. MULA will table a R50 million cash offer to the shareholders of ELX for the acquisition of the 85%
equity stake in ELX as at the start of the 2021 financial year.

4.6. ELX’s management personnel have been with the company since its inception. This management
team of ELX will continue to manage ELX post the acquisition.

REQUIRED:

(a) “Goal congruence” is often referred to as a prerequisite for a successful decentralisation.

(i) Explain the term “goal congruence” from MULA’s perspective and provide one
example related to the scenario to illustrate your explanation. (2)
(ii) From the perspective of a divisionalised organisational structure, discuss how MULA
could be affected by the potential negative consequences of decentralisation. (5)
(b) Assuming that TAB operates a standard costing system, calculate the following variances
for the 2019 financial year:
(i) TAB’s sales mix variance for product type PfT only. (3)
(ii) TAB’s direct labour idle time variance for product type BhT only. (3)
(c) (i) Prepare TAB’s budgeted statement of profit or loss (income statement) for the 2020
financial year; and (7)
(ii) Based on the gross profit margin calculated in (c)(i) above, briefly comment on
whether TAB is budgeted to achieve the gross profit margin target as set by MULA. (1)
▪ Support your commentary with necessary and relevant calculations.
▪ Ignore all possible taxation implications.

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(d) In answering question (d) only, assume the following two points regarding TAB for the
2020 financial year:
1. All the implications of opening and closing inventory are to be ignored.
2. All the other budgeted information remains as given in the scenario.
Calculate the budgeted units of BhT and PfT that TAB will need to manufacture and sell
during the 2020 financial year to achieve its target annual profit before tax. (8)
(e) Regarding the appended statement to TRONIX’s 2019 management report:
From TRONIX’s perspective and with reference to the 2020 financial year budgeted
information, critically evaluate and comment on the view that the minimum transfer price
is the best suited budgeted transfer price for the internal transfer of BCUs during the 2020
(10)
financial year.

▪ In answering (e), ignore the possible discontinuation of TRONIX.

▪ Show all relevant and appropriate calculations to support your evaluation.
▪ Calculations – 7 marks; Discussion and commentary – 3 marks.
(f) With regard to the possible discontinuation of TRONIX:
From a quantitative perspective, advise on the possible implication of discontinuing
TRONIX on its 2021 financial year only.

▪ Your advice must be from TRONIX’s perspective only.

▪ Support your advice with all relevant and applicable calculations.
▪ Ignore the possible acquisition of ELX.
▪ Ignore the possible taxation implications.
▪ Ignore all implications beyond the 2021 financial year. (11)
(g) Assume that TRONIX is discontinued and that MULA acquires the 85% equity stake in
ELX on 1 November 2020:
(i) Using the Price/Earnings (P/E) multiple valuation method, establish the
reasonableness of the cash offer tabled by MULA to the shareholders of ELX for their
85% equity stake in ELX as at 1 November 2020. (12)

(ii) By reference to information evident from the scenario, discuss four non-financial
factors that MULA will need to consider in its assessment of ELX for possible
acquisition. (8)

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3.21 RATA-TEA (PTY) LTD 50 Marks

RataTea (Pty) Ltd (“RT”) owns a 1 000 hectare farm situated in the Cederberg region of the Western
Cape. The farm is situated in an unspoiled mountain wilderness area with an abundance of wildlife and
plants. RT uses a portion of the farm for its tea production plant and farm worker housing. RT is owned
and operated by the farm worker families living on the farm. Currently RT purchase all direct raw
materials from a number of external suppliers. These direct raw materials (dried rooibos leaves and
other herbs) are combined to produce different types of tea products.

RT’s financial year-end is 30 June and it operates for all the twelve months of the year. RT uses a direct
costing system and values inventory on the first-in-first-out (FIFO) basis. The targeted rate of return
on capital invested is 10% per annum.

1. Rooibos-ginger loose tea

RT is the only company that produces and sells rooibos-ginger loose tea made from a blend of two
direct raw materials: dried organic rooibos leaves and dried organic ginger. The rooibos-ginger loose
tea is one of RT’s best-selling products. There were no budgeted direct raw materials opening and
closing inventory for the 2018 financial year. The rooibos-ginger loose tea are packed in a box
containing 100 grams of the rooibos-ginger loose tea mixture.
1.1. The following details, relating to the rooibos-ginger loose tea, have been extracted from the
budget working papers for the financial year ending 30 June 2018:
1.1.1. RT estimated that it will produce 72 000 boxes of rooibos-ginger loose tea and sell 70 800 boxes of
rooibos-ginger loose tea evenly throughout the financial year.
1.1.2. The standard sales price is R40 per box of rooibos-ginger loose tea.
1.1.3. Direct raw materials required to produce the budgeted 72 000 boxes are:
Budgeted price per kg Total budgeted cost
Dried rooibos leaves R30 per kg R172 800
Dried ginger R200 per kg R288 000

1.2. The actual information for the month of June 2018 relating to the rooibos-ginger loose tea:
1.2.1. 6 100 boxes were sold for a total sales value of R256 200.
1.2.2. 6 500 boxes were produced.
1.2.3. The direct raw materials were purchased and issued to production as follows:
Purchased Issued
Dried rooibos leaves 600 kg for R21 000 585 kg
Dried ginger 150 kg for R30 000 97,50 kg

2. Insourcing of dried rooibos leaves production

As part of their growth strategy and potential cost saving, RT is investigating the feasibility of insourcing
the dried rooibos leaves production. This investigation revealed the following information:
2.1. Dried rooibos leaves production starts by planting seedlings that grow into rooibos bushes. The
rooibos bushes (green rooibos) are harvested by hand once a year, by cutting off the branches
30cm above the ground. Rooibos bushes are harvested three times before new seedlings must
be planted. The harvested green rooibos cuttings are cut into uniform lengths, fermented and
then dried in sunlight which turn the green rooibos into dried rooibos leaves with a reddish colour.

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2.2. In order to meet the demand of their products, RT estimates that it will be required to produce
40 tonnes of dried rooibos leaves per year for a total of 120 tonnes over a three-year period.
2.3. If RT continues to buy the dried rooibos leaves from external suppliers, it is estimated that the
dried rooibos leaves purchase price will increase annually with 10% at the beginning of each
year. Year 1’s annual increase of 10% will be based on the actual June 2018 purchase price.
2.4. Ceder Conservation (Pty) Ltd (“CC”), a company that conserves the environment and provides
tourist accommodation and activities, currently leases 95% of the 1 000 hectare farm from RT
while RT utilises the remaining 5%. The lease contract with CC will expire in year 4 and the
monthly rental rate is fixed at R250 per hectare for the period of the contract. To have enough
farmland available to produce the required 40 tonnes of dried rooibos leaves per year if the
insourcing strategy is accepted, RT’s farm utilisation will have to increase to 15% and the area
CC leases will therefore reduce to 85%. CC is unaware of the proposed reduction in the hectares
available to it for rent.
2.5. If the insourcing strategy is accepted, RT will receive a once-off government grant of R1 100
000 during year 1 to purchase farm equipment. RT will purchase this farm equipment to the
value of R1 200 000 in the same month the grant is received.
2.6. RT obtained the following information from similar farms with regards to the production of
40 tonnes of dried rooibos leaves per year over a three-year period (Year 1 to Year 3):
2.6.1. Seedlings will be planted at the beginning of year 1 at a total once-off cost of R600 000.
2.6.2. The harvested green rooibos loses 4% of its weight during the cutting, fermentation and drying
processes.
2.6.3. Variable manufacturing overheads incurred during the cutting, fermentation and drying
processes are R8 per kg of harvested green rooibos. It is expected that the variable
manufacturing overheads rate per kg will remain the same throughout the three-year period.
2.6.4. During the harvesting period, migrant workers are employed to assist with the manual
harvesting. Migrant workers will be paid R30 per hour and can harvest 10 kg of green rooibos
in an hour. The labour rate per hour will remain constant over the three-year period.
2.6.5. Four (4) new farm workers will be permanently employed from year 1. The total combined
starting annual salary for these four farm workers is R240 000. The expected salary increase is
7,5% per year.
2.6.6. Fixed manufacturing cost are estimated to be R270 000 per year. The cost will remain constant
for the three-year period because of fixed amount contracts that will be negotiated with suppliers.
2.6.7. Dried rooibos leaves are exported internationally at an export cost of R5 000 per tonne and local
distribution costs to external clients are R1 000 per tonne. Distribution costs are for the account
of the rooibos producer.

3. Rooibos-espresso capsules
With the growth in popularity of coffee capsule machines and the increase in the sales of rooibos-
espresso capsules, RT is considering entering the rooibos-espresso capsule market within the next
three months. The expected investment to produce these capsules is R600 000. RT’s expected cost
price per package, containing 10 capsules, will be R25 and there is an expected annual demand of
4 000 packages. There are a number of established rooibos-espresso capsule producers and these
producers’ products are readily available at retailers at an average selling price of R50 for a package
of 10 capsules.

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REQUIRED

For each question below please remember to:

• Clearly show all your calculations in detail;
• Where necessary, indicate irrelevant amounts/adjustments with a R0 (nil-value);
• Round all your workings to two decimals, except where otherwise stated;
• Ignore all taxation implications.
(a) Calculate the following variances for the rooibos-ginger loose tea for the month of
June 2018:
(i) Sales price variance. (2)
(ii) Material mix variance per direct raw material type and in total. (4)
(iii) Material yield variance per direct raw material type and in total. (4)
(b) Briefly discuss two (2) reasons for a possible adverse material yield variance. (2)
(c) Advise RT’s management if they should insource the production of the dried rooibos
leaves or should continue purchasing the dried rooibos leaves from external suppliers.
The calculations should be for a three-year period.
Ignore time value of money implications. (18)
(d) Identify and briefly discuss four (4) qualitative factors that RT should consider when
making the decision to insource the production of the dried rooibos leaves. (8)
(e) Write a report to RT’s owners regarding the long-run (long-term) price setting for the
rooibos-espresso capsules and the rooibos-ginger loose tea. Your report must:
(i) Identify if RT is a price setting or a price-taking organisation in relation to the
rooibos-espresso capsules. Provide a reason for your answer. (2)
(ii) Identify if RT is a price setting or a price-taking organisation in relation to the
rooibos-ginger loose tea. Provide a reason for your answer. (2)
(iii) Provide a brief discussion of the limitations of the cost-plus pricing method. (2)
Present your report in the correct format, using appropriate headings.
(f) Calculate the target selling price per package for the rooibos-espresso capsules
using the targeted rate of return on invested capital approach. (4)
(g) The financial manager has heard that some loose tea producers are using process
costing. She is refreshing her process costing knowledge and has asked you to
explain the circumstances in which the short-cut method can be used in drafting a (2)
quantity statement.

3.22 MUFHIRIFHIRI BEEF (PTY) LTD 50 Marks

Mufhirifhiri Beef (Pty) Ltd (MfB) is a beef-producing group of companies with a centralised head office
and two divisions that are managed by independent management teams, namely: The Feedlot
Division and the Abattoir Division. MfB’s current intragroup transfer price policy is to use a negotiated
price. The group’s entire operation takes place at its 330 hectares farm situated a few kilometres
outside Bloemfontein. The Feedlot Division purchases cattle from the auction barns only. These
auction barns are registered with both the Department of Agriculture, Forestry & Fisheries (DAFF) and
the Agricultural Products Agents Council (APAC). The Abattoir Division purchase cattle from feedlots
and slaughter them for sale to all major retailers across the Free State and the Northern Cape provinces.

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The head office is fully responsible for the arrangement of the entire group’s long-term financing.
Unless specifically mentioned, all procurement, operational, working capital management, cash
management and short-term funding decisions of any division are solely made by the management
team of that respective division.

MfB makes use of the absorption costing system while all its inventory items are valued using the
first-in-first-out (FIFO) method. The company has a 31 May financial year-end.

1. THE FEEDLOT DIVISION

The feedlot has five (5) holding pens, each with a maximum holding capacity of 120 cattle. It is currently
operating at 75% of its maximum holding capacity. The division purchases the cattle once a month at
the beginning of each month. The division only buys Class B cattle. Class B cattle weigh 350 kilograms
(kg) each at the date of purchase. All the cattle are purchased on a cash basis only.

At the holding pens, the cattle are fed hay, maize chops, water and licks for a period of 30 days, after
which they are sold to abattoirs. Due to its well-researched feed rations, the feeding results in total
weight gain of 50kg per cattle. Only after the 30-day period feeding, are the cattle ready for selling.

The Feedlot currently sells 60% of its current operating capacity to the external clients, the balance is
sold internally to the Abattoir Division as per the group’s transfer pricing policy.

Additional actual information for the month ended 31 May 2018:

1.1. On 01 May 2018, the price of the Class B cattle at the auction barn was R20 per kg. On this
day, the total number of cattle purchased by the division was equivalent to the division’s current
level of operating capacity.

1.2. On the last day of the month, the division sold all the cattle it had bought on 01 May 2018. The
selling price to the external clients was R35,00 per kg. The internal transfer price to the
Abattoir Division was negotiated at R13 700 per each cattle. The external variable selling and
distribution costs was 1% of the related sales value.

1.3. The division employs direct labourers to assist with the delivery of the cattle purchased on the
first day of the month. These labourers are paid R140 per each cattle.
1.4. A Feedlot Division’s supervisor is responsible for supervising the direct labourers. She earns a
total monthly salary of R8 500. This salary is correctly included in the fixed production overheads
below (see 1.7 below).

1.5. The feeding costs of hay, maize chops, water and licks totalled R1 350 000 for the month. The
division currently makes use of the economic order quantity (EOQ) technique for managing the
purchases of its cattle feed.

1.6. The division’s veterinary duties (cattle inspections and vaccinations) are contracted to Dr Pal, a
renowned animal veterinarian. This contractual agreement provides for two veterinary duty visits
per month. Dr Pal visited the feedlot on the 1st and the 31th at the cost of R0,20 per kg of each
cattle weight and R0,30 per kg of each cattle weight respectively.

1.7. Fixed production overheads totalled R1 000 000 for the month. This amount excludes any
deprecation charge.

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1.8. Head office expenses of R100 000 for the month were allocated arbitrarily to the division.

1.9. The amounts of all components of the statement of profit or loss (income statement) occur
evenly throughout the financial year.

1.10. The division’s five (5) holding pens were constructed and brought to use on 01 June 2015 at a
total cost of R25,2 million. Each holding pen has a useful life of five (5) years. Deprecation is
calculated on the straight-line method over the useful life of the holding pens. The construction
cost was financed by a combination of: R20 million long-term loan repayable with a once-off
payment in year 2020; and the balance from the division’s cash resources. The long-term loan
bears interest at 12% per annum.

1.11. The division’s statement of financial position (balance sheet) as at 31 May 2018 reflects:
R2 million trade receivables and R1,6 million trade payables.

1.12. On 31 May 2018, although correctly reflected in the bank statement, the bookkeeper noticed
that the cattle purchases entry (see 1.1 above) were erroneously not recorded in the May 2018
cashbook. On 31 May 2018, the cashbook balance was R12 million. All the other cashbook
entries for the month and previous months were correctly recorded and accounted for.

2. THE ABATTOIR DIVISION

The division has a world class slaughtering facility with a maximum capacity to slaughter 135 cattle per
day and it operates for seven (7) days a week. The division purchases only Class B cattle from the
Feedlot Division and other feedlots across Southern Africa.

The feedlots deliver the cattle to the Abattoir Division’s abattoir-holding pen. The division’s slaughtering
process is recognised as a joint manufacturing process and the related joint costs are allocated to
the joint products based on the constant gross profit percentage method. This process
simultaneously yields three types of products, namely; the Premium cuts, the Standard cuts and the
Offal. The Offal is incidental to the slaughtering process. In addition to these products, the slaughtering
process results in waste products which have no scrap and/or sales value.

EXTRACT FROM THE BUDGET INFORMATION FOR THE MONTH ENDING 31 MAY 2018:

FINANCIAL BUDGET Ref. Premium Standard Offal

cuts cuts
R R R
Sales 2.1 ? ? ?
Less: Cost of sales ? ? ?
Joint costs 2.2 ? ? ?
Further processing costs 2.3 90 000 100 000 200 000
Refrigerating costs 2.4 164 520 100 000 130 400
Gross profit ? ? ?
Less: other non-manufacturing costs 1 000 000 1 000 000 60 365
Variable cost 900 000 800 000 60 365
Fixed cost 100 000 200 000 0
Net profit before tax ? ? ?

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2.1. The budgeted sales are based on the budgeted purchases and slaughter of 4 185 cattle. Each
cattle weigh 400kg and the standard output weight per each slaughtered cattle and the budgeted
selling prices are as follows:

Product Premium cuts Standard cuts Offal Waste

Output weight proportion 160 kg 192 kg 44 kg 04 kg
Selling price per kg R46,00 R42,50 R19,75 R0,00

2.2. The budgeted joint costs comprise of R56 million cattle purchasing and abattoir holding-pen
related costs and R2 million relating to the cattle slaughtering process.
2.3. The further processing costs includes the cost of sorting, cleaning and preparing the products for
distribution to the retailers.
2.4. The products are stored in three separate refrigerators, one refrigerator per product type.
2.5. The division’s minimum net profit percentage (ratio of net profit before tax to sales) per each joint
product is budgeted to remain at the historical level of 10%.

3. INVESTIGATION TO ESTABLISH THE HIDES DIVISION

The group executive management is considering establishing a hides processing plant to take full
advantage of the hides currently disposed-off as waste products by the Abattoir Division.

The estimated total investment to establish this plant is R4 million and the related required rate of return
is 8% per annum. The plant’s productive time is expected to be 7 hours a day for the full 220 working
days. Each working day is 8 hours, the first 0,5 hours relates to the plant set-up time and the last 0,5
hours relates to the cooling-off time. The processing capacity of this plant is 2 000grams of hides per
40 minutes of productive time. This processing capacity is equal to the estimated annual demand.

The processed hides of 3,5 kg per unit will be exported to Lesotho where it will be used in the design
of traditional outfits and as decorations. The total estimated production cost of each hide is R2 800.

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REQUIRED

For each question below, please remember to:

• clearly show all your calculations in detail;
• where necessary, indicate irrelevant amounts/adjustments with a R0 (nil-value);
• round all your workings to two decimals, except where otherwise stated;
• ignore all taxation implications.
(a) Calculate the annualised actual return on investment (ROI) for the Feedlot Division
based on the month of May 2018.
To the extent that the information allows, components of the statement of financial
position (balance sheet) must be shown at their carrying amounts at year-end. (12)

(b) Pradesh Naidoo (the Feedlot divisional manager) is unhappy about the current
intragroup transfer price. He is of the view that at minimum, the transfer price should be
between R14 000 and R14 500 per each cattle.
(i) Assuming the external demand of 525 cattle and the required internal transfer
is 200 cattle, calculate the minimum transfer price per each cattle transferred to
the Abattoir Division.

All the other information remains as given in the scenario.

(8)
(ii) Based on the calculated price per (b)(i) above; briefly comment on Pradesh’s view
about his proposed minimum transfer price range. (2)
(c) Briefly discuss three (3) qualitative factors that the Feedlot Division would have
considered in deciding to buy all the cattle from the auction barn as opposed to buying
from private cattle farmers. (6)
(d) Briefly discuss if the Feedlot Division can feasibly replace the EOQ technique with the
Just In Time (JIT) purchasing technique for the purchases of the cattle feed. Limit your
discussion to qualitative factors only. (2)
(e) Calculate the budgeted net profit percentage for the month ending 31 May 2018 for
each of the Abattoir Division’s applicable product(s) and comment whether each of
these products will meet the budgeted net profit percentage of 10%. (14)
(f) Assuming that the plan to establish the Hides Division is brought to fruition, calculate
the proposed target mark-up amount per unit of the hide using the “target rate of return
on invested capital” approach. (6)

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3.23 IMVULA (PTY) LTD 50 Marks

Imvula (Pty) Ltd (“Imvula”) is a medium-sized company that uses rubber imported from China to
manufacture and sell three different types of women’s rain boots namely Glossy, Fashion and
Standard. The manufacturing process is highly automated with very limited human intervention. The
company operates from the Rosslyn area in Gauteng and distribute the rain boots to retailers within
South Africa. Imvula’s financial year-end is 31 December and it operates for all the twelve months of
the year. Imvula uses an absorption costing system and values all its inventory items using the first-
in-first-out (FIFO) method.

1. Budget information for the financial year ending 31 December 2018

Following four years of consecutive decline in the market share, Ms Raindeer (the Chief Executive
Officer) is concerned that the continuing decline in sales demand will have an impact of the company’s
ability to break-even. The company’s in-house market research division established that Imvula’s
customer base is increasingly becoming socially and environmentally conscious and are therefore
“voting with their feet” in protest to Imvula’s usage of rubber.

1.1. The following are extracts from the budget for the financial year ending 31 December 2018:

Details Glossy Fashion Standard

Selling price per unit R180 R250 R140
Gross profit per unit R90 R125 R70
Number of manufactured and sales units 48 000 24 000 72 000
Machine minutes per unit 30 min 45 min 15 min
Rubber used per unit (grams) 600g 700g 350g

1.2. A pair of rain boots is equal to one unit because rain boots can only be sold as a pair of boots.
1.3. The manufacturing and sales of the rain boots will occur evenly throughout the financial year.
1.4. Variable selling cost per unit is 2% of the selling price per unit.
1.5. The fixed manufacturing overheads are absorbed based on annual budgeted machine hours. The
related budgeted absorption rate was calculated at R40 per machine hour.
1.6. The fixed non-manufacturing costs were budgeted to be a total of R2 880 000 for the financial
year and the fixed selling costs to be a total of R1 000 000 for the financial year.
2. The following are extracts from the month of May 2018 actual results:
2.1. Finished goods production statement is a follows:
Production statement (units) Glossy Fashion Standard
Opening inventory 0. 1 000. 2 000.
Plus: Manufactured 4 400. 1 800. 5 100.
Less: Sales (3 500) (2 250) (7 000)
Closing Inventory 900. 550. 100.

2.2. The total fixed manufacturing overheads were R224 600.

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2.3. The actual machine hours were 2 000 hours for Glossy, 1 500 hours for Fashion and 1 400 hours
for Standard.
3. Allocation of the fixed manufacturing overheads using activity-based costing
Ms Raindeer is considering a change from allocating the fixed manufacturing overheads (FMO) using
the traditional costing system to using an activity-based costing (ABC) system. The actual FMO for May
2018 were further analysed, and the following relationships between the actual FMO and the related
activities were established:

Activities Notes Total May 2018

cost
R
Logo printing 3.1 12 000
Quality inspections of boots 3.2 30 600
Machine costs 3.3 182 000
Total actual fixed manufacturing overheads for May 2018 R 224 600

3.1. Imvula’s logo is printed as follows:

3.1.1. Glossy: on the sole of each rain boot.
3.1.2. Fashion: on the sole and on both: the inner-side and the outer-side of each rain boot.
3.1.3. Standard: on the sole and the outer-side of each rain boot.
3.2. 1,5% of the Glossy units; 2,0% of the Fashion units and 1,0% of the Standard units were quality
inspected.
3.3. The machine cost is driven by the number of production/manufacturing runs. Glossy’s production
run contains 220 units, Fashion’s production run contains 180 units and Standard’s production
run contains 255 units.

4. Imvula’s rubber purchase agreement with Pemasok International Plc

Pemasok International Plc (Pemasok) a China based company, is Imvula’s only supplier of the rubber
used in the manufacturing of the rain boots. Pemasok’s customers are required to pay for the rubber
purchases in US dollars ($) only. Pemasok sells the rubber in kilogram denominations only. The
budgeted rubber purchase price for July 2018 is R20 per kilogram and it is based on the July 2018
R:$ exchange rate. With the strengthening of the South African Rand (R) in June 2018, the R:$
exchange rate is budgeted to stabilise at R1 = $0,085 for the entire July 2018 month. Imvula’s treasury
department has limited their R:$ foreign exchange currency exposure for the purchasing of rubber to a
maximum of $8 398 per month. The outstanding balance relating to the rubber purchases during any
particular month is fully settled at the end of that particular month.

5. Manufacturing resources
Unless otherwise stated, Imvula’s manufacturing resources are expected to be sufficiently available
throughout the 2018 financial year.

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REQUIRED

(a) Ignoring the possibility of the limitation of any manufacturing resource(s).

Assist Ms Raindeer with the calculation of the budgeted number of units for each
product that Imvula must sell in order to break even for the 2018 financial year. (12)
(b) Calculate the following standard costing variances for the month of May 2018:
i. Sales quantity variance per product.
ii. Fixed manufacturing overheads volume efficiency variance for product Fashion (6)
only. (2)
(c) In responding to the findings of the market research, list and briefly discuss three (3)
social and environmental qualitative factors that Imvula should consider. (6)
(d) Calculate the total actual fixed manufacturing overheads allocated to each product for
the month of May 2018 using the activity-based costing (ABC) system. (9)
(e) Briefly motivate why Imvula would consider changing the basis of allocating the fixed
manufacturing overheads from the traditional costing system to the activity-based
costing (ABC) system. (2)
(f) Taking into account the purchase agreement between Imvula and Pemasok and points
1 and 2 below:
1. Assume the following contribution per unit for the month of July 2018:
Details Glossy Fashion Standard
Contribution per unit R108,00 R140,00 R87,50

2. Except for the assumed contribution per unit as per f(1) above, all the other budgeted
information remains as given in the scenario.

Calculate the optimal number of units that Imvula can manufacture and sell during the
month of July 2018.
For this question only round all your workings to 3 decimal places. (13)

3.24 BRIGHT & SHINE (PTY) LTD 50 Marks

Bright & Shine (Pty) Ltd (BnS) is classified by the Department of Trade and Industry as a level 5 Broad-
Based Black Economic Empowerment (BBBEE) medium-sized company. The company manufactures
and sells two types of liquid soaps; Geza-Zandla (GZ) liquid hand-soap and Manzi-Phanzi (MP) liquid
floor-cleaning soaps. The hand-soap is manufactured in the GZ Division (“GZD”) while the floor-
cleaning soaps are manufactured in the MP Division (“MPD”). Currently, the manufactured liquid soaps
are only sold to corporate clients and government departments. Each liquid soap type is sold in a 20-
litre closed-plastic container. The company’s annual normal manufacturing capacity is 210 000 units of
GZ’s and 180 000 units of MP’s in each financial year. All the losses that occur in the liquid soaps
manufacturing process are considered immaterial. BnS uses a standard costing system.

The company makes use of an absorption costing system. The company’s financial year starts at 01
August each year. BnS’s required and budget rate of return is 8,50% per annum. BnS uses Economic
Order Quantity (EOQ) technique to manage its direct raw material inventories.

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1. GZ DIVISION (GZD)
1.1. Standard variable manufacturing costs of a one (1) 20-litre hand-soap container are as follows:
Direct raw material:
▪ 15 000 millilitres of surfactants @ R18,50 per litre
▪ 3 000 millilitres of sodium @ R12,50 per litre
▪ 2 000 millilitres of colourant @ R6,50 per litre
Direct labour: 0,5 clock hours @ R12,00 per clock hour
Variable manufacturing overheads: R5,00 per unit
1 x 20-litre open-plastic container @ R5,00 per container
1 x Plastic container-lid @ R1,50 per lid
1.2. The division’s budgeted annual fixed manufacturing overheads for the 2018 financial year was
R1 255 800. The fixed manufacturing overheads are budgeted for and absorbed evenly
throughout the year at a predetermined absorption rate based on the annual budgeted
manufacturing capacity.

1.3. GZD’s standard gross profit on each 20-litre hand soap is 20% throughout each financial year.

1.4. The standard direct labour idle time is 12% per clock hour.

1.5. During each financial year, the manufacturing of the liquid soaps is budgeted to occur evenly
throughout the financial year. The annual manufacturing capacity for the 2018 financial year was
budgeted for at 92% of the annual normal manufacturing capacity.

1.6. GZD anticipated that 85% of the budgeted manufactured units during the 2018 financial year
will be sold during the same period. During each financial year, 20% of the annual budgeted
sales units are sold in the first quarter, 30% are sold in the second quarter, while the budgeted
sales units for quarter three (3) and quarter (4) four are always the same.

1.7. The division budgeted to incur R5,00 selling costs for each unit of hand-soap sold. A fifth of this
selling cost relates to fixed selling costs while the remainder relates to variable selling costs.

1.8. The division is renting a storage warehouse from StoreAge (Pty) Ltd to store all the surfactants
required for manufacturing. All the surfactants requirements are bought from one supplier only.
GZD buys surfactants in quantities of 120 litres in a barrel. It cost R5 500 to place one order.
The division expects to incur holding costs (excluding required rate of return) of R2,50 per
annum per each litre of surfactants.

1.9. Below is an extract of the 2018 budgeted statement of financial position as at 31 July:
Details Notes Current Comparative
budget budget
2018 2017
Office building at carrying value (a) R10 175 000 R12 950 000
Accrued rent expense for one month: (b) R27 000 ?
StoreAge (Pty) Ltd

Notes to the budgeted statement of financial position:

(a) The office building was bought on 01 August 2015 for R18 500 000. The purchase price
was financed by a 20-year mortgage bond at a fixed interest rate of 11,25% per annum. It
is the policy of BnS not to capitalise any finance costs. This office building is depreciated
monthly on the straight-line method.

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(b) The lease agreement with StoreAge (Pty) Ltd provides for the payment of the rent expense
monthly in arrears. This lease agreement also provides for a compulsory 6,50% escalation
clause of the rent expense on 01 January each year.
1.10. Except for all matters listed in 1.1 to 1.9 above, GZD’s other operating expenses were budgeted
at R2 700 000 for the 2018 financial year. These expenses are incurred evenly throughout the
financial year.
1.11. Below is an extract of the actual costs incurred for the financial year-ended 31 July 2018:
Item Cost
R
Direct raw material purchases:
▪ surfactants @ R18,00 per litre 47 314 800
▪ sodium @ R13,50 per litre 6 369 300
▪ colourant @ R6,90 per litre 1 860 240
Direct labour: 102 000 clock hours 1 275 000
Variable manufacturing overheads @ R5,50 per unit 910 250
Fixed manufacturing overheads 1 250 000
20-litre open-plastic containers: 169 800 units 933 900
Plastic container-lids: 169 800 units 251 304

1.12. The actual productive direct labour hours were 15% less than the hours clocked (see 1.11
above) for the financial year ended 31 July 2018.
1.13. The manufacturing statement for the financial year-ended 31 July 2018 reflects the following
actual results:
▪ All units manufactured were sold.
▪ No work-in-progress (WIP).
▪ Open-plastic containers and container-lids were issued as per the manufacturing
requirements.
▪ Direct raw materials were issued as follows:
- 2 612 000 litres of surfactants
- 469 500 litres of sodium
- 265 000 litres of colourant

1.14. The actual selling price of a 20-litre hand-soap was R465 per unit throughout the 2018 financial
year.
1.15. The division had no actual and budgeted opening inventories for the 2018 financial year.

2. MP DIVISION (MPD)

The MP division manufactures three types of liquid floor cleaning-soaps: Floor-starter (“FST”), Floor-
sparkle (“FSP”) and Floor-shiner (“FSR”). As part of the standard and budget setting process, the
capacity of these product lines has to be considered. MPD’s cost of capital is 8,15% per annum. The
division maintains a standard gross profit percentage of 25,00% throughout each financial year. The
division is headed by Ms. Cleaners, a Chemical Engineer. The management accountant made the
following information for the financial year ending 31 July 2018 available:

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2.1. An extract of the standard costs per product reflect the following:

FST FSP FSR

R R R
Direct raw material 180,00 220,00 280,00
Direct labour 45,00 52,50 50,00
Variable manufacturing overheads 20,00 25,00 23,00
Selling and administration cost 25,00 25,00 25,00

FST FSP FSR

Monthly production and sales demand in units 4 200 4 900 5 600

2.2. The division’s budgeted annual fixed manufacturing overheads are R1 800 000 and are
absorbed evenly throughout the year at a predetermined absorption rate based on the annual
normal manufacturing capacity.

2.3. The total monthly selling and administration costs (see 2.1 above) are budgeted at R367 500,
60% of these costs are fixed in nature.

2.4. On 01 August 2017, the MPD entered into a supply agreement with the University of Polokwane
(UoP). In terms of the supply agreement, MPD will supply their full budgeted annual production
of the FST (50 400 units) floor cleaning-soaps to the UoP. FSTs will be supplied to the university
evenly throughout the 2018 financial year. The agreement fully binds MPD to supply FST as
agreed. It is the intention of MPD to fully honour the supply agreement with the UoP during the
2018 financial year.

2.5. The manufacturing and the selling of units are expected to occur evenly and in the same
proportion throughout the financial year.

2.6. The floor cleaning-soaps manufacturing process includes two separate automated processes,
the mixing process and the finishing process. Each of these processes is performed by
dedicated machinery, a mixer and a finisher. The machine hours capacity and the related
machine time for each unit of 20-litre floor cleaning-soap are as follows:

FST FSP FSR Total monthly

per unit per unit per unit capacity
Mixing time in hours 1⁄ 1⁄ 1⁄ 3 450
4 4 2
Finishing time in hours 3⁄20 7⁄20 10⁄20 5 150

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REQUIRED

For each question below, please remember to:

• clearly show all your calculations in detail;
• where applicable, indicate irrelevant amounts/adjustments with a R0 (nil-value);
• round all your workings to two decimals, except where otherwise stated;
• ignore all taxation implications.
(a) Draft GZD’s budgeted statement of profit and loss (income statement) for the six (6)
months-ended 31 January 2018.
Ignore the implications of the EOQ on the statement of profit and loss. (12)

(b) With regard to the budgeted purchases and the storing of the surfactants manufacturing
requirements for the 2018 financial year.
(i) Calculate the number of barrel(s) that the surfactants supplier will use to package
and fully deliver one (1) order of the direct raw material surfactants required by
GZD. (4)

(ii) Calculate the budgeted number of orders to be placed. (2)

(c) Briefly discuss three (3) purposes of standard costing. (3)

(d) For the year ended 31 July 2018, calculate the following variances for the GZD:
(i) Sales volume variance. (2)
(ii) Direct raw material purchase price variance (per material type and in total). (3)
(iii) Direct raw material yield variance (per material type and in total). (4)
(iv) Direct labour idle time variance. (3)
(e) Calculate the budgeted annual optimum manufacturing mix for the MPD for the financial
year ending 31 July 2018. (9)
(f) Calculate the budgeted margin of safety units for FSP only for the 2018 financial year. (8)

3.25 LOOK-LIKE-LEATHER (PTY) LTD 60 Marks

Look-Like-Leather HandBags (Pty) Limited (“3XL”) is company that manufactures and sells leather
handbags from the Spartan industrial area of Johannesburg. The company’s client base is
predominately ladies, but has in recent years, also captured the metrosexual market. 3XL reports on
an absorption costing system and values all its inventories using the first-in-first-out (FIFO) method.
The company’s financial year end is 31 July, and it operates for 260 days during each financial year.
3XL’s maximum manufacturing capacity is based on a maximum of 80 direct labourers. Currently, 3XL
manufactures and sells two types of leather handbags, LadyBags (“LB”) and ManBags (“MB”). The
same type of raw leather (direct raw material) is used for both products types and this raw leather
is purchased in quantities of kilograms (kg) only.

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1. MANAGEMENT ACCOUNTS EXTRACT FOR THE 2020 FINANCIAL YEAR
Details Budget Actual
Sales: LB R74 250 000 R52 800 000
Sales: MB R36 750 000 R24 750 000
Total direct labour clock hours ? 108 240
Direct labour clock hours per day per labourer 8 8
Direct labour work hours per day per labourer ? 6,8
Direct labour rate per clock hour R210 R220
Total raw leather purchases R45 600 000 R43 000 000
Total raw leather issues to manufacturing: LB 8 550 kg 6 300 kg
Total raw leather issues to manufacturing: MB 2 850 kg 1 950 kg
Opening inventory: raw leather 0 kg 0 kg
Closing inventory: raw leather 0 kg 350 kg
Variable manufacturing overheads rate per machine hour R90 R95
Total fixed manufacturing overheads R6 817 500 R4 900 000
Variable selling costs per handbag R20 R20

Sales and manufacturing

The budgeted units to be manufactured were determined based on the budgeted raw leather issues to
manufacturing. There are no opening and closing finished goods or work-in-progress. The standard raw
leather manufacturing requirements are 380 grams per unit of LB and 190 grams per unit of MB. To
attract customers by projecting a deceiving shining look that is similar to that of a top quality genuine-
leather handbag, each handbag is polished extensively at cost of R100 per LB unit and R80 per MB
unit. The budgeted polishing costs per unit and the unit actual polishing costs were equal. The actual
sales units equaled the actual manufacturing units for both products; and these were 16 500 LBs and
9 900 MBs.

Although a leather cutting machine is used, the manufacturing process is primarily labour-intensive.
Both the budget and the actual headcount of the direct labourers for the entire 2020 financial year was
75, and these labourers are exclusively employed to hand-sew the handbags. Although they can only
work on one handbag at a time, the direct labourers are skilled to work on either handbag type. The
standard direct labour idle time percentage is 10% while the standard direct labour clock time is 252
minutes for LB and 228 minutes for MB. The actual direct labour clock time was 264 minutes per unit
of LB and 216 minutes per unit of MB.

Direct raw material

The total budgeted raw leather purchases and the total actual raw leather purchases were 11 400 kg
and 8 600 kg, respectively. 6 500 kg of the total actual raw leather purchases were allocated to LB
while the remaining 2 100 kg were allocated to MB. The actual raw leather manufacturing requirements
per actual unit manufactured were the same as the related standard raw leather manufacturing
requirements.

Manufacturing overheads

Variable manufacturing overheads relate to the leather cutting machine. The standard/budgeted and
the actual leather cutting machine time is 25% of the related direct labour time per handbag. The fixed
manufacturing overheads are allocated to products on a predetermined rate based on the budgeted
direct labour clock hours and the resulting under-/over-allocations are treated as period costs.
R1 600 000 of the total actual fixed manufacturing overheads relate to MB.

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Additional notes relating to the management accounts extract above:

1.1. During the 2020 financial year’s budgeting period, Monopoly Leather (see 1.2 below) and 3XL,
formally agreed on the purchase price of the raw leather as reflected in the raw leather purchases
budget.

1.2. 3XL purchases some of its raw leather requirements from Monopoly Leather (“ML”). ML is not a
registered company and operates from a building that is known to be highjacked. During the 2020
financial year, ML ferociously renegaded on the formal agreement as per 1.1 above. As a result,
3XL had no choice but to purchase the company’s required raw leather at an actual price as
reflected in the management accounts extract as per point 1 above. All efforts by 3XL to negotiate
possible discounts on the raw leather purchases were met with fierce reluctance and arrogance.
Not surprisingly, this was not the first time that ML broke an arrangement.

2. BUDGET INFORMATION FOR THE 2021 FINANCIAL YEAR

2.1. Retrenchment of direct labourers

Post the completion of the 2021 budgeting process, an intense and emotional review of the 2020
financial year’s cost structure ensued. Thereafter, 3XL resolved to retrench 60% of its direct labour
headcount as at 31 July 2020. These retrenchments will be effective from 1 August 2020.

Additional information:

(i) The budgeted annual manufacturing units will equal the budgeted annual sales units for each
product type; and these will be 11 000 units and 7 500 units for LB and MB, respectively.

(ii) The budgeted direct labour clock time is to remain at 252 minutes per unit of LB and 228 minutes
per unit of MB while the standard direct labour idle time percentage will reduce from 10% to 5%. No
manufacturing occurs during idle time. The standard direct labour clock hour rate is budgeted for at
R228 per hour while the direct labour clock time per day is set to remain at 8 hours per labourer.

(iii) The standard raw leather requirements will remain at 380 grams per unit of LB and 190 grams per
unit of MB. Besides increasing the raw leather price for the 2021 financial year, ML will also
intentionally limit its supply of the raw leather to 3XL to 6 000 kg for the entire 2021 financial year,
in solidarity with the direct labourers affected by the retrenchments.

(iv) Despite changes in some of the costs, the manufacturing process will remain as that of the 2020
financial year.

(v) The total annual budgeted fixed manufacturing overheads will be R3 436 200. Once determined
during the budgeting process, the predetermined fixed manufacturing overheads allocation rate is
not subsequently revised.

(vi) No opening and closing inventory of any product type is budgeted for.

2.2. Possible acquisition of Monopoly Leather (“ML”)

In retaliation to what it deems to be unethical business practices aimed at stalling its business success,
3XL is considering a hostile take-over of ML effective 1 August 2020. Post the take-over, 3XL will
register and operate a new company, Handy Leather-Bags (Pty) Ltd (“HLB”). Through the
establishment of a divisionalised organisational structure, HLB will consist of two operating divisions;
the HandBags Division, (the current 3XL), the Leather Division (the current ML) and also the Head

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Office. HLB’s year-end will be 31 July. The Head Office will be responsible for all the working capital
management functions of the entire structure. Regarding this proposed acquisition, 3XL undertook a
take-over feasibility study on ML and subsequently gathered the following information about ML’s
operations and the proposed new company (HLB).

(a) With the envisaged take-over, the retrenchments as per 2.1 above will no longer take place while
the raw leather requirements will remain as per 2.1 above.
(b) ML currently sells the raw leather on cash basis only, with its business motto: “Cash is KING, no
KING no business”. To manage its large cash reserves at its premises, ML bought and smuggled
into the country, several high-speed cash counting machines. Some of ML’s large cash reserves
are allegedly stored at a heavily-guarded and unknown underground bunker. In the instance that
ML’s take-over is successful, 3XL will not acquire any of ML’s cash reserves.
(c) At a high level, ML’s manufacturing process involves the purchase and the importation of
unprepared leather (“UL”) from Tanzania. The unprepared leather is subsequently processed
through a relatively complex manufacturing process to yield the raw leather for sale.
(d) Table A – HLB’s budgeted management accounts for the 2021 financial year are as follows:
Details Head HandBags Leather
Office Division Division
R million R million R million
Sales 0 72,8 39
Variable selling and distribution costs n/a n/a 0,468
Fixed selling and distribution costs n/a n/a 0,424
Raw leather purchases 0 33,7 n/a
Other variable manufacturing costs n/a 20,1 n/a
Purchase costs – Unprepared leather (UL) n/a n/a 18,2
Importation costs – UL n/a n/a 2,6
Variable processing overheads – UL n/a n/a 7,8
Fixed manufacturing overheads n/a 3,4362 5,2
Head office allocated costs n/a 9 6
Other non-manufacturing operating expenses 35 4,5 2,8
Interest on bank overdraft 0,7 0,1 0
Interest on long-term loans 1,8 1,58 0
Property, plant and equipment 15 65 20
Positive bank balance 5 0 0
Trade receivables 30 38 0
Cash at the company premises 0 0 250
Trade payables 45 20,5 0
Bank overdraft 7,85 1,15 0
Vosho Bank: Long-term loan (long-term portion) 16,4 14 0
Vosho Bank: Long-term loan (short-term portion) 4,1 3,5 0

(e) The Leather Division’s annual maximum operating capacity for processing unprepared leather into
raw leather is expected to be 8 000 kg in the 2021 and the 2022 financial years. The Leather
Division will supply the raw leather to HandBags Division and other external customers. The raw
leather demand for other external customers for the 2021 financial year is 3 500 kg. No losses
occur in the manufacturing process of the raw leather.
(f) The Leather Division’s budget (see Table A above) was prepared on the premise of the Leather
Division operating at 65% of its maximum operating capacity. Neither of the two divisions expect
to hold inventory of any type at the start or end of the financial period.

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(g) The Leather Division’s trading information and the related selling and distribution costs as per Table
A above are based on the premise of 3XL still being one of ML’s customers. No selling and
distribution costs will be incurred on HLB’s intragroup sales.

(h) Notwithstanding the availability of the raw leather from other suppliers at an average forecasted
price of R6 000 per kilogram during the 2021 financial year, the raw leather requirements of the
HandBags Division for the 2021 financial year will be exclusively procured from the Leather
Division.

(i) In terms of performance management, the following performance bonus incentive structure for the
HLB group is applicable for the 2021 financial year:
APPLICABLE PERFORMANCE MEASURE: RESIDUAL INCOME
Residual income rand values Performance Performance bonus
parameters rating amount
≤ R2 000 000 D R0
> R2 000 000 but ≤ R4 000 000 C R500 000 + 5,0% of division’s total sales
> R4 000 000 but ≤ R6 000 000 B R500 000 + 6,5% of division’s total sales
> R6 000 000 A R500 000 + 7,5% of division’s total sales

HLB’s performance bonuses will be determined based on residual income as one of the
performance measures. For example, a residual income of R1,2 million will mean a performance
rating of “D” and R0 (nil) performance bonus. Performance bonuses are only paid to the
management teams of the divisions. The performance bonuses are only paid by the Head Office
into the personal bank accounts of the management team members. Despite the above bonus
incentive structure, the payment of the performance bonus is solely at the discretion of the Head
Office.

(j) HLB’s target capital structure is 60% Equity and 40% Debt. The market cost of equity is 12,50%
and the market related cost of debt of 6,56%.

(k) Vosho Bank’s only long-term loan covenant for each division of HLB is the return on investment of
13,50% per annum.

(l) Unless otherwise stated, each division will be responsible for all its operational, capital investments
and long-term financing decisions.

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REQUIRED
• Clearly show all your calculations in detail;
• Where necessary, indicate irrelevant amounts/adjustments with a R0 (nil-value);
• Round all your workings to two decimals, except where otherwise stated; and
• Unless otherwise stated, ignore all taxation implications
(a) Calculate the budgeted contribution amount per unit of product LB only for the 2020
financial year. (7)
(b) Assuming that the standard costing system is in use, calculate the following variances
for the 2020 financial year:
(i) Direct labour idle time variance in total. (3)
(ii) Sales mix variance for both products and in total. (4)
(iii) Raw leather yield variance for both products and in total. (3)
(c) Assuming a budgeted annual gross profit of R3 800 000 for product MB only, prepare
the actual statement of profit or loss (income statement) for product MB only for the
2020 financial year, and advise whether product MB has actually achieved the budgeted
gross profit for the 2020 financial year. (8)
(d) Assume the following regarding 3XL’s 2021 financial year for question 2(d) only:
Details LB MB
Budgeted selling price per unit R4 500 R3 100
Budgeted variable selling costs per unit R22 R22
Budgeted constant gross profit margin 15% 20%
Illustrate the envisaged impact of the retrenchments by calculating 3XL’s budgeted
optimal manufacturing mix in units for the 2021 financial year. (8)
(e) Assume that the acquisition of ML and the subsequent establishment of HLB will occur,
(i) Draft a memorandum to 3XL’s Chief Financial Officer wherein you identify and
discuss ethical and business-related concerns that 3XL would have considered in
the feasibility study to acquire ML. (8)
(ii) Calculate the budgeted minimum transfer price per kilogram of raw leather at which
the Leather Division will be willing to accept for the transfer of the required raw
leather by the HandBags Division during the 2021 financial year. (8)
(iii) Based on the HandBags Division’s 2021 budgeted financial information, calculate
and advise if the management team of the HandBags Division is forecasted to
receive a performance bonus during the 2021 financial year.
▪ Show all your calculations to support your advice. (9)
(iv) Comment on whether the HandBags Division is forecasted to honour Vosho Bank’s
long-term loan covenant for the 2021 financial year.
▪ Support your commentary with all the relevant and necessary calculations. (2)

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3.26 AQUA FIRST (PTY) LTD 50 Marks

AquaFirst (Pty) Ltd (Aqua) is a mineral water bottling and selling company. Its financial year end is
30 April each year. Aqua’s water bottling process is undertaken in two independent divisions; Division
Valley (DivVal) and Division Mountain (DivMou). DivVal is responsible for the manufacturing of all the
empty glass bottles while DivMou is responsible for the harvesting, preparing, distilling and the bottling
of the prepared mineral water. Notwithstanding the selling of the empty glass bottles from DivVal to
DivMou, Aqua does not currently have a transfer pricing system in place. The company uses first-in-
first-out (FIFO) method to value all its inventory types. Its cost of capital and the target return on
investment (ROI) is 11,50% and 12,50% per annum respectively. Each divisional manager is entitled
to receive a performance bonus provided their division meet or exceed the target ROI.

1. DIVISION VALLEY

DivVal’s maximum normal manufacturing capacity is 1 400 000 empty 500 ml glass bottles per annum.
The division’s market segmentation of [external sales: internal sales] is [35%:65%] for the 2018
financial year. The manufacturing of the empty 500 ml glass bottles occurs in proportion similar to the
division’s market segmentation throughout each financial year. The division’s profit mark-up on all
external sales is 25% on all-inclusive manufacturing costs. There is no profit mark-up on all internal
sales.

1.1. Information relating to the 2018 financial year budget:

1.1.1. The division is expected to manufacture and sell 85% of its normal manufacturing capacity.
1.1.2. The standard all-inclusive manufacturing costs of one (1) empty 500 ml glass bottle is:
Item Costs
Raw glass 600 grams @ R3,00 per kg
Bottle cap 1 steel cap @ R0,20 per cap
Direct labour 4,5 minutes @ R6,00 per direct
labour hour
Variable manufacturing overheads R12,00 per direct labour hour
Fixed manufacturing overheads (absorption rate) R0,45 per unit

1.1.3. Variable selling cost is budgeted at R0,05 per each unit of 500 ml empty glass bottle and it is
only incurred for external sales. The total budgeted fixed selling cost is expected to be R105
000 for the financial year.

1.1.4. The fixed manufacturing overheads are absorbed based on the budgeted operating capacity.

1.2. Below is an extract of the actual management accounts for the 2018 financial year:
1.2.1. Income statement extract:
Details Notes External Internal Total
Sales – R Sales – R R
Sales (a) ? ? 4 587 075
Cost of sales (a) ? ? ?
Gross profit (a) ? ? ?
Variable and fixed selling costs (123 310)

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Details Notes External Internal Total
Sales – R Sales – R R
Interest income on fixed 68 500.
deposit at iMali Bank
Other operating expenses (b) (350 000)

(a) Throughout the financial year the actual all-inclusive manufacturing costs per unit were
equivalent to the standard all-inclusive manufacturing costs. External sales were made at
an actual profit mark-up of 25% on all-inclusive manufacturing costs. The following units of
empty 500 ml glass bottles were actually manufactured and sold for the 2018 financial year:
(i) External units were 388 500.
(ii) Internal units were 721 500.

(b) Included in the actual other operating expenses of R350 000 are the following:
(i) Allocated head office expenses of R205 000.
(ii) R4 500 interest expense on the bank overdraft at iMali Bank, each division is solely
responsible for the management of its cash and cash equivalents.
(iii) R85 000 municipal rates and taxes for the head office’s administration building.

1.2.2. The division’s actual controllable investments as at 30 April 2018 was R2 050 000.

2. DIVISION MOUNTAIN

DivMou’s mineral water’s bottling process involves; (i) harvesting the natural fresh water from the
mountains; (ii) preparing and distilling the harvested water; (iii) adding the vitamins and/or flavouring
sugar to the prepared water; and lastly (iv) bottling the water into 500 ml glass bottles for sale. Adding
the vitamins and flavouring sugars does not increase the volume of the mineral water. The division
bottles and sells two types of mineral water: still mineral water (STW) and flavoured sparkling mineral
water (FSW). The same type of glass bottle is used for both types of mineral water and are only
differentiated by the bottle-caps. A blue bottle-cap is used for STW and a red bottle-cap for FSW.
DivMou purchases all its empty bottles (including the related colour-coded bottled caps)
requirements exclusively from DivVal.

A standard sales mix of 6:2 for STW:FSW is maintained throughout each financial year. At any point in
time, all of DivMou’s finished goods inventory is held in the same proportion as the standard sales mix.
No other types of inventories is held by the division.

The following information relates to the 2018 financial year budget:

2.1. The budgeted unit selling price per each 500 ml bottled water is R6,80 and R8,10 for STW and
FSW respectively.
2.2. The division is expected to sell a combined total of 393 750 litres of mineral water during the 2018
financial year.
2.3. Opening inventory is 75 000 units of 500 ml bottled mineral water. The 2017 financial year’s all-
inclusive actual mineral water manufacturing costs was R5,30 and R6,10 for STW and FSW
respectively.
2.4. DivMou is expected to operate at its maximum water-bottling capacity. DivVal’s budgeted internal
sales for the 2018 financial year represents DivMou’s maximum water-bottling capacity.

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2.5. All the empty bottles to be purchased during the 2018 financial year are expected to be fully
bottled with the mineral water in the same proportion as the standard sales mix.
2.6. Empty bottles are currently purchased from DivVal’s at a price equivalent to DivVal’s all-inclusive
manufacturing costs, that is, no profit is made on all internal transfers.
2.7. The budgeted variable manufacturing costs also includes the following:

Bottled Bottled
STW FSW
500 ml 500 ml
Prepared water @ R1,50 per litre ? ?
Vitamins per 500 ml bottle R0,25 R0,75
Flavouring sugars R0,00 R0,25
Bottle branding label R0,15 R0,15

2.8. The division’s total annual fixed manufacturing overheads (FMO) are budgeted for at R712 350.
The allocation of these fixed manufacturing overheads is based on the following relationships
between these overheads and the related activities that drive these overheads:

Cost drivers
Activity Cost
Bottled STW Bottled FSW
Water quality testing R163 350 Every 125th bottle is tested Every 160th bottle is tested
Water pump set-up R225 000 A total of 30 set ups A total of 45 set ups
Affixing branding label R324 000 ¼ minute per bottle ¼ minute per bottle
Total R712 350

2.9. The total annual fixed selling costs are budgeted at R150 000, 75% of which relates to STW. The
variable selling costs are expected to be R0,20 per bottle.
2.10. Budgeted annual other operating expenses of R280 000 are allocated equally between STW and
FSW.
AQUA’S 2017 EXTERNAL AUDIT MATTERS

Aqua’s external auditors raised the following “going concern assumption” matter with regards to the
2017 financial year end audit:
“Without qualifying our audit opinion, we bring your attention to the following matters that could directly
impact Aqua’s ability to continue operating as a going concern. The recent changes in the global
weather patterns, has led to widespread industry criticism and a call for an industry overhaul by
prominent environmentalist. Of serious concern is Aqua’s CO2 emission which is considered to be
amongst the highest in South Africa, mainly because of; (i) its bottle-manufacturing plant’s source of
energy is coal, (ii) its landfill site is the largest amongst its competitors and (iii) inadequate bottle-
recycling strategy. Lastly, we note with serious concern, the possibility of the introduction of sugar-tax
in South Africa considering the fact that one of the ingredients in Aqua’s flavoured sparkling mineral
water is flavouring sugar”

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REQUIRED

(a) Identify the costing system used by Aqua for its internal reporting purposes and also for
assigning costs to its products. Briefly motivate your answer by making reference to the
relevant information from the scenario. (2)
(b) Calculate DivVal’s total budgeted number of internal sales units to DivMou for the 2018
financial year. (2)
(c) Assume that Aqua decides to introduce a transfer pricing system.
Calculate and recommend a budgeted minimum transfer price per one (1) 500 ml
empty bottle that the DivVal will be willing to charge DivMou for the 2018 financial year.
Provide one (1) reason to motivate your recommended minimum transfer price. (6)
(d) Calculate DivVal’s total budgeted fixed costs that would be used to calculate the
division’s budgeted break-even point for the 2018 financial year. (3)
(e) (i) Calculate DivVal’s actual residual income for the 2018 financial year. (6)
(ii) Based on the 2018 actual results, determine and comment if Leahandra Hendricks
(DivVal’s divisional manager) will receive a bonus or not.
The Total column is required. (3)
(f) Prepare DivMou’s production (manufacturing) budget in units for the 2018 financial year. (4)
(g) The below two assumptions must only be used for answering question (g)i. and (g)ii.
1. The assumed production (manufacturing) budget is as follows:
Production (manufacturing) budget STW units FSW units
Sales 555 300 185 100
Plus: Closing inventory 40 950 13 650
Units required 596 250 198 750
Less: Opening inventory (56 250) (18 750)
Units manufactured 540 000 180 000

2. All other DivMou’s 2018 budgeted information will remain as given in the scenario.
(i) Calculate the budgeted fixed manufacturing overheads per unit that DivMou will
(6)
allocate to STW and FSW for the 2018 financial year.
(ii) Prepare the 2018 budgeted statement of profit and loss (income statement) for
product STW only based on the absorption costing system. (10)
(h) Identify and briefly discuss four (4) qualitative factors from Aqua’s operations that could
possibly have a negative impact on the natural environment and on Aqua’s customers.
Make use of the relevant information from the scenario. (8)

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3.27 ZAMBANI-CHIPS (PTY) LTD 50 Marks

ZambaniChips (Pty) Ltd (Zambaa) is a member company of a diversified group of companies with a
centralised head office responsible for overseeing the group’s entire operations. Each member
company within the group has an independent management team of executive directors. Zambaa
manufactures and distributes two brands of potato-chips, the Barbecue potato chips (BBQ) and the
Wavy-lightly-salted potato chips (WLS). Zambaa makes use of an absorption costing system and
all its inventory items are valued using the first-in-first-out (FIFO) method.

The manufacturing takes place at its highly automated plant in the Pretoria Industrial area, which is just
outside the Pretoria CBD. The plant has a maximum annual manufacturing capacity of 22 million
packets of BBQ and 6 million packets of WLS. The potato chips manufacturing process starts at the
receiving-bay where received raw potatoes are examined for quality purposes. Raw-potatoes are then
peeled, sliced, colour-treated and fried into potato-chips. The fried potato-chips are then sorted into two
(2) different pots where the spices, salts and other ingredients are added. Each input of 1kg raw potato
yield 1kg of fried potato-chips. The fried potato-chips are finally sealed into individual packets of 125g
per packet.

The following extracts are from the company’s actual results for the year ended 31 March 2018:
Details BBQ WLS Total
R R R
Sales 280 000 000 65 000 000 345 000 000
Raw potatoes purchases 80 000 000 20 000 000 100 000 000
Direct labour (excluding directors’
40 000 000 10 000 000 50 000 000
remuneration)
Spices, salt and other ingredients 16 000 000 3 500 000 19 500 000
Packaging costs 2 000 000 500 000 2 500 000
Variable manufacturing overheads 4 000 000 1 000 000 5 000 000
Variable distribution costs 3 600 000 900 000 4 500 000
Fixed manufacturing overheads 16 000 000 4 000 000 20 000 000
Directors remuneration ? ? ?
Allocated head office expenses 3 000 000
Finance costs 1 500 000
Property, plant and equipment 500 000 000
Intangible asset – Trademarks 39 000 000
Trade receivables 36 000 000
Long-term borrowings 105 000 000
Trade payables 34 500 000

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Additional notes relating to the extract of the actual results:
Manufacturing and sales

In line with current demand, Zambaa manufactured and sold 20 million packets of BBQ and 5 million
packets of WLS.

Director’s remuneration

For the past 5 years including the current financial year, the company executive directors headcount
has remained at eight (8). The executive directors earn the same total annual remuneration. Seven (7)
of the eight (8) directors are administrative executives and the other director is Mr. Zungu, the
Production director.

Other additional information

Unless otherwise stated, manufacturing costs were allocated to products in proportion to the actual
units manufactured.

PERFORMANCE MANAGEMENT SYSTEM

One of the group’s strategic objectives is to attract and retain suitable and competent executive
directors. To achieve this, the remuneration committee designed and implemented, as part of the
group’s remuneration policy, a management incentive scheme. The terms of the scheme are such that
the executive directors are entitled to a performance bonus in line with their performance rating. The
executive directors’ performance ratings are based on the actual achieved return on investment (ROI)
only. The payment of the bonuses is the sole responsibility of the head office. The bonuses are paid in
the year following the year in which the bonuses were actually earned, for example, 2017 bonuses are
only paid in 2018. The bonus calculation is as follows:

Actual ROI Performance Bonus

rating
Less than 10% C 0% of annual directors’ remuneration
Between 10,01% up to 20% B 50% of annual directors’ remuneration
Above 20% A 80% of annual directors’ remuneration

In line with the 2017’s performance rating of “B”, the head office paid the 2017 year-end bonuses by
processing the below journal entry in the 2018 financial year:

Date Account Debit Credit

30 September 2017 Accrued bonuses R6 000 000
30 September 2017 Bank R6 000 000
Payment of the 2017 financial year bonuses to the 8 (eight) executive directors

The executive directors’ 2018 actual annual remuneration was 9,50% more than their 2017 financial
year’s actual annual remuneration.
Allocated head office expenses are allocated arbitrarily to the group companies.
As part of the centralised treasury function, the head office is also responsible for the management of
the group’s entire working capital.

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Intangible assets - Trademarks are the brand names registered with the Companies and Intellectual
Property Commission (CIPC) under ZambaniChips (Pty) Ltd.
Unless specifically mentioned, all other procurement, operational and funding decisions of any member
company within the group are solely made by the executive directors of that respective member
company.
BARBECUE POTATO CHIPS LOST BID
Zambaa recently lost a bid for a large new contract from Steinhopp for the supply of BBQ. Zambaa’s
submitted bid price was reportedly R0,12 per kg higher than that of the winning bidder. The executive
directors were very surprised by this loss as Zambaa only added 6% on the related total manufacturing
costs to arrive at a profit.

PROPOSED COST ALLOCATION SYSTEM

After losing the Steinhopp bid, the company’s executive committee (EXCO) agreed on the view that the
current costing allocation system might have significantly contributed to the overpricing of Zambaa’s
bid. The Chief Operating Officer immediately requested the Chief Financial Officer (CFO) to review the
current cost allocation system. The CFO explored several ways of refining the current cost allocation
system, including the allocation of the fixed manufacturing overheads. An initial analysis of the actual
fixed manufacturing overheads established the following relationships between the overheads and the
activities:

Activity area Notes Total cost

R
Potatoes ordering i 5 000 000
Quality inspections ii 7 000 000
Peeling and slicing iii 8 000 000
Total R20 000 000

Notes:

i. Total ordering costs are allocated to products BBQ and WLS in a ratio of 5:3 respectively.

ii. Quality inspection costs are allocated to the products based on the actual manufacturing output.

iii. The peeling and slicing is performed in production runs. Each production run consist of a 1 000
kg’s of raw potatoes.
EXTRACT OF THE MINUTES OF ZAMBAA’s EXECUTIVE COMMITTEE (EXCO) MEETING
Date: 15 February 2018

Attendance register:

Present: Apologies:
Mrs. McKenzie – Group’s Chief Executive officer Mr. Zungu – Zambaa’s Production director
Mr. Smith – Group’s Chief Financial Officer Mrs. Molefe – Zambaa’s Financial director
Present: Apologies:
Mr. Molefe – Zambaa’s Chief Operating Officer Ms. Aboo – Zambaa’s Sales and
Distribution director

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Mr. Khumalo – Zambaa’s Marketing director Mrs. Ledwaba – Zambaa’s Corporate
Affairs director
Ms. Snyman – Zambaa’s Strategic director
Mr. Van Zyl – Zambaa’s Human resource director
Mr. Mokoena (stand-in at meeting for the Production
director)

The minutes of the previous EXCO held on 25 October 2017 were approved with no objections.

In accordance with the resolution passed on the 25 October 2017 to launch a new potato chips brand
the following items were presented to the EXCO:

1. Summary of key points presented by Mr. Khumalo:

(i) The proposed name for the new potato chips is Vita-Limon (V-L).
(ii) V-L will have reduced salt and spices, with the aim of penetrating the highly lucrative health
conscious market.
(iii) The monthly demand/volume of V-L is expected to be 12 500 packets of 125g each.
(iv) Marketing campaign to support V-L: four (4) billboards at a cost of R300 000 per billboard.

2. Summary of key points presented by Mr. Mokoena:

(i) The capital invested to support V-L: R13,2 million new plant and equipment to be used exclusively
for V-L.
(ii) To meet the expected annual demand of V-L’s, the manufacturing and the related sales will occur
evenly throughout the 2018 financial year.
3. Summary of key points presented by Ms. Snyman:

Although the target rate of return (RoR) for V-L is still uncertain, both the Strategic department and
the office of the CFO agree that the below table fairly represent the envisaged RoR for V-L:

Target RoR per annum Probability

11,50% 10%
9% 30%
10% 25%
8% 35%

4. Summary of key points presented by Mrs. McKenzie:

(i) The meeting approved the “target rate of return on invested capital” approach as the appropriate
long-term pricing policy for V-L.
(ii) The meeting is satisfied with Mrs. Molefe view that the cost to manufacture one (1) unit of V-L is
R8,49.
(iii) V-L will launch and start selling from 01 April 2018.
(iv) Mrs. Molefe is therefore mandated to utilise all the relevant available information to calculate the
target price for V-L.

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REQUIRED
For each question below please remember to:
• clearly show all your calculations in detail;
• where necessary, indicate irrelevant amounts/adjustments with a R0 (nil-value);
• round all your workings to two decimals, except where otherwise stated;
• ignore all taxation implications.
(a) Critically analyse the structure of Zambaa’s management incentive scheme. Limit your
analysis to qualitative factors only. (6)
(b) By reference to the 31 March 2018 actual results, determine whether the executive
directors of Zambaa are entitled to receive bonuses. (10)
(c) The executive directors have opposing views about the treatment of Intangible assets –
Trademarks in the calculation of their bonuses.

From a performance measurement perspective, briefly discuss one (1) reason

supporting the inclusion of Intangible assets – Trademarks in the calculation of the
bonuses and also discuss one (1) reason supporting its exclusion. (2)
(d) Based on the 31 March 2018 actual results and the current cost allocation system,
calculate what the winning bidder’s price per kg of BBQ was for the Steinhopp bid. (10)
(e) Identity and briefly discuss seven (7) qualitative factors that Zambaa would have
considered in relation to submitting the bid to Steinhopp. (14)
(f) Assume that the proposed cost allocation system is adopted, allocate the total fixed
manufacturing overheads to BBQ and WLS for the financial year ended 31 March 2018. (4)
(g) Calculate the target price of V-L. (4)

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3.28 S’KHOTHANE (PTY) LTD 50 Marks

S’khothane (Pty) Ltd (S’khothane) is a boutique shoemaking company owned by two prominent
“tenderpreneurs”. The company’s year-end is 31 December and it operates for 220 days during each
financial year. It uses the variable costing system and all its inventory items are valued using the first-
in-first-out (FIFO) method. S’khothane specialises in the manufacturing and selling of adult-size,
limited edition and high-end crocodile leather shoes (Krocvellars). These shoes are made from the
leather of an endangered crocodiles of the Nile River. Krocvellars are only sold as a pair in a shoebox.
It therefore follows: a pair of shoes packaged in a shoebox is equivalent to one unit. Krocvellar, a
constant trending name on social media, is a local based brand name of choice amongst the South
African socialites and the high-ranking political figures.

1. The following information relates to both the 2018 and 2019 budgets:

1.1. Manufacturing capacity and sale units

The maximum shoe manufacturing capacity is 3 000 units per financial year. This level will be
maintained for the foreseeable future. In order to maintain their exclusivity, a limited number of units
are manufactured in each financial year. The number of budgeted units to manufacture and sell during
each financial year is linked to the numerical description of that calendar year. For example: in calendar
year 1998, the budgeted manufacturing and sales units were 1 998 only, in calendar year 2007, the
budgeted manufacturing and sales units were 2 007 only, and so forth. This calendar year linked
manufacturing and sales trend will be maintained until the company reaches its maximum shoe
manufacturing capacity.

1.2. Sales

S’khothane sells Krocvellars via two sales channels: (1) at each of their three retail stores in the
Gauteng Province (one at the OR Tambo International Airport, one at the Mall of Africa and one at the
Menlyn mall); and (2) an online store with country-wide delivery. The company’s contribution margin
ratio is 60%.

1.3. Manufacturing process and standard direct manufacturing costs

Krocvellars are handmade from start to finish. The process start with the buying of the crocodile leather
at R5 000 per metre (m). 450 millimetres (mm) crocodile leather is used in the manufacturing of one
shoe. S’khothane employs 25 men only shoemakers (direct labourers), some as young as 13 years.
Standard direct labour clock hour rate is at R10 per hour. The daily standard clock hours and the
related idle time is 11 hours and 2,2 hours per shoemaker respectively. It takes one shoemaker 12
productive hours to fully complete one shoe. Shoelaces are bought at R35 per shoelace. Each shoe
require 125 millilitres (ml) of specialised glue at a cost of R37,50 per shoe. Once the leather is sewed
and glued together, one rubber sole of R50 is attached to each shoe, followed by 350 mm innersole
bought at R450 per metre. Lastly, the shoe is quality inspected and polished at a combined cost of R5
per shoe. All the wastage that occur during the manufacturing process are immaterial.

Each pair of shoes is packaged in one (1) shoebox. These shoeboxes are currently bought from
Dibemba Plc, a Nigerian based shoebox supplier. The standard cost per shoebox quoted by Dibemba
Plc is N40 000 (forty thousand Nigerian Naira (N)). The standard cost of one shoebox is based on the
exchange rate of Nigerian Naira (N) to South African Rand (R) of N1:R0,005.

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1.4. Manufacturing overheads

The manufacturing overheads includes both the variable and the fixed portions. These portions are
calculated by reference to the observations of the previous financial year’s manufacturing costs and
activities. During the 2017 financial year, the highest manufacturing activity was 220 units in April with
manufacturing overheads of R135 000, while the lowest manufacturing activity was 50 units in
December with manufacturing overheads of R50 000. Although the variable portion will remain at the
2017 level, on 1 January 2018 the fixed portion is budgeted to increase by 6,50% from the 2017 level.

1.5. On-line selling and distribution costs

S’khothane has contracted the distribution of the shoes to Veterans Cadres Couriers (VCC). The
agreement provides for both variable and fixed distribution costs. This distribution contract is renewable
every three years; the latest renewal was on 1 January 2018 at fixed distribution costs of R150 000 per
month. S’khothane pays R400 per each unit sold online for the delivery to the customer door.

1.6. Other fixed costs

The company leases a 2 000 m2 property from the Eastern Cape Provincial Government and uses it as
its factory plant. This property is located in a poverty stricken and one of the most rural areas of the
province, with the unemployment rate ranging between 60% and 85%. The lease agreement is for a
period of 99 years and provides for monthly fixed payments of R25 per m2 for the entire lease term. As
at 31 December 2018, similar market related leases were at R150 per m2 per month with an 8,5% rent
escalation clause each year.

Monthly rent expense for the retail stores are budgeted as follows: R105 000 per month at the
OR Tambo International Airport, R100 000 per month at the “Mall of Africa” and R85 000 per month at
the Menlyn mall. Staff related costs are R25 000 per month for each of the three retail stores.

2. The following information was extracted from the 2018 financial year’s actual results:

Units manufactured 2 018

Selling price per unit R16 025
Leather purchases 2 000 m R11 300 000
Innersole purchases 1 600 m R552 000
Specialised glue purchases 506 000 millilitres R227 700
Direct labour 66 000 clock hours R561 000

All the wastage that occurred in the manufacturing process were regarded as immaterial. The actual
idle time was 1,5 hours per shoemaker per each working day.

Actual inventory as at:

Inventory item 1 January 2018 31 December 2018
Leather 0m 180 m
Innersole 0m 175 m
Specialised glue 0 millilitres 1 500 millilitres
Finished goods 45 units 0 units
The actual physical inventory count on 31 December 2018 revealed that a total of 15 pairs of Krocvellars
were stolen across the three retail stores, down from 27 pairs in the 2017 financial year.

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3. Business acquisition proposal

On 22 October 2018, S’khothane submitted a business acquisition proposal to Platinum Box (Pty) Ltd
(PlatBox), an exclusive top-end shoebox manufacturer valued at approximately R500 000. If acquired,
the S’khothane’s shoe manufacturing operations and PlatBox will operate as two (2) independent
divisions of the S’khothane group, namely; the Kroc Division and the Box Division (previously
PlatBox). Notwithstanding being in the same group, each division is expected to retain its identity,
culture, autonomy, market and profit objectives. If acquired, the group will adopt the absorption costing
system and start operating from 1 January 2019. The Box Division will be required to transfer all of the
Kroc Division’s 2019 financial year shoeboxes requirements at R120 per shoebox.

PlatBox’s maximum manufacturing capacity is 2 500 shoeboxes per year. The current operating
capacity is 2 000 shoeboxes per year. After being manufactured, the shoeboxes are quality inspected
and 1 in every 100 manufactured shoeboxes are discarded as damaged and not usable. This loss
is considered as a normal loss in line with the industry norm and the related normal loss value is already
accounted for in the variable manufacturing overheads below. PlatBox’s current external shoeboxes
sales is limited to its current undamaged shoeboxes manufactured.

Details Cost
External selling price R150 per shoebox
External selling and distribution costs R2,50 per shoebox
Direct raw material R50 per shoebox
Direct labour R25 per shoebox
Variable manufacturing overheads R35 per shoebox
Fixed manufacturing overheads absorption rate R12,50 per shoebox
Annual fixed administrative costs R6 000

4. Special order from the Department of Economic Affairs and Trade (DEaT)

After failing to clinch the PlatBox deal and subsequently closing down all the retail stores effective
1 January 2019, S’khothane received an online special order from the DEaT for 1 400 pairs of
Krocvellars. The DEaT is procuring the shoes for its 50 strong delegation it plans to take to the 2019
Global Economic Forum at Davos. Each DEaT delegate will receive one (1) pair of Krocvellar. All the
pairs not bought specifically for the delegates will be presented as gifts to the various foreign dignitaries
at Davos. After a special intervention by the country’s “political heavy-weights”, the Centralised
Treasury Department approved and immediately paid R30 000 000 to S’khothane for this special order.

The special order further provides for the following:

(i) Each shoe must be covered in a specialised cotton-like cloth cover at R5 per shoe.
(ii) The national coat of arms (national emblem) must be imprinted on each shoebox at a cost of
R15 per shoebox.
(iii) The name of each delegate must be printed in the inner side of each shoe at R7,50 per shoe.

(iv) S’khothane’s pricing policy on special orders is to add 45% profit on all total relevant costs.

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REQUIRED

(a) S’khothane is considering using only one sales channel and close down a channel with
a lower contribution per unit between the two channels.
i. Calculate the 2018 budgeted contribution per unit for each of the two sales channels
and briefly advise which one, if any, of the two sales channels should S’khothane
consider closing down?
(11)
In your advice, ignore qualitative factors.
ii. Assuming that S’khothane uses the retail store sales channel only, calculate the
budgeted margin of safety percentage for the 2018 financial year. (5)
iii. Briefly discuss 4 (four) qualitative factors that S’khothane would need to consider if
they were to decide to sell via the online sales channel only. (4)
(b) Calculate the following variances for the 2018 financial year:
i. Direct raw material purchase price variance for specialised glue only. (2)
ii. Direct raw material mix variance for leather and innersole only. Round the direct
raw material quantities to the nearest m or mm. (4)
iii. Direct labour idle time variance. (3)
(c) By reference to the S’khothane’s business model and its entire operations, discuss four
(4) ethical, social and legislative considerations that could possibly disrupt and/or
threaten the continued operations of S’khothane. (4)
(d) Assume that the business acquisition proposal is accepted. Calculate the minimum
transfer price per shoebox that the Box Division will be willing to accept for the transfer
of the shoeboxes to the Kroc Division during the 2019 financial year. (6)
(e) A reputable investigative-journalist from NtomeTsebe Press (NtP) asked Mrs
Whistleblower (S’khothane’s Management Accountant) to comment on the following:
“NtP has it on good authority that after failing to clinch the PlatBox deal, the DEaT
immediately facilitated a quick R30 million special order deal for S’khothane to
“allegedly” improve their financial position for a possible hostile takeover of PlatBox.”

i. As part of the comment, assist Mrs Whistleblower by calculating the special order
price based on S’khothane’s special order pricing policy and compare it to the
R30 million offered and paid by the DEaT.
For this (e)(i) question only, assume the direct manufacturing costs per unit and the
lost contribution per external sales unit amounts are R7 300 and R8 700, (9)
respectively.

ii. Based on your calculated special order price in (e)(i) above, briefly comment
whether or not there could be merit(s) to the “allegations” about the DEaT special
order. (2)

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3.29 TZANEEN TRAMPOLINES (PTY) LTD 100 Marks

Tzaneen Trampolines (Pty) Ltd (TT) is a recently established family-owned company in Limpopo.
TT manufactures and sells two different types of square trampolines, namely Humpty-trampolines
(HT) and Dumpty-trampolines (DT). Trampolining is becoming increasingly popular all around the
country, as it serves as a source of exercise and fun at home. TT makes use of an absorption costing
system and all its inventory items are valued using the first-in-first-out (FIFO) method. TT’s year end
falls on 31 July of each financial year.

1. TT’S STANDARD AND BUDGETED INFORMATION FOR THE 2018 FINANCIAL YEAR

1.1 Inventory and manufacturing

The company had no budgeted opening inventory and no budgeted closing inventory for all types of
inventories for the 2018 financial year. To minimise possible wastage during each financial year, the
company budgets to manufacture the trampolines in direct proportion to its standard sales mix. The
budgeted manufacturing levels for the 2018 financial year were equal to the company’s normal
manufacturing capacity.

1.2 Sales

TT budgeted to sell 24 000 trampolines in the standard sales mix of 1 : 3 for HT : DT. The standard
selling price of HT and DT was set at R8 000 and R3 000, respectively.

1.3 Variable costs

Trampolines consist mainly of four basic components, that is, the tubing, steel springs, jumping mats
and safety pads made of foam. The tubing used to make the frame and the trampoline’s lower support
structure is made of galvanised steel and is bought at standardised lengths and widths from suppliers.
Currently, TT buys all its springs from Springs Galore CC, a renowned springs manufacturing specialist.
These springs are manufactured according to TT’s specifications. The jumping mats are made of woven
fibres. For safety purposes, foam safety pads are used to cover the springs of the trampolines.

TT employs factory workers (direct labourers) who operates various manufacturing machines. The
standard is to allow 10% idle time.

Standard variable costs requirements for one (1) HT and one (1) DT:

Requirements per unit

HT DT
Tubing (R150 per metre) 24 metres 6 metres
Steel springs (R5 per spring) 110 springs 80 springs
Jumping mat fabric (R50 per m2) 4 m2 3 m2
Safety pads (R1 per safety pad) 110 safety pads 80 safety pads
Direct labour (R100 per direct labour working hour) 8 working hours 4 working hours
Variable manufacturing overheads (R10 per machine hour) 6,5 hours 5,5 hours
Variable selling and administrative costs R50 R50

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1.4 Fixed costs
TT uses top-of-the-range machines that bend and punch holes in the tubes. These machines cut the
jumping mat fabric into the required sizes and sew D-rings into the fabric to hold the mat to the frames.
As quality control is extremely important to TT, all the trampolines manufactured are inspected regularly
to ensure that they meet established guidelines. Budgeted fixed manufacturing overheads of R5 000
000 for the 2018 financial year were allocated to products, based on the budgeted direct labour
working hours. The total annual normal manufacturing capacity of the factory workers was equal to
the budgeted annual working hours.

The company’s budgeted annual fixed selling and administrative expenses for the 2018 financial year
were R120 000 and they were allocated to products, based on the budgeted number of units sold.

1.5 Insurance
The company has taken out third-party insurance with SkyInsurers for possible litigation that might arise
from improper and/or unsafe use of the trampolines by consumers. The insurance premiums have not
yet been determined with certainty for the 2018 financial year. Indication are that, the fixed component
of the premium is expected to be R25 000 per month, and it is allocated equally to the products. The
variable component is based on the number of budgeted sales units and the probabilities of insurance
cost per sales unit. For HT, there is a 10% probability of R30 per unit sold, a 20% probability of R15 per
unit sold, a 25% probability of R40 per unit sold, and a 45% probability of R20 per unit sold. For DT,
there is a 15% probability of R20 per unit sold, a 25% probability of R40 per unit sold, a 40% probability
of R30 per unit sold, and a 20% probability of R10 per unit sold.

1.6 Administrative staff costs

Fixed administrative staff costs are budgeted for at R1 200 000 for the financial year, of which one third
(⅓) is allocated to HT and the remainder to DT.

2. TT’s ACTUAL RESULTS AND INFORMATION FOR THE 2018 FINANCIAL YEAR

2.1 Manufacturing and sales

The actual sales and the actual manufacturing levels were equal. 5 000 HTs were sold at R7 700 per
unit and 20 000 DTs were sold at R3 500 per unit. There was no actual opening inventory of any type
at the beginning of the 2018 financial year.

2.2 Variable costs and manufacturing information

HT DT
R R
Total tubing purchased @ R152,50 per metre 18 452 500 17 690 000
Steel springs (110 springs per HT; 80 springs per DT) 2 750 000 8 000 000
Jumping mat fabric (R50 per m2) 1 025 000 2 900 000
Safety pads (R1,05 per safety pad) 577 500 1 680 000
Direct labour (R80 per direct labour clock hour) (see note  below) 4 000 000 8 000 000
Variable manufacturing overheads (R9,95 per machine hour) 318 400 1 114 400
Variable selling and administrative costs 250 000 1 000 000

:The actual idle time percentage was double the percentage of the allowed (standard) idle time.

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2.3 Fixed costs

The actual fixed manufacturing overheads were R4 800 000. The actual fixed selling and administrative
costs were R130 000.

3. ACTIVITY-BASED COSTING (ABC) SYSTEM INVESTIGATION

The budgeted fixed manufacturing overheads (refer to section 1.4 above) was traditionally allocated to
the products based on the direct labour working hours (refer section to 1.3 above). TT’s chief financial
officer (CFO) has recently taken a cost accounting refresher course, where she learned more about the
activity-based costing (ABC) system as an alternative to the traditional costing system. She would like
to establish the effect of the ABC system on TT’s product costs. To undertake this exercise, the
management accountant established the following information:

3.1 Machine hours for each type of trampoline will remain as budgeted for.

3.2 Total budgeted cutting time is 65 000 hours, of which 0,5% relates to the cutting plant’s warm-up
time while the related cool-off time is 0,8%. 40% of the productive cutting time relates to HT, while
DT consumes the other 60% of the productive cutting time.

3.3 Every second unit of HT is inspected for quality control, while every tenth unit of DT is inspected.

3.4 For each product type, the set-up of machines occurs after every 500 units that are manufactured.

3.5 The budgeted manufacturing units are in line with the standard sales mix while the budgeted fixed
manufacturing overheads have been allocated to identified activities as follows:

Activities Cost driver R

Bending and shaping of the tubes Machine hours 2 220 000
Cutting of the jumping mat fabric Cutting time percentage 200 000
Quality inspection costs Number of inspections 1 350 000
Machine set-up costs Number of set-ups 1 230 000

4. ACQUISITION OF SPRINGS GALORE CC (SG)

As part of its growth strategy, TT acquired the entire shareholding of SG on 1 August 2018. SG is a
sole manufacturer of various steel springs of different shapes and sizes. During 2017, one of SG’s
managers (Ms. Lerato Ndlovu) was awarded the 2017 TopNotch Quality Manager award as voted by
clients. TT is expected to leverage off Ms Ndlovu’s excellent customer-care and leadership qualities.
The leadership style of both companies is the same. All the employees of SG have been retained and
integrated into the group. During the integration process, an unforeseen IT-related glitch affected the
August 2018 payroll run of the employees migrated from SG. This IT glitch resulted in the incorrect
calculation and short payment of their August 2018 salaries. These employees indicate their intention
to engage in a strike action until the matter is resolved. In the past, the staff turnover of SG has been
minimal.

TT immediately restructured on 1 August 2018 and adopted a divisionalised structure consisting of two
divisions, namely the Springs Division (previously, Springs Galore CC) and the Trampoline Division
(TT’s previous trampoline manufacturing entity). A transfer pricing system was introduced, as the
Trampoline Division requires the springs from the Springs Division. The CFO wants the transfer price

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to be set at a price that will motivate the managers of both divisions to act in the best interest of TT.

It is expected that the Trampoline Division will require 2 500 springs from the Springs Division for the
2019 financial year. The Springs Division has a capacity to manufacture 3 000 units of the springs which
the Trampoline Division requires. The Springs Division currently has an external demand of 1 350 for
these springs. Financial information on the springs that meets the Trampoline Division's requirements:

R per unit
External selling price 5,00
Direct material 2,00
Direct labour 1,00
Variable manufacturing overheads 0,50
External variable selling costs 0,30

5. TT'S ACTUAL PERFORMANCE FOR THE MONTH ENDED AUGUST 2018

The performance of Springs Galore CC was measured according to its return on investment (ROI).
The performance of the Springs Division and the Trampoline Division in TT will now be measured
according to residual income (RI).

5.1 Extract from the statements of profit or loss (income statement)

Details Springs Division Trampoline Division
R R
Operating profit 2 475 000 7 240 000
Allocated head office expenses 12 500 12 500
Staff costs 275 000 408 000
Rates and taxes – administrative building 11 250 0
Rates and taxes – factory building 8 250 6 500
Legal expenses 55 000 65 200

5.2 Extract from the statements of financial position (balance sheet)

Details Springs Division Trampoline Division
R R
Total assets 43 180 000 45 500 500
Non-current assets 35 175 000 39 098 000
Current assets 8 005 000 6 402 500
Total equity and liabilities 43 180 000 45 500 500
Equity 4 429 600 23 512 850
Non-current liabilities 35 175 000 18 500 000
Current liabilities 3 575 400 3 487 650
5.3. In the calculation of the operating profits of R2 475 000 and R7 240 000, where applicable, no
items listed in sections 5.1 to 5.2 above and sections 5.4 to 5.11 below were taken into account.
5.4. All the administrative decisions are the responsibility of head office. Therefore, the accountability
thereof rests with head office.

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5.5. Head office expenses are arbitrarily allocated to the divisions.
5.6. In each division, 25% of the staff costs relate to administrative staff.
5.7. Included in the Springs Division’s non-current assets (NCAs) are R3 345 000 and R14 550 000
relating to an administrative building and a factory building, respectively. R17 520 000 of the
Trampoline Division’s NCAs relates to the factory building. The remaining non-current assets in
each division relate to various manufacturing assets used in the manufacturing factories of the
respective divisions.
5.8. On 31 August 2018, TT received three (3) property bond statements from SnabTec Bank. The
outstanding amounts in the statements of that day are equivalent to the related outstanding
amounts in the statement of financial position as at 31 August 2018. SnabTec Bank charges
finance costs/interest on the outstanding balances daily during a 365-day financial year.
Capital repayments are made at the end of each month.
The summary of these property bond statements are as follows:

Statement 1
Springs Division – administrative building
Days Date Opening Capital Finance Closing
balance repayments costs balance
30 30/06/2018 R3 450 000 R35 000 R28 356,16 R3 415 000
31 31/07/2018 R3 415 000 R35 000 R29 004,11 R3 380 000
31 31/08/2018 R3 380 000 R35 000 ? R3 345 000

Statement 2
Springs Division – factory building
Days Date Opening Capital Finance Closing
balance repayments costs balance
30 30/06/2018 R15 000 000 R150 000 R123 287,67 R14 850 000
31 31/07/2018 R14 850 000 R150 000 R126 123,29 R14 700 000
31 31/08/2018 R14 700 000 R150 000 ? R14 550 000

Statement 3
Trampoline Division – factory building
Days Date Opening Capital Finance Closing
balance repayments costs balance
30 30/06/2018 R18 000 000 R160 000 R147 945,21 R17 840 000
31 31/07/2018 R17 840 000 R160 000 R151 517,81 R17 680 000
31 31/08/2018 R17 680 000 R160 000 ? R17 520 000

5.8. The divisional managers have been given full authority to make use of legal services, as and
when they need these services, at the standard fee agreed by head office.
5.9. Unless specifically mentioned, all other procurement, operational, working capital management
and funding/financing decisions are made by the respective divisional managers.

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5.10. The cost of capital is 12% per annum for the Springs Division and 10% per annum for the
Trampoline Division.

REQUIRED

(a) Prepare the budgeted statement of profit or loss (income statement) of TT for the
2018 financial year.
For the purposes of question (a) only:
▪ Show the amounts for product HT and product DT in separate columns.
▪ The total column is not required.
▪ Round your workings to the nearest rand.
▪ Ignore the prospect of making use of an activity-based costing system. (15)
(b) The cost accounting trainee of TT requires your assistance with calculating the
following variances for the 2018 financial year:
(i) Sales mix variance for HT, DT and in total (5)
(ii) Tubing purchase price variance for HT only (2)
(iii) Jumping mat fabric usage variance for HT only (2)
(iv) Direct labour rate variance for DT only (3)
(v) Direct labour idle time variance for DT only (4)
(c) Draft a report to the CFO and explain the following four costing questions:
(2)
1. Give a brief explanation of the term “common fixed costs”.

2. Give a brief explanation of the difference between a “semi-variable cost” (2)

and a “semi-fixed cost”.
(5)
3. Give an explanation of whether, considering local circumstances in South
Africa and more specifically in the Springs Division, it is reasonable to classify
labour cost as a variable cost. (1)

4. Identify one (1) line item in the statement of profit or loss (income statement)
to which a learning curve could be applied.
Presentation and the format of the report (1)
(d) Calculate the annual budgeted number of units per product type that TT will need
to manufacture and sell to achieve a monthly target profit of R750 000 during the
2018 financial year. (8)
(e) “The optimal costing system is different for different organisations” (Drury, 2015).
Briefly explain the characteristics that TT’s CFO would have considered in the
decision to implement the most optimal costing system when comparing the ABC
system to the traditional costing system. (3)
(f) Calculate the total budgeted fixed manufacturing overheads per unit for the 2018
financial year allocated to each product type, if TT decides to implement an activity-
based costing (ABC) system. (10)

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(g) Assume that both the jumping mat fabrics and the direct labour hours were not readily
available and were limited to 60 000 m2 and 80 000 work hours, respectively, for the
2018 financial year budget.
1. Establish and comment on whether both the jumping mat fabrics and the direct
labour hours are sufficiently available to meet the manufacturing requirements for
the 2018 financial year budget. (6)

2. Based on your answer in (g)(1) above, recommend to TT the most suitable

technique that it can use to calculate the budgeted annual optimum (1)
manufacturing mix.

3. Assume that your answer in (g)(2) above is linear programming, formulate the
objective function and all the other applicable equations necessary to establish
TT’s budgeted annual optimum manufacturing mix for the 2018 financial year. (6)
(h) Determine the minimum transfer price per unit that the Springs Division will be willing
to transfer the required springs to the Trampoline Division. (8)
(i) List three (3) qualitative factors that TT would have taken into consideration in
relation to the acquisition of Springs Galore CC. (3)
(j) 1. Calculate the actual residual income for the month ended 31 August 2018 for
the Springs Division and the Trampoline Division. (11)

2. Briefly discuss the actual residual income of the Springs Division in comparison (2)
to that of the Trampoline Division as calculated in (j)(1) above.

3.30 UGOGO BAKKER (PTY) LTD 50 Marks

Ugogo Bakker (Pty) Ltd (“UB”) has for many years manufactured its own well-known brand of a savoury
cheese biscuit and various sweet biscuits exclusively for the retail consumer market.

The savoury cheese biscuit manufacturing takes place at the UB’s Middelburg Bakery (MB) and the
sweet biscuits are manufactured at its eMalahleni Bakery (EB). Ms Ugogo Bakker is the founder, owner
and the manager of UB. She is planning to retire in 2020 and as part of the succession plan she is
training her two daughters, Ms Rosemary Bakker and Ms Poppy Smith, to eventually take-over the
business. Ms Ugogo Bakker has therefore appointed her two daughters as managers of the respective
bakeries.

UB’s financial year-end is 30 November and it operates for all twelve months of the year. The company
uses the first-in-first-out (FIFO) method of inventory valuation and prepares the management
accounts based on the absorption costing system.

1. eMalahleni bakery (EB)

EB manufactures two types of sweet biscuits: Chocolate chip (CC) and Chocolate-mint (CM) packed
into 200g packets (one 200g packet = one unit). The base dough of these two types of biscuits is similar,
with only the quantity of chocolate, the baking time and the flavouring being the main differences.

Ms Poppy Smith has provided the following budgeted information for the month of November 2018:

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1.1. An extract of the standards per unit reflect the following:

Note CC CM
R R
Sales price 40,00 35,00
Prime costs 21,75 17,90
Variable manufacturing overheads 4,00 4,00
Fixed manufacturing overheads 1.3 4,20 3,60
Variable selling costs 2,00 2,00

1.2. November’s budgeted manufacturing and sales demand for CC and CM are 3 000 units and 2 800
units respectively.

1.3. Fixed manufacturing overheads are absorbed based on the budgeted oven baking time of each
product. The budgeted fixed manufacturing overheads absorption rate determined at the
beginning of the financial year representing a normal month is R12 per hour.

1.4. Ms Poppy Smith is extremely concerned about November’s manufacturing because two of the
twelve baking ovens broke down and must be repaired. The repairer is still waiting for the
necessary replacement parts before he can continue with the repairs. He has indicated that the
two ovens will be out of service for 5 working days each. Each baking oven normally operates
for 22 working days in a month and seven hours per day.

2. Middelburg bakery (MB)

MB was UB’s first bakery. This bakery operates a process costing system in the manufacturing of the
savoury cheese biscuit (SCB).

The SCB’s manufacturing process begins with the mixing of the direct raw materials (flour, butter,
cheese and eggs) followed by the kneading of the dough. The dough is then cut into the required forms
and baked. The baked biscuits are cooled and packaged into individual packets of 500 grams (g) each,
which represents one unit of SCB. These units are packed on pallets for distribution to various
supermarkets. Each pallet packs 48 units of the SCB.

All the direct raw materials required to manufacture SCB are added at the beginning of the
manufacturing process. Direct labour and manufacturing overheads are incurred evenly throughout
the manufacturing processes.

1 kilogram (kg) of the direct raw materials yield 1 kg of SCB biscuits. Normal losses in the form of
broken and rejected biscuits amount to 6% of the direct raw materials added. These broken and rejected
biscuits are identified at the 80% completion point of the manufacturing process. All broken and rejected
biscuits are sold to bird breeders at R10 per kg.

Actual information for the month of October 2018 was as follows:

2.1. On 30 September 2018 there was 200 kg of work in process (WIP) which was 60% completed.
The direct raw material costs included in this WIP was R4 000 and the direct labour and
manufacturing overheads was R6 000.

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2.2. 1,3 tonnes of direct raw materials, costing R25 100 were added into the process.

2.3. The current direct labour and manufacturing overheads totalled R75 300.

2.4. 2 200 units were completed in the month.

2.5. On 31 October 270 kg of the WIP were 90% completed.

2.6. All completed units were sold in the current month at a selling price of R80 per unit. There were
no opening and closing finished inventory.

2.7. MB only uses Far & Wide Ltd to distribute the biscuits to the supermarkets’ central warehouses.
The agreement with Far & Wide Ltd stipulates a fixed monthly fee of R5 000 plus a cost of R100
per pallet transported.

2.8. MB’s office equipment was bought on 01 August 2015 for R130 000 and immediately brought into
use. On this day, the equipment’s resale value was estimated to be R10 000 at the end of its
useful life. This equipment is depreciated monthly on the straight-line method over its 5-year
useful life.

3. Wheat flour purchases and inventory management thereof

UB’s centralised procurement function is fully responsible for all the wheat flour inventory management.
The company currently uses the Economic Order Quantity (EOQ) technique to manage all its wheat
flour inventory requirements. The wheat flour used in both the Middelburg and the eMalahleni bakeries
is purchased in bulk from Golden Mills.

UB uses approximately 24 tonnes of wheat flour annually in their manufacturing. Manufacturing takes
place evenly throughout each financial year, which consist of 300 working days. Wheat flour is currently
purchased at R 8 per kg. Safety stock amounts to the manufacturing requirements of three working
days. The estimated cost to place one order amounts to R1 200. Direct inventory holding costs
(excluding the required annual return on investment in inventories) amounts to R5 per kg. The current
required rate of return is 6% per annum and the current EOQ is 3 000 kg.

UB has been approach by another wheat flour supplier, New Mill, offering a purchase price of R7 per kg,
provided that orders are placed in batches of 1 500 kg per order. New Mill is situated further from the
bakeries and as a result the ordering costs will increase by 50% per order.

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REQUIRED

For each question below, remember to do the following:

• Clearly show all your calculations in detail.
• Where necessary, indicate irrelevant amounts/adjustments with a ‘R0’ (nil value).
• Round all your workings to two decimals, except where otherwise stated.
• Ignore all taxation implications.
(a) Assist Ms Poppy Smith by:
i. Calculating whether EB will be able to manufacture the required budgeted
number of CC and CM biscuits for the month of November 2018. (7)
ii. Calculating the budgeted monthly optimum manufacturing mix for EB for the
month of November 2018. (5)
(b) Prepare MB’s actual quantity statement for October 2018.
Where applicable, round your workings to the nearest unit of measure. (8)
(c) Based on your answer in (b), calculate MB’s equivalent cost per unit for October 2018. (3)
(d) Using your calculations in (b) and (c), prepare MB’s statement of profit or loss and
other comprehensive income (income statement) for the month of October 2018.
Where applicable, round your workings to the nearest Rand. (12)
(e) With the imminent retirement of Ms Ugogo Bakker, briefly explain to her two daughters,
the five (5) benefits of divisionalising the two bakeries, with each daughter
independently managing one bakery. (5)
(f) Recommend to UB whether or not the special offer from New Mill should be accepted.
Support your recommendation with the appropriate and relevant calculations.
Ignore any qualitative factors. (10)

3.31 AFRiKAN-ROCK CEMENTS (PTY) lTD 100 Marks

Three months after her retirement as African Roots Cements Plc’s Chief Executive Officer, Dr. Christian
Myburgh, a registered CA (SA), used some of her R20 million severance package and R30 million
restraint-of-trade payout to start AfrikanRock Cements (Pty) Ltd (ARC). ARC, a direct competitor to
African Roots Cements Plc, is a South African based cement manufacturing company with a February
financial year-end. The company’s cement manufacturing process is recognised as a joint
manufacturing process. ARC makes use of an absorption costing system while all its inventory items
are valued using the first-in-first-out (FIFO) method.

On its incorporation, ARC appointed your audit firm as their first external auditors. During your firm’s
“understanding the client” meeting with ARC, Dr. Myburgh went mad about your question regarding the
brewing legal woes with African Roots Cements Plc. Angrily she responded: “After giving them 40 years
of my life, I expect better from them. It’s not my fault that our restraint-of-trade contract states three
months, they claim it was actually meant to provide for three years instead. I am worth way more than
R10 million a year, all peanuts if you ask me”.

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As the audit senior on the ARC audit, you managed to gather the following information relating to the
2019 and 2020 financial years.

1. GENERAL INFORMATION

1.1. The cement manufacturing process

The process starts with the purchasing of two (2) key direct raw materials (limestone and silica) in
accordance to the set standard input ratio. The direct raw materials are then crushed and mixed
together to create three types of cements, a heavy-duty cement (HdC), a light-duty cement (LdC)
and a floor-tiling cement (FtC). The standard input ratio of the key direct raw materials to manufacture
one (1) kilogram (kg) of the aforementioned cements is 0,6kg of limestone and 0,4kg of silica. Upon the
completion of the cement manufacturing, the cements are packaged in a highly durable, heavy-duty
and custom-made paper bags of different sizes depending on the standard output weight of the product.

1.2. Audit planning meeting

During the audit planning meeting Dr. Myburgh said to you: “Just like in my African Roots Cements
days, I expected the entire cement manufacturing process to simultaneously yield three (3) types of
products crucial to the commercial viability of ARC, (i) the heavy-duty cement (HdC); (ii) the light-duty
cement (LdC); and (iii) the floor-tiling cement (FtC). However, my Production Manager made me aware
that, although incidental in nature and negligible in sales value, the cement manufacturing process
simultaneously yields a “mysterious” fourth cement (MfC). I nevertheless do not foresee that MfC will
have any influence on any of our operational and/or strategic decision(s)”.

1.3. Manufacturing capacity

ARC’s annual normal maximum manufacturing capacity is 35 million kilograms of cement. The
budgeted operating manufacturing capacity for the 2019 financial year is 75% of the aforementioned
annual normal maximum manufacturing capacity. During each financial year, ARC’s direct raw material
inputs into the cement manufacturing process yields the four (4) products in the following standard
allocation ratio: 45%:HdC, 1%:MfC, 30%:LdC and 24%:FtC. The fixed manufacturing overheads are
allocated to joint products based on a predetermined fixed manufacturing overheads absorption rate.
This absorption rate is based on the joint products’ annual budgeted number of units to be
manufactured.

1.4. Packaging of the products for selling

The size of the paper-bag used to package the manufactured cements is based on the product’s
standard output weight. The standard output weights and the standard selling prices for the 2019
financial year are as follows:

Product Output Unit selling

weight price
Heavy-duty cement (HdC) 75 kg R95,00
Mysterious-fourth cement (MfC) 05 kg R20,00
Light-duty cement (LdC) 50 kg R68,00
Floor-tiling cement (FtC) 25 kg R97,50

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1.5. Further information gathered during the audit planning stage:

(i) At any given point in time, all finished goods inventory will already be packaged in their respective
paper-bags and ready for sale.

(ii) The company uses the physical measures method to allocate all the joint costs to the joint
products.

2. BUDGET INFORMATION FOR THE 2019 FINANCIAL YEAR

ARC’s Management Accountant is a second year, distance-learning B.Com Accounting student. With
his limited cost and management accounting knowledge, he was unable to complete the company’s
budget (as presented below) and the related information for the 2019 financial year. The below
information also contains a number of errors:

BUDGET INFORMATION Ref. HdC MfC LdC FtC

Packaged bag size per unit 75 kg 05 kg 50 kg 25 kg
Sales units 2.1 ? ? ? ?
Manufacturing units 2.1/2.2 ? ? ? ?
Closing inventory units 2.2 ? 0 ? ?
Direct labour minutes per unit 2.3 45 N/A 30 18
FINANCIAL BUDGET R R R R
Sales 2.1 14 136 000 1 050 000 9 690 000 23 234 250
Closing inventory 2.2 ? 0 ? ?
Direct labour costs 2.3 2 835 000 0 1 890 000 1 814 400
Joint costs 2.4 5 338 983 1 779 661 5 338 983 8 542 373
Packaging paper-bags costs 2.5 1 181 250 26 250 787 500 630 000
Fixed manufacturing overheads 2.6 ? 0 ? ?
Fixed selling and distribution costs 2.7 44 640 0 42 750 71 490
Variable selling and distribution costs 2.7 178 560 26 250 171 000 285 960

2.1. Both the manufacturing and selling of all units is expected to occur evenly throughout each
financial year. The sales amounts have been correctly calculated.
2.2. The budgeted units to be manufactured and the closing finished goods are based on the
company’s current operating capacity as per 1.3 above. Closing inventory only relates to finished
goods. No opening inventory of all types was budgeted for in the 2019 financial year.

2.3. The budgeted direct labour costs are correctly calculated for all the products. The standard direct
labour rate per hour is the same for all the applicable products and is expected to remain constant
throughout the 2019 financial year. Direct labour costs are not incurred during the joint
manufacturing process.

2.4. The allocated joint costs correctly includes the budgeted purchases of: limestone at a standard
cost of R0,50 per kg and silica at a standard cost of R0,82 per kg. All of the budgeted direct raw
material purchases are expected to be fully issued to manufacturing. No direct raw material losses
are incurred in the manufacturing process. In addition to the direct raw materials costs, the
allocated joint costs also include R4 515 000 budgeted costs for crushing and mixing the
limestone and silica.

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2.5. All of ARC’s cements are packaged using the same type of heavy-duty paper. As a standard, one
(1) kg of the heavy-duty paper is required for packaging every 50 kg cement. The standard cost
of one (1) kg of heavy-duty paper is R5.

2.6. The budgeted predetermined fixed manufacturing overheads absorption rate is R10 per unit. It is
the accounting policy of ARC to treat the related under-(over) recovery as a period cost.

2.7. The budgeted selling and distribution costs have been correctly calculated. The fixed selling &
distribution costs are incurred evenly throughout each financial year.

2.8. Except otherwise stated or indicated, any other information has been correctly treated and/or
accounted for.

3. AN EXTRACT OF THE ACTUAL STATEMENT OF PROFIT OR LOSS FOR THE PERIOD-ENDED

31 AUGUSTS 2018:

STANDING INFORMATION Ref. HdC MfC LdC FtC

Packaged bag size per unit 75 kg 05 kg 50 kg 25 kg
Sales units 3.1 73 500 32 500 70 500 121 000
Manufactured units 3.1 91 875 32 500 88 125 151 250
Direct labour hours per unit 3.2 0,75 N/A 0,60 0,25
ACTUAL FINANCIAL DATA R R R R
Sales 3.1 7 203 000 682 500 4 653 000 11 555 500
Joint costs 3.3 3 307 500 0 3 172 500 5 445 000
Fixed manufacturing overheads 920 000 0 875 750 1 520 000
Other costs 3.4 ? ? ? ?

3.1. The company did not have opening inventory items of any type. Both the selling and
manufacturing of units occurred evenly throughout the period.

3.2. Actual direct labour rate was R30 per hour throughout the period.

3.3. Information relating to the actual joint costs for the period:
(i) The total actual joint costs were correctly calculated and correctly allocated.

(ii) Included in the joint costs is the following direct raw material purchases: 9 517 000 kg of
limestone and 5 833 000 kg of silica purchased at R5 710 200 and R4 666 400, respectively.
All the direct raw materials actually purchased were issued to manufacturing in the same
proportion that they were actually purchased at.

3.4. Actual “Other costs” (packaging paper-bag costs per unit, variable selling & distribution costs per
unit and total fixed selling & distribution costs) were all equivalent to their related budgeted costs.

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4. INVESTIGATION TO CHANGE THE ORGANISATIONAL STRUCTURE

ARC is investigating the possibility of diversifying its business operations to also include a bricks
manufacturing division (BMD). BMD will manufacture and sell three types of bricks: maxi-bricks (MB);
face-bricks (FB) and paving-bricks (PB). If the diversification plan is brought to fruition, ARC will
henceforth operate from a head office and two divisions: the current cement-manufacturing division
(CMD) and the new BMD. Except for the heavy-duty cement (HdC), which will be exclusively bought
from CMD, all the other direct raw materials (sand, water and clay) needed for the bricks manufacturing
process, will be bought from external suppliers. ARC will set up independent management teams to
manage each of the two divisions. Unless specifically mentioned otherwise, these management teams
will have direct influence over their respective division’s asset procurement, operational and funding
decisions.

4.1. ARC will also adopt a transfer pricing policy to facilitate the transfer of the required HdC from
CMD to BMD. The initial transfer pricing policy will be based on CMD’s 2020 financial year budget
and standards as per 4.2 below.

4.2. The following information was extracted from CMD’s 2020 financial year budget:
HdC’s 2020 FINANCIAL YEAR BUDGET INFORMATION and STANDARDS
Packaged output weight per unit 75 kg
Maximum annual manufacturing capacity in units 210 000
Annual demand/sales units to the external customers only 185 000
Selling price per unit (refer to 4.3 below) ?
Direct labour costs per unit R22,50
Other variable manufacturing costs per unit (including joint costs) R43,50
Fixed manufacturing overheads absorption rate per unit R12,50
Variable selling & distribution costs on external sales only R1,50
Fixed selling & distribution costs per unit R0,40

4.3. HdC’s standard selling price per unit is expected to increase by 8% from the 2019 financial year
standards.

4.4. Dr. Myburgh has further confirmed the following for CMD’s 2020 financial year: cost of capital
percentage will be 9,50% per annum; projected controllable investments will be R77 520 000,
while the related projected profit before taxation is R17 442 000. This projected profit before
taxation was calculated after taking the following into consideration:
(i) Consultation fees of R1 000 000 for industrial engineers to improve the joint
manufacturing process.
(ii) Projected statutory external audit fees of R600 000. ARC’s external auditors are only
appointed and/or dismissed by ARC’s audit committee.
(iii) Allocated head office expenses of R210 000.
(iv) Cement manufacturing equipment depreciation of R370 000.

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5. BMD’s PRELIMINARY INFORMATION FOR THE 2020 FINANCIAL YEAR

5.1. The following information relates to the 2020 financial year projected budget and/or standards:
FINANCIAL YEAR BUDGET/STANDARDS MB FB PB
Annual demand in units (bricks) 750 000 1 125 000 400 000
Brick-making labour time in minutes per unit 6 3 1,5
Selling price per unit R6,50 R10,50 R5,00
Direct raw material costs per unit (all included) R2,05 R4,25 R2,10
Brick-making labour costs per unit R? R? R?
Variable manufacturing overheads per unit R0,25 R0,50 R0,35
Fixed manufacturing overheads absorption rate per unit R0,50 R0,50 R0,50
Variable selling costs per unit R0,10 R0,10 R0,10
Fixed selling costs per unit R0,05 R0,05 R0,05

5.2. As a result of a highly competitive brick-makers’ labour market, BMD has structured an impressive
brick-makers’ retention policy for its 75 brick-makers. During each 365-days financial year, each
brick-maker will be entitled to a 20-days continuous compulsory annual leave. Furthermore, the
brick-makers will also be entitled to a 15-days continuous discretionary annual leave. Based on
the brick-manufacturing industry norm, there is a 40% and 60% probability that ⅓ and ⅔ of the
brick-makers, respectively, will exercise their discretionary annual leave entitlement. BMD will not
operate during the weekends in any of the 52 weeks during the financial year. BMD’s brick-makers
are qualified to make any of BMD’s bricks, however, each brick-maker can only make one-type
of a brick at a time. Subsequent to the signing-off of the national minimum wage by the President
of the Republic of South Africa, Mr. MC Ramaphosa, the BrickMakers Trade union (BricTU) and
BMD agreed on a standard brick-maker labour rate of R20 per hour for a 7-hour working day for
both the 2020 and 2021 financial years.

5.3. Except for the brick-making time, all the other resources needed for the brick-manufacturing
process, are expected to be available in unlimited supply.

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REQUIRED

(a) Briefly comment on Dr. Myburgh’s response in relation to her brewing legal woes with
African Roots Cements Plc.
Your comment must specifically address the fundamental principle of integrity as
expected from a CA(SA). (3)
(b) Prepare ARC’s cement manufacturing/production budget in units for the financial year
(8)
ending 28 February 2019.
(c) Calculate the budgeted total contribution amount that ARC must generate for the 2019
financial year so as to break-even.
In answering this question, break-even units calculations are not required. (4)
(d) The audit partner on the ARC assignment raised the following two (2) review notes for
your attention in answering question (d)(i) and (d)(ii) below:

1. “I am of the firm view that the total budgeted joint costs for the 2019 financial year
were allocated incorrectly and that the allocation should be adjusted”.

2. “Although the budgeted annual joint costs of R16 485 000 and R4 515 000 have
been correctly casted to R21 000 000, I do not agree that this amount of
R21 000 000 is the correct joint costs amount to be allocated to the joint product(s)”.

(i) Calculate the correct total annual budgeted joint costs to be allocated to the joint (6)
product(s) during the 2019 financial year.

(ii) Allocate the correctly calculated total annual budgeted joint costs in (d)(i) above to
the joint product(s). (3)
(e) The following is quoted from an e-mail you received from Dr. Myburgh during the 2019
financial year’s interim audit:
“I’m extremely unhappy about our current method of allocating joint costs to the joint
products”, is (are) there any other alternative method(s) we can consider in this
regard?”

Draft a report to Dr. Myburgh wherein you briefly explain the other alternative (5)
method(s), if any, of allocating joint costs to the joint products.
(f) Calculate the following variances for the period-ended 31 August 2018:
(i) Sales price variances for HdC and FtC only (per product type and in total). (3)
(ii) Direct labour efficiency variance for product LdC only. (4)
(iii) Direct raw material purchase price variances (per material type and in total).
(5)
(iv) Direct raw material mix variances (per material type and in total).
(5)
(g) Prepare the actual statement of profit or loss and other comprehensive income (income
statement) for the period-ended 31 August 2018 for product LdC only.
Except for the over-/under-absorption of the fixed manufacturing overheads
(if applicable), ignore all the other possible standard costing variance(s). (12)

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(h) As part of the organisational structure investigation, Dr. Myburgh requested you to:
(i) Calculate CMD’s projected residual income for the 2020 financial year. (5)
(ii) Calculate CMD’s projected return on investment for the 2020 financial year. (2)
(iii) List four (4) non-financial measures that can be used to evaluate CMD’s
performance in terms of the quality and efficiency of the cement manufacturing
process. (4)
(iv) In your own words, briefly explain the concept of benchmarking in the context of
CMD’s cement manufacturing process. (2)
(i) Assuming that the BMD’s annual requirements of the HdC for the 2020 will be 150 000
units.
(i) Calculate (if any) the envisaged total contribution that CMD will lose during the
2020 financial year as a result of transferring 150 000 units of HdC to BMD.
(5)
(ii) Calculate the minimum transfer price that CMD will be willing to accept for the
transfer of each unit of HdC required by BMD during the 2020 financial year.
(4)
(j) (i) Advise Dr. Myburgh whether the BMD will be able to fully meet all its 2020 financial
year annual demand for all the three (3) types of bricks. Motivate your advice with
necessary and applicable calculation(s). (10)

(ii) Calculate the optimum mix of bricks that BMD will be able to manufacture and sell
to maximise its projected contribution for the 2020 financial year. (10)
For question (j)(ii), where applicable:
▪ Round the labour rate(s) to the nearest rand(s) and/or cent(s).
▪ All the other workings, round to two (2) decimal places.
Total marks [100]

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3.32 MATAMATIE (PTY) LTD 50 Marks

MataMatie (Pty) Ltd (“MtM”) is a tomato and related products company. The company leases a 500-
hectare farm from the Department of Land Reform (“DLR”) and this lease is up for renewal at the end
of the current financial year. MtM has two (2) operating divisions (the Farming Division (“FD”) and the
Processing Division (“PD”)) and a Head Office (“HO”). The two (2) operating divisions are managed
by autonomous management teams. Performance is managed and measured at a divisional level. FD
farms the tomatoes while PD processes the raw tomatoes into tomato sauce and tomato juice.

MtM has a 30 September financial year-end; uses the absorption costing system and values all its
inventories using the first-in-first-out (FIFO) method. The management team of each operating
division receives a performance related bonus if their division meets or exceeds the company’s target
annual return on investment (ROI) of 18,50% in a financial year.

1. THE FARMING DIVISION (FD)

FD specialises in raw tomato farming. FD currently sells some of the raw tomatoes to PD at R7 500 per
tonne, a transfer price negotiated by the two divisions through the HO’s facilitation. The negotiated
transfer price is in a price range between the minimum transfer price and the maximum transfer price.
Furthermore, FD has also entered into a long term non-cancellable contract in terms of which FD
must supply 9 000 tonnes of raw tomatoes per harvest period to the Almost-Famous Brands Group
(“AFBG”) at R7 105 per tonne. Lastly, although no supply contract exists thereto, FD’s supplies its only
other external customer, Stearz Burgers-n-Chips (“Stearz”), with 1 000 tonnes of raw tomatoes per
harvest period at R8 500 per tonne.

1.1. Budgeted information relating to the harvest period ending 30 September 2019:

1.1.1. Total harvest for the harvest period is 16 000 tonnes after all the normal losses.

1.1.2. Other budgeted information:

Details Rand per tonne
Selling price ?
Seed and irrigation water costs 1 500
Direct labour costs 2 000
Pesticides costs 1 050
Variable production overheads 1 160
Variable external selling costs 200
Fixed production overheads 1 400

FD is persistently in conflict with the Environmental Lobby Group, the Water Affairs Department and
the DLR about: (i) excessive use of drinking water for irrigation; and (ii) reluctance to use
environmentally friendly pesticides; and (iii) refusal to, as per the lease agreement, plant vegetation to
manage soil erosion. To this end, many of the DLR officials visiting the farm have, on numerous
occasions, exchanged not only heated words with the farm manager, but also some left hooks and
uppercuts. In some instances, the farm manager was heard saying, “I pay an arm-and-a-leg for this
farm and the water; I will use them as I please. Don’t tell me about soil erosion and drinking water – my
business is tomatoes and not conservation. My motto: ‘If you want to save water, drink tomato juice or
tomato sauce for all I care.’”

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2. THE PROCESSING DIVISION (PD) – 2019 FINANCIAL YEAR

PD owns a processing plant (“plant”) and operates a process costing system. Within the plant there
are two (2) separate sections each used to produce either of PD’s top-end products, Tomato Sauce
(“Sauce”) and Tomato Juice (“Juice”). Each product is sold in units of 750 milliliters (ml).

On 15 August 2019, whilst preparing the budgeted management accounts for the month ending
30 September 2019, PD’s Management Accountant received an e-mail from Ms. Sereki (the company’s
Procurement Manager). Part of the e-mail said: “In your budgeting, take note for the month of
September, PD will only have access to a maximum of 10,8 tonnes of raw tomatoes. Internally, both
the drought and the AFBG supply contract are not helping matters at all. It is rough out there my friend,
no new supplier is able to supply at such short notice.”

2.1. An extract from the standards and budget for the month ending 30 September 2019:
Details Notes Per unit
Sauce Juice
Selling price 2.1.1. R35,00 R33,00
Raw tomato costs 2.1.2. R?? R??
Other ingredient and packaging costs R3,60 R3,50
Direct labour costs 2.1.3. R1,80 R1,80
Variable production overheads R9,00 R9,00
Fixed production overheads R1,20 R1,20
Variable distribution costs R0,20 R0,40

2.1.1. The sales team informed the Management Accountant that the budgeted demand is 7 000 and
2 000 units of Sauce and Juice, respectively.

2.1.2. Ms. Sereki’s above e-mail also stated that the budgeted purchase price of raw tomatoes is
R8 per kilogram (kg) and this is non-negotiable. The raw tomatoes’ standard usage-to-yield is 2
kg-to-one (1) litre of the Sauce and 1,6 kg-to-one (1) litre of the Juice.

2.1.3. PD hired direct labourers for the weighing, cleaning and sorting of the raw tomatoes. Each of
these labourers are paid at a rate of R24 per hour.

2.1.4. Except where information from the scenario indicates that it might not be the case, all the
required production resources will be available to meet the budgeted demand.

3. Actual results of the Sauce production for the month ended 30 September 2019:

3.1. Production information

Production begins with the purchase of the direct raw materials: raw tomatoes (from FD and some
from external suppliers) and other ingredients. At the plant, cleaned raw tomatoes are put into the
process followed by the other ingredients to produce the “sauce-mixture”. The raw tomatoes’ actual
usage-to-yield is 2kg-to-one (1) litre of fully processed sauce-mixture. Other ingredients do not increase
or decrease the volume of litres in the process. At just before the 100% completion point, the fully
processed sauce-mixture flows from the processing plant into settling tanks and is cooled off to produce
the “Sauce”. Sauce is packaged in units of 750 ml each, ready for sale.

The required raw tomatoes are added at the beginning of the process, while other ingredients are added
when the process is 10% complete only. The conversion costs are incurred evenly throughout the
process.

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The process’s only wastage point occurs at 80% completion and the resulting normal loss is 5% of the
input that reaches the wastage point. All lost litres are sold as scrap at R1 per litre (p/l).

3.2. Actual management accounts extract for the month ended 30 September 2019:
Details Notes Quantity Amount
Raw materials put into production in the current period 3.2.1. ?? R62 050
Conversion costs: current period 3.2.2. ?? R59 820
Opening work-in-progress (sauce-mixture) – 70% complete 3.2.3. 1 000 litres R18 000
Closing work-in-progress (sauce-mixture) – 90% complete 400 litres R??
Sales (packaged Sauces) 3.2.4. ?? R17 250
Closing finished goods (packaged Sauces) 3.2.5. 5 175 ??
Stolen finished goods (packaged Sauces) inventory write-off 3.2.5. ?? R23 850
Notes:

3.2.1. The actual current input put into the process for the month was 5 000 litres.

3.2.2. During the month, PD completed and transferred 5 250 litres of Sauce for packaging.

3.2.3. R8 000 of the opening WIP value relates to the conversion costs and the balance thereof relates
to the direct raw material costs.

3.2.4. Some of the completed, transferred and packaged Sauces were sold. The selling price was
R34,50 per unit.

3.2.5. PD had no opening finished goods inventory as at 1 September 2019. During the physical
finished goods inventory count on 30 September 2019, only 5 175 packaged Sauces were
counted in the store room. A local fish-and-chips fast-food outlet was recently opened adjacent
to PD’s factory premises and suspicions are that some of the Sauces that were completed,
transferred and packaged during September 2019 might have managed to “squeeze their way
out of the store room into the adjacent fish-and-chips fast-food outlet”, that is, were stolen to be
frank. All inventory write-offs are recognised as period costs in the month they occur.

3.2.6. The actual total variable distribution costs and total fixed distribution costs were R100 and
R5 250, respectively.

4. THE PROCESSING DIVISION (PD) – 2020 FINANCIAL YEAR BUDGET

In addition to determining its own expenses and allocating these to the operating divisions at its
discretion, the Head Office is fully responsible for arranging and negotiating all the company’s long-
term loan agreements. The operating divisions are responsible for all their respective investments in
non-current assets and working capital management decisions. Unless specifically stated otherwise,
the operating divisions are responsible for all their operational decisions. The interest rate on all the
company’s long-term loans is 12% per annum.

PD’s budgeted net profit before tax for the 2020 financial year is R1,5 million. This amount was
determined after taking into account the following three (3) items: total annual interest on long-term
loans; R0,075 million for administrative staff salaries and R0,2 million for head office allocated costs.
The budgeted statement of financial position (balance sheet) as at 30 September 2020 reflects:
R11,5 million for non-current assets; R2,1 million for current assets; R3 million for non-current liabilities
(long-term loans only) and R2 million for current liabilities. No changes in the long-term loans balance
are budgeted to occur during the entire 2020 financial year.

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REQUIRED
For each question below, remember to:

• Clearly show all your calculations in detail;

• Where necessary, indicate irrelevant amounts/adjustments with a R0 (nil-value);
• Round all your workings to two decimals, except where otherwise stated;
• Ignore all the taxation implications.
(a) Assuming that PD’s budgeted raw tomato demand for the harvest period ending
30 September 2019 was determined at 7 000 tonnes:
(i) Determine the budgeted minimum transfer price at which FD would have been
willing to transfer one (1) tonne of raw tomatoes to PD for the harvest period ending
30 September 2019. (8)
(ii) From PD’s performance measurement perspective, briefly comment on the fairness
of the current negotiated transfer price in comparison to the budgeted minimum
transfer price as determined in (a)(i) above. Show your calculations. (3)
(b) Identify and briefly discuss three (3) social, ethical and environmental concerns
evident from FD’s operations that could potentially harm MtM’s business reputation and
possibly negatively affect its continued existence. (6)
(c) For question (c) only, ignore all the losses in PD’s production activities.
Calculate PD’s budgeted optimal allocation of the available raw tomatoes in kilograms
per product type that will maximise PD’s budgeted profit for the month ending
30 September 2019. (9)
(d) Determine the actual equivalent cost per unit (in Rand per litre) for the month ended
30 September 2019 for the Sauce product type only.
▪ In answering question (d), the actual Quantity Statement is also required. (8)
(e) In answering question (e) only, assume the following three (3) points for the month
ended 30 September 2019 for the Sauce product type:
1. The actual equivalent costs per unit are R14 per litre for the direct raw materials and
R10 per litre for the conversion costs;
2. Based on budgeted completed & transferred and sales units both being 7 000
packaged Sauces, the Sauce’s budgeted net profit before tax is R108 900; and
3. Except for point 1 and 2 above, all the other applicable information remain as given
in the scenario.
(i) Calculate the actual number of packaged Sauce units that were stolen during
September 2019. (1)
(ii) Prepare PD’s actual statement of profit or loss and other comprehensive income
(income statement) for the packaged Sauce product type only for the month ended
30 September 2019. (Use the actual quantity statement in question (d) above.) (8)
(iii) List two possible reasons that could have contributed to the difference between the
actual net profit before tax calculated in (e)(ii) and the Sauce’s budgeted net profit
before tax. (2)
(f) Based on the 2020 budgeted information, comment on whether or not it is expected
that PD’s management team will earn a performance related bonus for the 2020
financial year.
▪ Your commentary must be supported by necessary and relevant calculations. (5)
Total marks [50]

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3.33 SAMSONS FAMILY TRUST 100 Marks

The Samsons family owns four (4) companies via the “Samsons Family Trust”. The trust operates a
divisionalised group structure with each company operating independently. Each of the three (3)
Samsons siblings (Bard, Leighsah and Mugreth) is an administrative manager of one (1) operating
company, while their parents, Hummer and Murdge, are responsible for the head office. The group’s
year-end is 30 June. Inventories are valued using the first-in-first-out (FIFO) method and the
absorption costing system is in use. The group’s cost of capital is 9,75% per annum while the group’s
target annual rate of return is 75 basis points above the group’s cost of capital.

1. SAMSONS GROUP STRUCTURE

THE SAMSONS FAMILY TRUST

SAMSONS HEAD OFFICE

(PTY) LTD (SHO)

SAMSONS VINEYARD SAMSONS FRUITS (PTY) SAMSONS LIQUOR

(PTY) LTD (SV) LTD (SF) (PTY) LTD (SL)

2. INFORMATION RELATING TO THE SAMSONS HEAD OFFICE (PTY) LTD (SHO)

2.1. The head office is fully responsible for all the administrative functions and capital investment
(all non-current assets) decisions of the entire group. It generates revenue solely from the
management fees charged to the three (3) operating companies within the group. Management
fees are not negotiable and are unilaterally set by the head office.
2.2. The group’s working capital management is not recognised as an administrative function.
However, organising any long-term funding for the group is regarded as an administrative
function.

2.3. The head office uses the intra-group loan accounts to continuously improve the cash resources
of the operating companies. This is done by financing the operating companies’ trade debtors and
trade creditors through transferring cash between the head office and the operating companies.
Despite this finance arrangement, the rights and obligations of the operating companies’ trade
debtors and trade creditors are not ceded to the head office. The operating companies’ unilaterally
determine the terms of this finance arrangement.

2.4. All the non-current assets are accounted for in the head office’s records. The group’s depreciation
policy is 20% per annum on the straight-line basis on all buildings while land is not depreciated.
Depreciation policies are unilaterally decided by the head office.

2.5. The following information was used to prepare some aspects of the head office’s 2019 budget:
2.5.1. Management fees are R365 000 per month per operating company.
2.5.2. Head office pays and accounts for the administrative managers’ salaries of R1 500 000
each per annum. Hummer and Murdge draw a combined salary of R1 180 000 per annum.

2.5.3. The head office’s total annual budgeted cleaning expenses is R1 260 000. This cost is
allocated equally amongst all the operating companies at the head office’s discretion.

2.5.4. R540 000 interest income on the intra-group loan accounts.

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2.5.5. The head office’s total assets budget includes the following only:
(i) Head office’s administrative block at a cost of R2 000 000 (40% Land and 60%
Buildings). The related carrying value as at 1 July 2018 was R1 760 000.
(ii) Three (3) factory properties (Land and Buildings). Each factory property was bought
at a cost of R9 000 000 (R3 000 000 for Land and R6 000 000 for Buildings). At 1 July
the 2018 carrying value of these factory properties was R23 400 000.
(iii) A vineyard (farm land only) used exclusively by SV, purchased at a cost of R5 000
000.
(iv) R11 000 000 for current assets relating to the intra-group loan accounts with the
operating companies.

2.5.6. The head office’s total liabilities budget and related annual interest expense budget (where
applicable) includes the following only:

(i) R8 500 000 in long-term borrowings and related interest of R550 000.

(ii) R500 000 for current liabilities relating to the intra-group loan accounts with the
operating companies.

2.6. Unless otherwise stated, the head office and the operating companies are fully responsible for
their respective operational decisions.

3. SAMSONS VINEYARD (PTY) LTD (SV)

3.1. Budget and standards information for the year ending 30 June 2019

SV is responsible for the planting, harvesting and distributing of grapes from its vineyard. The vineyard
only produces white grapes. During each financial year, SV budgets to harvest at its maximum capacity
of 200 000 kilograms (kg) grapes, 5% of which is of low quality and sold unpackaged to local pig-farmers
at R4 per kg. The rest of the harvest is then sold as follows: 60% externally to Mr. Banrs Winery (“MbW”)
(a boutique white-wine maker), 25% internally to SF for selling to wholesalers, and 15% is contractually
sold to ShopMart. There was no budgeted opening and closing inventories of any type.

The standard selling price to MbW is R15,00 per kg while the ShopMart contract provides for a standard
selling price at 20% below the selling price of sales to MbW. Only grapes sold to MbW and to ShopMart
are sold in quantities of 100 kg packaged in a custom-made box. The standard cost of this custom-
made box is R10. All current (and possible future) intra-group sales are (will be) made unpackaged.
According to the head office’s instructions, all intra-group sales of grapes are at R0 (nil) price.

The standards of the following three production cost items are set based on a 100 kg of grapes:
(i) vineyard costs @ R500; (ii) irrigation costs @ R250; and (iii) pest-control costs @ R375.

The standard direct labour harvesting time is 3 clock minutes per 5 kg of grapes @ R45,50 per clock
hour. The related allowed standard idle time is 7,5 minutes per clock hour.

The budgeted annual fixed production overheads of R150 000 are absorbed based on the total
budgeted kilograms of harvested grapes.

Amongst other non-production costs, R100 000 and R105 750 for interest expense on intra-group loan
account and vineyard security costs, respectively are also budgeted for.

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3.2. Extract from the 2019 financial year’s actual management information:
Grape harvest 180 000 kg
Direct labour costs – 2,8 clock minutes per 5 kg of harvested grapes R76 440
Direct labour idle time percentage 15%
Total fixed production overheads R130 000
All types of inventories (opening and closing) R0

4. SAMSONS FRUITS (PTY) LTD (SF)

SF buys and sells fruits to wholesalers. All the white grapes sold at SF are transferred from SV while
all the red grapes are bought from external suppliers. All the grapes are sold as a packaged unit of 10
kg in a plastic crate (“crates”). The crates are bought from CratesMatter Ltd (“CM”), a manufacturer
known for using coal and non-renewable energy at its plant. The same crate is used for both the white
and the red grapes.

The following information was extracted from the 2019 financial year budget:
Details White grapes Red grapes
Annual demand and purchases in kilograms 45 000 30 000
Selling price per kg R20,00 R25,00
Transfer price per kg R? N/A
Purchase price per kg N/A R12,00
Unit crate cost (inclusive of normal loss due to damage) R15,00 R15,00
Variable refrigeration costs per kg R0,15 R0,15
Fixed overheads (FO) absorption rate per kg R0,70 R0,70

SF has noted with concern, CM’s continued tussle with the environmental groups about the
environmental impact of CM’s operations and its usage of plastic. This prolonged tussle has put the
future availability of the crates under jeopardy. Leighsah (SF’s manager) is however insisting on utilising
CM’s crates and no one else’s. Notwithstanding possible restrictions, CM is adamant that there are
probabilities of 0,65 and 0,35 to supply 7 500 and 6 500 crates, respectively to SF during the 2019
financial year. Each time CM delivers crates to SF, an equivalent of 3 out of every 75 purchased crates
are damaged and cannot be used.

Leighsah is not happy with the current allocation of the fixed overheads (FO). SF currently allocates the
FO on a predetermined absorption rate based on the budgeted grape purchases. Her view is:

“The current allocation basis is arbitrary and irrational. It is questionable that both the products are
allocated the overheads at the same rate. For example, R37 500 of the total budgeted FO relates to
packing the crates ready for sale. Although each crate is only packed once, the white grapes are packed
more often than the red ones. The remaining budgeted FO relates to the inspection of packed crates
ready for sale. We inspect every 25th crate of the white grapes and every 10th crate of the red grapes. I
think the activity-based costing system (ABC) allocation basis will reflect a fairer allocation of the FO.”

5. SAMSONS LIQUOR (PTY) LTD (SL)

5.1. Budget information for the 2020 financial year

As from 1 July 2019, SL will, under the stewardship of Mugreth Samsons, start producing two types of
white wines, Semi-sweet wine (“SSW”) and Dry-wine (“DRW”). Each wine will be sold as a unit of 750
millilitres in a glass bottle. The annual wine demand is expected to be 64 000 units and 256 000 units
for SSW and DRW, respectively. The budgeted contribution margin ratio on all wine sales is 40%. All
of SL’s white grape requirements will exclusively be supplied by SV through sacrificing some or all of

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the budgeted grapes supply to Mr. Banrs Winery (MbW) only. The standard grape requirements are
450 grams (g) to produce one (1) litre of either wine type. The fixed production overheads absorption
is based on SL’s total budgeted litres of wine. Other fixed costs are budgeted for at R5 000 000.

The common standard costs of one (1) litre (l) white wine includes the following amongst others:
Cost item One litre wine
Grape costs (at the current transfer price) R?
Primary fermentation costs R20,00
Variable production overheads R12,00
Fixed production overheads absorption rate R5,00
To bring out the sweetness in the SSW, a secondary fermentation is carried out at a cost of R8,00 per
litre.

SL will use the Economic Order Quantity (EOQ) technique to manage all the 320 000 glass bottles
(“bottles”) it requires for the 2020 financial year. The purchase price per bottle is expected to be R4,50
throughout the 2020 financial year. Bottles will be ordered at R104,00 per order. The warehouse storage
costs and inventory insurance costs will be a total of R1,00 per bottle per annum. The required annual
rate of return on investment in inventories is expected to be 10,50% per annum.

REQUIRED
In respect of Samsons Head Office (Pty) Ltd (SHO) answer question (a) below:
(a) Hummer and Murdge read the following from a reputable management and cost
accounting textbook: “Some degree of decentralisation is essential for all but the
smallest firms. Organisations decentralise by creating responsibility centres.”
(i) Briefly explain what a “responsibility centre” is. (1)
(ii) Recommend the most appropriate “responsibility centre” type for the Samsons
Head Office and briefly motivate your recommendation with two (2) relevant
pieces of information from the scenario. (3)
▪ Your motivation must be limited to the aspects of the recommended
“responsibility centre” type.
(iii) Calculate SHO’s budgeted return on investment (ROI) for the 2019 financial
year. (15)
(iv) Based on your answer in question (a) (iii) above, briefly comment on whether or
not SHO is budgeted to achieve the group’s target annual rate of return for the
2019 financial year. (2)
In respect of Samsons Vineyard (Pty) Ltd (SV) answer question (b) below:
(b) (i) Prepare the budgeted statement of profit or loss and other comprehensive
income (income statement) for the 2019 financial year.
▪ Round all your workings to the nearest Rand. (14)
SV’s manager (Bard) is of the view that: “with reference to the budgeted income
statement for the 2019 financial year, the company’s profitability, or lack thereof, is
mainly due to the negative impact of the four (4) intra-group items.”
(ii) Briefly comment on the correctness of Bard’s view.
▪ Where applicable, support your commentary with brief calculations. (3)

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(b) (iii) Calculate the total direct labour idle time variance for the 2019 financial year. (5)
(iv) Calculate the fixed production overheads over-/under absorption amount for the
2019 financial year. (4)
In respect of Samsons Fruits (Pty) Ltd (SF) answer question (c) below:
(c) (i) Calculate the optimum kilograms mix of grapes that will maximise SF’s budgeted
contribution for the 2019 financial year. (13)
(ii) Briefly list three (3) environmental concerns that could have prompted the
environmental groups’ continuous disagreements with CratesMatter Ltd. (3)
(iii) Ignoring the possibility of any limitation of crates, use the ABC technique to
calculate the budgeted fixed overheads to be allocated to each grape type for
the 2019 financial year. (6)
In respect of Samsons Liquor (Pty) Ltd (SL) answer questions (d) and (e) below:
(d) Calculate the budgeted break-even point in units per product type for the 2020
financial year.
▪ Ignore the inventory ordering and holding costs. (12)
(e) At the launch of SL’s wine selling, Bard was heard whispering this to Mugreth:
“Without ‘my grapes’, all this will not be possible for you. Considering that I will have
to sacrifice selling my grapes to Mr Banrs, I think the intra-group transfer price should
surely reflect this fact and not be at the current R0 value.”
(i) Identify and advise Bard as to which is the most appropriate transfer pricing
method to determine the minimum transfer price for the internal transfer of SV’s
grapes to SL. (3)
▪ Motivate your advice with relevant information from the scenario.
▪ Limit your advice to the aspects of the transfer price type you identified.
▪ Your advice must not include any calculations.
For answering question e(ii) only, assume the following 2 points:
1. The budgeted grapes supply to MbW for the 2020 financial year is 120 000 kg at
R16,00 p/kg.
2. SV’s budgeted grape production costs for the 2020 financial year are:
Cost item Per kg
Vineyard, irrigation and pest control costs R12,50
Direct labour costs R0,50
Packaging costs R0,15
Fixed production overheads absorption rate R0,80

(ii) Calculate the budgeted minimum transfer price per kilogram of grapes that SV
will be willing to accept for the expected transfer of grapes required by SL during
the 2020 financial year. (10)
(iii) Calculate the budgeted number of orders to be placed with regards to the glass
bottle requirements during the 2020 financial year. (6)

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3.34 SCRUMPTIONS SOUTH AFRICAN SOUP (PTY) LTD 50 Marks

Scrumptious South African Soups (Pty) Ltd (“SSAS”) is a private company specialising in the
manufacturing of South African soups for distribution to local and international retailers. SSAS
manufactures and sells two (2) types of soup namely Biltong Soup (“BilS”) and Samp and Bean Soup
(“SamS”). The soup is manufactured from high-quality ingredients that are first cooked slowly. The
cooked soup is packaged in environmentally friendly containers (EfCs) and then flash-frozen. Flash-
freezing refers to the quick freezing of food/products for the preservation of the quality and flavour. The
flash-frozen soups that are packaged in EfCs are the finished products and these are stored in a cold
room, ready for sale.

Both the manufacturing and sales of units occur evenly throughout each financial year, which starts
on 1 September each year. SSAS makes use of an absorption costing system and all types of
inventory are valued using the first-in-first-out method (FIFO).

1. BUDGET INFORMATION FOR THE 2019 FINANCIAL YEAR

Sales demand and standard selling prices

1.1. The total sales demand for the financial year is 500 000 units in the ratio of 2 BilS to 3 SamS.

1.2. The standard selling prices were determined at R70 and R45 for BilS and SamS, respectively.

Manufacturing
1.3. One (1) unit consists of 500 grams (g) of soup packaged in an EfC.

1.4. The opening finished goods inventory is 3 000 BilS units and 15 000 SamS units.

1.5. The closing finished goods inventory is 7 000 units of BilS and 9 000 units of SamS.

1.6. Post manufacturing, 4% of the manufactured units from each product type are spoiled while still
in the cold room. Spoiled units cannot be rectified or sold.

Direct Materials
1.7. The direct materials comprise of soup ingredients and the EfCs.

1.8. Extract from a list of standard soup ingredient (input) requirements and standard costs to
manufacture one (1) unit:

BilS (1 unit = 500g) Grams R SamS (1 unit = 500g) Grams* R

Biltong 120 g 18,00 Beef stock 350 g 4,90
Spiced cream base 300 g 5,10 Samp and bean mixture 150 g 1,50
Cheese 80 g 4,80 Vegetables 100 g 0,30

*The difference between SamS input weight and the final output weight is as a result of the
evaporation that occurs during the cooking process.

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1.9. The budgeted opening and closing inventory for the biltong is 100 kg and 50 kg, respectively. The
other soup ingredients have no budgeted opening or closing inventory.

1.10. Each unit of soup uses one (1) EfC and each EfC has a standard purchase price of R0,10. The
same type of EfC is used for both BilS and SamS.

Manufacturing overheads
1.11. The soup manufacturing process is highly automated; hence, the variable and the fixed
manufacturing overheads are allocated to the products based on the machine time spent on each
product. One (1) unit of BilS and one (1) unit of SamS requires machine time of 90 minutes and
132 minutes, respectively. Machine time per unit includes both cooking and flash-freezing time.

1.12. For both products, the fixed manufacturing overheads absorption rate is R3 per machine hour
and the variable manufacturing overheads rate is R6 per machine hour.

Other costs
1.13. SSAS has a contract with Best Buds (Pty) Ltd to market SSAS products locally and internationally
for an annual fee of R632 000.

1.14. Fixed administrative costs are R1 400 000 per annum.

2. EXTRACT FROM THE ACTUAL RESULTS FOR THE MONTH ENDED 31 MAY 2019
2.1. The actual units manufactured during the month of May 2019 were 14 000 BilS and 24 000 SamS.

2.2. The following SamS ingredients were purchased and issued:

Ingredients Purchased Issued to Purchase

manufacturing price per kg
Kg Kg R/kg
Beef stock 9 000 8 800 R 15
Samp and bean mixture 3 800 3 700 R9
Vegetables 2 600 2 200 R4

2.3. The actual total machine hours for BilS were 20 000 hours for the month of May 2019.

3. POSSIBLE REPLACEMENT OF THE COLD ROOM CONDENSING UNITS

During the 2019 financial year-end review, the losses incurred in the cold room once again became a
contentious point of discussion. The cold room’s current condensing units are the cause of these losses.
The Chief Operations Officer (“COO”) of SSAS has heard of a newly established Swedish company,
Iskyld Incorporation Aktiebolag (“SInc”). SInc guarantees that their condensing units will reduce any
customer’s current cold room losses by 10%.

The COO of SSAS has obtained and made available the following information to assist with
investigating the possible replacement of the cold room condensing units:

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3.1. Should SSAS decide to replace the current cold room condensing units, the replacement units
will be bought, installed and brought to use on 1 September 2019. As with the current condensing
units, the annual maintenance of the replacement units will also be compulsory.

3.2. New condensing units:

The new condensing units will cost €6 000 and will have an expected useful life of four (4) years with
no scrap value. The applicable €:R exchange rate on 1 September 2019 is €1:R17. In order to maintain
the condensing units’ warranty, these units must only be installed and subsequently serviced by a SInc
approved service provider, of which there are only a limited number in South Africa. The installation fee
is estimated to be a total of R18 500. SInc requires all its approved service providers to charge a fixed
maintenance fee of R6 000 per year. In comparison to the current units, the new condensing units are
more energy efficient. The related average electricity bill is estimated to be R2 000 per month over the
life span of the new units.

3.3. Current condensing units:

Two years ago, SSAS bought refurbished condensing units from a South African supplier and installed
them in the cold room. At 31 August 2019, these condensing units had a book value of R20 000 and
remaining useful life of four (4) years. Although the resale value of these condensing units is estimated
to be R22 000 on 1 September 2019, it will be R0 in four years’ time. These units are maintained by
SSAS’s in-house maintenance team. The relevant maintenance cost is R6 500 per year. As a result of
the older technology used in these units, they are less energy efficient. The average electricity bill for
the current condensing units is estimated to be R2 400 per month over the remaining useful life of these
units. Losses incurred from the current condensing units are expected to amount to a total of R645 000
for the remaining useful life. If these current condensing units are replaced, they will be removed and
decommissioned by SSAS’s existing in-house maintenance team.

3.4. It is SSAS’s policy to depreciate all its non-current assets on a straight-line basis over their useful
life.

4. NEW PRODUCT (CHAKALAKA SOUP (“ChaS”)) LAUNCH IN THE 2020 FINANCIAL YEAR
During July 2019, SSAS ran a competition to identify a new-to-the-market type of soup to add to their
product range. Ms Rashid’s Chakalaka soup emerged as the winner. The SSAS test kitchen did all the
necessary testing and development of ChaS and subsequently declared the product as safe for
consumption, ready to be introduced into the market from 1 September 2019. The SSAS marketing
team gathered the following information to assist with the long-term pricing of ChaS:
4.1. The expected annual customer demand levels and total cost per unit at various selling prices are
as follows:

Selling price Annual Total cost per

per unit demand in unit
R units R
60 46 000 46
58 48 000 44
56 50 000 40
54 52 000 39

4.2. ChaS’s demand is deemed to be elastic.

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REQUIRED
(a) With regard to product BilS only for the 2019 financial year:
v. Prepare the manufacturing budget in units. (4)
vi. Prepare the purchases budget for the ingredient Biltong only. (4)
(b) In answering question (b) only, assume the following four (4) points with regard to
SSAS’s budget for the 2019 financial year:
1. The annual manufacturing/sales units are 220 000 for BilS and 330 000 for SamS;
2. That SSAS does not hold any type of inventory;
3. Ignore the implications of losses in the cold room, depreciation, and maintenance
and electricity of the condensing units; and
4. Except for the above three points, all the other applicable information remains as
given in the scenario.
Calculate the budgeted break-even point in units per product for the 2019 financial
year. (12)
(c) The COO has read in an internal memo that SSAS has an operating leverage of five
(5) and that its closest competitor, Delight Foods (Pty) Ltd, has an operating leverage
of two (2). These two companies have the same levels of sales.
From a profit perspective, state which one of these two companies is more vulnerable
to an economic downturn and provide a reason for your answer. (2)
(d) Calculate the following standard costing variances for the month of May 2019:
i. Direct material yield variance for the Samp and bean mixture ingredient only. (4)
ii. Fixed manufacturing overheads volume efficiency variance for BilS only. (2)
(e) Briefly discuss two (2) reasons for a possible favourable direct material yield variance
for the SamS ingredients. (2)
(f) i. From a quantitative perspective only, advise the COO as to whether or not to
replace the cold room’s current condensing units with the new condensing units.
▪ Ignore the time value of money and taxation. (8)
ii. Briefly discuss four (4) qualitative factors that SSAS should consider in its
decision-making process relating to the possible replacement of the condensing
units. (4)
(g) As part of launching ChaS, assist the COO with addressing the following questions:
i. Determine which one of the unit selling prices will result in the highest total profit. (3)
ii. Briefly explain what is meant by an elastic demand. (1)
iii. Briefly explain the difference between a price-skimming and a penetration pricing
policy. (2)
iv. State which one of the two pricing policy methods as per (g)iii above is more
suitable to an elastic demand environment and provide a reason for your answer. (2)
Total marks [50]

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4 SUGGESTED SOLUTIONS

4.1 DOOLAX (PTY) LTD

(a) Calculate DoLax’s budgeted selling prices per unit per product type for the 2020
[10]
financial year.
Details Interior-P Exterior-P
(In-P) (Ex-P)
R R
Total manufacturing costs R889 R917
Solvent & pigment 644,00 532,00
Resins 0 140,00
Colourant 20,00 20,00
Direct labour costs 21,50 21,50
VMO 56,25 56,25
Packaging costs 3,50 3,50
FMO 143,75 143,75
Selling prices per unit R1 270 R1 310
 Given
 In-P: R28 x 23 litres = R644; Ex-P: R28 x 19 litres = R532
 R35 x 4 litres = R140
 R10 x 2 litres = R20
 9 seconds x 25 litres = 225 seconds ÷ 60 ÷ 60 = 0,0625 hours x R900 = R56,25
 R2 300 x 0.0625 hours = R143,75
 R3 450 000 ÷ 1 500 hours = R2 300 per hour
 24 000 x 0,0625 hours = 1 500 hours
 Sum of all manufacturing costs
 In-P: R889 ÷ 70% (GP margin = 30%) = R1 270; Ex-P: R917 ÷ 70% = R1 310

(b) Calculate the budgeted number of units per product that DoLax’s will need to
produce and sell to achieve the joint venture’s target profit for the 2020 financial [8]
year.
Units to manufacture and sell:
Total fixed costs + target profit In-P: 4 165 x 1 = 4 165
Weighted contribution per unit (WC p/u) Ex-P: 4 165 x 3 = 12 495
= R5 820 000 + R2 800 000
R2 070  Given
 R3 450K + R2 370K = R5 820K
= R8 620 000  Weighted contribution per unit (WC p/u)
R2 070 Details In-P Ex-P
per unit per unit
= 4 164,2512 Contribution R480 R530
≈ 4 165 (always round-up) WC per unit R480 R1 590

 R480 x 1 = R480; R530 x 3 = R1 590

 6 000 ÷ 6 000 = 1; 18 000 ÷ 6 000 = 3
 R480 + R1 590 = R2 070

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(c) Briefly describe “contribution margin ratio” (CMR) as a concept and further briefly
explain how DoLax can use it as a useful tool in undertaking cost-volume-profit [3]
sensitivity analysis.
Description:
1. “This measures the level of contribution in relation to sales. The higher the ratio, the quicker the
fixed costs will be recovered below break-even, and the greater the profits will be above break-
even per unit sold” (Wood et. al, 2012:40).
2. A higher ratio is synonymous with relatively low break-even units while the lower the ratio the less
quickly the fixed costs will be recovered, and thus synonymous with a higher break-even point
units.

Explaining how DoLax can use CMR:

Within relevant range, DoLax can apply the CMR to (projected) different levels of sales, determine
the resulting impact on profits and subsequently make the following key business decisions, for
example:

1. Highest/lowest contribution margin ratios between on-line sales channel and retail store.
2. Highest/lowest contribution margin ratios between different types of paints.
3. Highest/lowest contribution margin ratios considering a particular sales mix of paints.
4. Contribution margin ratios of a new paint-line (steel paints, motor vehicle paints etc.) for possible
market entry (diversification).
5. Contribution margin ratios of new market segments for possible entry (diversification).
6. Contribution margin ratios of new sales initiatives, for example, the introduction of LaxApp.

(d) Prepare DoLax’s actual statement income statement and comment on whether or
[12]
not the joint venture’s target profit was actually met for the 2020 financial year.
Details R
Sales 21 420 000
Less: Cost of sales 15 484 900
Opening inventory 332 000
Plus: Variable manufacturing costs (VMC) 15 504 000
Plus: Fixed manufacturing overheads (FMO) 2 760 000
Less: Closing inventory 3 111 100
Gross profit R5 935 100
Less: FMO under-allocation 120 000
Less: Fixed administrative costs 2 370 000
Net profit before taxation R3 445 100
Comment: At an actual net profit before tax of R3 445,1K, DoLax has met and exceeded the joint
venture’s R2 800K target profit for the 2020 financial year.

 Given
 (4 080 x R1 200 = R4 896K) + (12 240 x R1 350 = R16 524K) = R21 420K
 R284 000 + R48 000 (400 x R120) = R332 000

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(d) Prepare DoLax’s actual statement income statement and comment on whether or
[12]
not the joint venture’s target profit was actually met for the 2020 financial year.
 VMC = (4 800 x R785 = R3 768K) + (14 400 x R815 = R11 736K) = R15 504K
 FMO = (300 x R2 300 = R690K) + (900 x R2 300 = R2 070K) = R2 760K
 (4 800 x 0,0625 = 300 hours) + (14 400 x 0,625 = 900 hours) = 1 200 hours
 (9 seconds x 25 litres ÷ 60) ÷ 60 = 0,625 mixing plant hours per unit
 R3 450K ÷ 1 500 = R2 300 per mixing plant hour
 (6 000 x 0,0625 = 375 hours) + (18 000 x 0,0625 = 1 125 hours) = 1 500 hours
 R1 040,2K (In-P) + R2 070,9K (EX-P) = R3 111,1K
 In-P: 1 120 x R928,75 = R1 040,2K
 Ex-P: 2 160 x R958,75 = R2 070,9K
 In-P: (R3 768K + R690K) ÷ 4 800 = R928,75
 Ex-P: (R11 736K + R2 070K) ÷ 14 400 = R958,75
 Actual closing inventory units:
Details Interior-P Exterior-P
Opening inventory 400 0
Plus: Manufacturing 4 800 14 400
Available for sale 5 200 14 400
Less: Sales 4 080 12 240
Closing inventory 1 120 2 160
 R2 880K less R2 760K = R120 000

(e) From DoLax’s perspective, briefly discuss and motivate the appropriate cost
classification of the LaxApp royalties. Your discussion must be limited to the “cost [3]
behaviour” and “function” attributes (characteristics) of the LaxApp royalties.
1. These royalties’ costs have two components. The first component is R250K annual fees which
are fixed in nature and the second component is R5 per unit of paint that will be sold online and
thus variable in nature.
2. Classification of cost in accordance to behaviour is therefore, “mixed costs/semi-variable costs”
because this item consists of two components, R250K fixed cost component and R5 unit variable
cost
3. The LaxApp royalties do not relate to- and will not be incurred in the manufacturing process,
therefore, in accordance to function, it will be classified as non-inventoriable costs (non-
manufacturing/not related to manufacturing), and in the main, as online selling/distribution costs

(f) Why would the budgeted contribution for the online sales channel be different to that
[2]
of the retail store sales channel despite no changes to the budgeted selling prices?
1. Contribution is calculated as selling price less all variable costs. The question is explicit that no
changes in the selling prices will occur, therefore, in this instance, changes in the variable costs
will be the only reason why the budgeted contribution between the two channels will differ.
2. With the introduction of LaxApp for the online sale channel, DoLax will incur additional variable
costs of R5 (variable royalties) per unit of paint sold online. As such, decreased online
contribution. (In contrast, the retail store sales channel will not utilise the LaxApp and will thus
not incur this additional R5 per unit of paint sold from the retail store).

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(g) (i) Assist Ms Smith to make an informed decision about the possible implementation
[6]
of ABC by briefly discussing three (3) limitations of the ABC system.
No. Limitations Explaining
1. ABC can be expensive to The process of gathering information and identifying
implement. activities can be time consuming and expensive.
2. The reliability of the cost As with any system, if the input is incorrect (the activity
information generated by an ABC measures), the output will be incorrect. Worse yet is that
system is undermined by certain if the system itself is faulty, then the output will also be
impracticalities and/or incorrect: the cost information is only as accurate as the
inaccuracies in identifying cost accuracy with which the cost drivers have been
drivers. identified.
3. ABC is more suited for long-term When making a decision, the timeframe and scope of
decision-making rather than short- the decision must always be considered. The
term decision-making and can impression can be created that all costs that are
thus create a false impression of allocated to cost objects by ABC are variable in the
the relevance of overhead costs to short-term, when some may, in fact, actually be stepped
decision-making. fixed costs or fixed costs that will not be affected by
small change in the cost driver.
Source: Principles of management accounting – a South African perspective (Roos et al. 2011:166-167)

(g) (ii) Assuing that DoLax introduces and implements ABC, calculate the total
budgeted fixed manufacturing overheads to be allocated to Interior-P and [6]
Exterior-P for the 2021 financial year.

Details Interior-P Exterior-P

Paint mixing plant depreciation R472 500 R1 417 500
Set-up costs R416 500 R1 190 000
Total R889 000 R2 607 500
Manufacturing units 7 000 21 000
 Given
 In-P: R1 890K x 437,5hrs ÷ 1 750hrs = R472 500
 Ex-P: R1 890K x 1 312,5hrs ÷ 1 750hrs = R1 417 500
 In-P: R1 890K x 7÷28 = R472 500; Ex-P: R1 890K x 21÷28 = R1 417,5K
 In-P: [7 000 x 225 (9 x 25 litres)] ÷ 60 seconds ÷ 60 minutes = 437,50 hours
 Ex-P: [21 000 x 225 (9 x 25 litres)] ÷ 60 seconds ÷ 60 minutes = 1 312,50 hours
 437,50 hours + 1 312,50 hours = 1 750 hours
 In-P: 800 ÷ 10% less 1 000 = 7 000; Ex-P: 2 300 ÷ 10% less 2 000 = 21 000
 In-P: R1 606,5K x 35 ÷ 135(35 + 100) = R416 500
 Ex-P: R1 606,5K x 100 ÷ 135 = R1 190 000
 R3 496,5K less R1 890K = R1 606,5K
 7 000 ÷ 200 = 35; 21 000 ÷ 210 = 100

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4.2 DELICIOUS CEREALS (PTY) LTD

(a) Determine the total budgeted contribution per product type by preparing the budgeted
marginal cost statement of Delicious Cereals (Pty) Ltd for the year ended 31 March 2016 in
as much detail as possible. The total column is not required. Round off all your workings to
the nearest rand.
Details Calculation CC WC
R R
Sales  3 000 000 1 750 000
Less: Variable cost of sales 2 597 400 1 398 765
Opening inventory  23 400 12 600
Barley, sugar, vitamins  707 000 357 000
Corn  404 000 -
Wheat  - 391 170
Box  303 000 153 000
Direct labour  1 010 000 425 000
Variable manufacturing overhead  202 000 102 000
Less: Closing inventory  52 000 42 005
Less: Variable selling and  20 000 10 000
administration cost
CONTRIBUTION R382 600 R341 235

Calculations:
Details Calculations CC Calculations WC
 Sales 100 000 x R30 = 3 000 000 50 000 x R35 = 1 750 000
 Opening inventory R24 600 – (1 000 units x R1,2) R13 200 – (500 units x R1,2)
= 24 600 – 1 200 = 23 400 = 13 200 – 600 = 12 600
 Barley, sugar, vitamins 101 000 x R7 = 707 000 51 000 x R7 = 357 000
 Corn 101 000 x 0,5kg/u x R8
= 50 500 x R8 = 404 000
 Wheat 51 000 x 0,5kg/u x R15,34
= 25 500 x R15,34 = 391 170
 Box 101 000 x R3/box = 303 000 51 000 x R3/box = 153 000
 Direct labour 101 000 x 12/60 x R50/h 51 000 x 10/60 x R50/h
= 20 200 hours x R50/hour = 8 500 hours x R50/hour
= 1 010 000 = 425 000
 Variable manufacturing 101 000 x R2 = 202 000 51 000 x R2 = 102 000
overhead

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Details Calculations CC Calculations WC
 Closing inventory Units calculation: Units calculation:
1 000 + 101 000 – 100 000 500 + 51 000 – 50 000
= 2 000 units = 1 500 units

Variable manufacturing cost per Variable manufacturing cost per

unit: unit:
(707 000 + 404 000 + 303 000 + (357 000 + 391 170 + 153 000
1 010 000 + 202 000) / 101 000 + 425 000 + 102 000) / 51 000

= 2 626 000/101 000 = 1 428 170/51 000

= R26/unit = R28/unit or R28,003/unit

2 000 units x R26 = 52 000 1 500 units x R28 = 42 000

Also accept:
(1 500 units x R28,003 = 42 005)
 Variable selling and 100 000 x R 0,2 = 20 000 50 000 x R 0,2 = 10 000
administration cost

(b) Calculate the total budgeted fixed manufacturing overheads allocated to both the corn
cereals (CC) and whole-wheat cereals (WC) using the current basis of allocation for the year
ended 31 March 2016.
Corn cereal = 101 000/152 000 x 200 000 = R132 895
Whole-wheat cereal = 51 000/152 000 x 200 000 = R 67 105
R200 000

(c) Calculate the actual fixed manufacturing overheads for the year ended 31 March 2016 per
unit of cereal, for both the corn cereals (CC) and the whole-wheat cereals (WC), using the
activity-based costing system.

Corn (CC) Calculations Amount

Raw material ordering 10/20 X R25 000 R 12 500
Factory shop rental 4/7 X R120 000 R 68 571
Packing process 100 500/8 = 12 562,50 R 11 247
12 563/16 755 x R15 000
Quality inspections 100 500 / 5 = 20 100 R 15 240
20 100/26 388 x R20 000
Total overheads 107 558 R107 558
÷ Actual units produced 100 500 100 500 units
Rate per unit 1,07 R1,07 per unit

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Wheat (WC) Calculations Amount

Raw material ordering 10/20 X R25 000 R12 500
Factory shop rental 3/7 X R120 000 R51 429
Packing process 50 300 / 12 = 4 191,67 R 3 753
4 192/16 755 x R15 000
Quality inspections 50 300 / 8 = 6 287,5 R 4 760
6 288/26 388 x R20 000
Total overheads R 72 442
÷ Actual units produced 50 300 units
Rate per unit R1,44 per unit

(d) Assume there are no opening finished inventory units. Calculate DC’s total required units
for each product type for the year ended 31 March 2016, to break even on the total budgeted
fixed costs for the year.
Contribution per unit CC WC
Sales 30 35
Less: Variable costs per unit 26 28
Barley, sugar, vitamins 7 7
Corn 4 -
Wheat 7,67
Box 3 3
Direct labour 10 8,33
Variable manufacturing overhead 2 2
Less: Variable selling & admin 0,2 0,2
CONTRIBUTION per UNIT R3,80 R6,80

Formula = Total fixed costs ÷ weighted contribution

Total fixed costs = R200 000 + R70 000 (R100K x 70%) = R270 000
Weighted contribution per batch = (R3,80 x 2) + (R6,80 x 1)
= R7,60 + R6,80
= R14,40

Break-even batches = R270 000 ÷ R14,40

= 18 750

18 750 x 2 = 37 500 units of CC

18 750 x 1 = 18 750 units of WC
= 56 250 units

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(e) Variances
(i) Sales price margin variance for the whole-wheat cereals.
= (Actual price – Budgeted price) X Actual sales units
= (R38 – R35) X 50 000
= R150 000 F.

(ii) Direct material wheat usage variance.

= (Actual usage – Standard usage) X Price per kg
= ((0,6 X 50 300) – (0,5 X 50 300)) X R15,34
= (30 180 – 25 150) X R15,34
= R77 160 (U).

(iii) Direct labour rate for the corn cereal.

= (Actual rate – Budgeted rate) X Actual hours
= (R52,5 – R50) X (12/60 X 100 500)
= (R2,5 X 20 100)
= R50 250 (U).

(iv) Fixed manufacturing overheads expenditure variance.

= Actual expenditure – Budgeted expenditure
= R180 000 – R200 000
= R20 000 F.

(f) Briefly discuss the difference between quality costs and target cost.
Quality costs are costs incurred to ensure that a product sold or a service rendered meets and/
or even exceeds customers’ expectations; and
A target cost is the allowable amount of cost that can be incurred on a product or a service so that
the required profit on the product or service can still be earned.

(g) Briefly discuss the difference between direct and absorption costing systems.

A direct costing system (also known as a marginal or variable costing system) assigns only
variable manufacturing costs to product cost whereas an absorption costing system assigns both
direct and indirect costs to cost objectives/products, which includes both fixed and variable
manufacturing costs.

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4.3 MITOLI BYEBOER (PTY) LTD

(a) Calculate BHD’s budgeted annual harvest kilograms for the 2019 financial year. [3]

Details Results
Total number of bee-hives per harvest 150
Standard harvest per bee-hive 24kg
Standard harvest kilograms per harvest 3 600kg
Number of harvest periods per financial year 3
Total budget harvest kilograms per financial year 10 800 kg
 Given
 5 bee-hives x 30 hectares = 150
 150 x 24kg = 3 600kg
 3 600kg x 3 = 10 800kg

(b) Prepare BHD’s actual income statement for the four-month period ended
[14]
30 April 2019

Details R
Sales 192 000
Less: Cost of Sales 171 400
Feeding costs 56 700
Other variable farming overheads 14 000
Direct labour costs 64 800
Preservation costs 2 300
Fixed farming overheads 33 600
Plus: Fixed farming overheads over absorption 3 600
Gross profit 24 200
Add: Other income – profit on the insurance proceeds 605
Less: Other operating expenses 22 415
Insurance expenses 16 000
Variable selling costs 2 415
Administrative building painting costs 4 000
Net profit before tax R2 390

 Given
 [2 300kg x R60 = R138K] + [1 200kg x R60 x 75% (100% less 25%) = R54K] = R192K
 3 500kg less 2 300kg = 1 200kg
 150 x 3kg x 120 days = 54 000kg x R63/60 = R56 700
 2 300kg x R1,00 = R2 300
 2 800hrs x R12 = R33 600

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(b) Prepare BHD’s actual income statement for the four-month period ended
[14]
30 April 2019
 R69 120 ÷ 5 760hrs (240 days x 3 workers x 8 hrs) = R12 p/h
 R33 600 less R30 000 = R3 600
 R 4000 x 4months = R16 000
 2 300kg x R1,05 = R2 415
 R12 000 ÷ 12months x 4months = R4 000

(c) Briefly explain why budgeted fixed production overhead rates should be used in
[2]
preference to actual fixed production overhead rates.
“Because the uses of actual rates causes delay in the calculation of product or service costs, and the
establishment of monthly rates results in fluctuations in the overhead rates throughout the year, it is
recommended that annual budgeted overhead rate should be used.” (Drury, 2015:71)

(d) (i) Calculate the standard feed purchase price per 60 kg of feed [2]

Details Amount
Total actual feeding costs purchases R57 960
Less: Adverse purchase price variance R6 072
Total budgeted feeding cost purchases R51 888
Standard feeding cost purchases per 60kg R56,40

 Given
 55 200kg x R1,05 (R63 ÷ 60kg) = R57 960
 R57 960 less R6 072 = R51 888
 R51 888 ÷ 55 200kg = R0,94 x 60kg = R56,40

(d) (ii) Possible reasons for the R6 072 adverse feed purchase price variance [2]

1. Diminishing supply in the feed might have pushed the purchase price upward.
2. Intentional holding back of the supply to inflate the market prices.
3. Possible price fixing by the few suppliers in the market (few monopoly cooperatives).
4. Increased demand pulling up the market prices (pure supply and demand market forces).
5. Standard might have been incorrectly set.

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(e) Identify and briefly discuss two (2) ethical concerns regarding MapT that could
[4]
potentially harm MB’s reputation through their business association with MapT.

No. Listing Discussion

1. MapT is constantly MB’s association with a company that is known for substandard work
accused of shoddy on the municipal projects has the propensity to negatively affect the
panting works on views and support of the general public (customers)
municipal projects.
2. Dangerous and Correct road markings are essential for the safety of road users (both
confusing road motorists and pedestrians). Any dangerous and confusing markings
markings. may result in road accident(s) and fatalities. MB can ill afford to be
associated with a company that has total disregard for human safety
and safety of all other road users.
3. Hosting weekly Continuous hosting of parties for teenagers is not consistent with
parties for responsible corporate citizenry. MB’s business reputation can be
teenagers. harmed by a perceived endorsement of this irresponsible behaviour by
MapT.
4. Encouraging Alcohol use is one of the country’s major social challenge. A company
underage alcohol that is seen as encouraging and/or endorsing underage alcohol use run
use. the risk of been ostracised by the community and consumers. By being
associated with MapT, MB also run the risk of possible community and
consumer revolt.

(f) Calculate the budgeted minimum transfer price per kg of raw-honey [8]

Minimum price in this scenario = Incremental costs + lost contribution

Units to transfer

= R30 300 + R11 325 OR R20,20 + R7,55

1 500

= R41 625
1 500

= R27,75 per kg

 Given
 Determination of lost units
Details Kilograms
Total budgeted harvest for period 2 3 500
Less: External demand 2 300
Available for internal transfer 1 200
Less: Budgeted requirements for internal transfer 1 500
Lost units 300

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(f) Calculate the budgeted minimum transfer price per kg of raw-honey [8]
 Determination of external contribution

Details Amount
Sales per kg 60,00
Less: Incremental costs per kg 20,20
Less: Preservation costs per kg 1,00
Less: Variable selling costs per kg 1,05
External contribution per kg 37,75
Lost contribution in total R11 325
Lost contribution per unit R7,55

 Determination of incremental costs

Details In Total Per unit

Feeding costs 24 300 16,20
Plus: Variable farming overheads 6 000 4,00
Plus: Fixed direct labour cost 0** 0**
Plus: Fixed farming overheads 0** 0**
Plus: Preservation costs 0* 0*
Plus: Variable selling costs 0* 0*
Incremental costs R30 300 R20,20

* Not incurred on internal sales

** Fixed cost is not incremental cost and hence not included
 R37,75 x 300kg = R11 325 ÷ 1 500kg = R7,55
 R56 700 ÷ 3 500kg = R16,20
 R16,20 x 1 500kg = R24 300
 Refer to question (b), calculation 
 R14 000 ÷ 3 500kg = R4,00
 R4,00 x 1 500kg = R6 000

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(g) Prepare the actual quantity statement of HPD for the month ended 30 April 2019. [7]

Physical units Equivalent units

Direct
Input Output Conversion
Details raw material
(kg) (kg) kg % kg %
1 200 Opening WIP
5 800 Put into production
Completed from:
Opening work-in-progress 1 140 0 0 456 40
Current production 4 860 4 860 100 4 860 100
Completed and transferred 6 000 4 860 5 316
Normal loss 350 0 100 0 70
Abnormal gain (100) (100) 100 (70)  70
Closing WIP 750 750 100 600 80
7 000 7 000 5 510 5 846
 Given
 1 200 x 95% (net normal loss of 5%) = 1 140
 1 140 x 40% (100% less 60%) = 456
 6 000 less 1 140 = 4 860
 (1 200 + 5 800) = 7 000 x 5% = 350
 Short-cut method application.
 7 000 less (6 000 + 350 + 750) = -100
 -100 x 70% = -70
 750 x 80% = 600

(h) Calculate HPD’s actual closing finished goods value as it would have appeared
[6]
in the income statement for the month-ended 30 April 2019.
Actual closing finished goods value as at 30 April 2019: 100 units x R40,00 = R4 000
 Given
 Determining closing finished goods units
Details Units
Opening finished goods units 150
Plus: Completed and transferred 12 000
Available for sale 12 150
Less: Sales units 12 050
Closing finished goods units 100

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(h) Calculate HPD’s actual closing finished goods value as it would have appeared
[6]
in the income statement for the month-ended 30 April 2019.

 Equivalent cost per unit

Details Amount
Direct raw material equivalent cost per unit R60,00
Plus: Conversion equivalent cost per unit R20,00
Equivalent cost per (kilogram) R80,00
Equivalent cost per unit (finished goods)
R80 ÷ 1 000 grams x 50 grams = R40,00 R40,00

 6 000kg x 1 000 grams ÷ 500 grams = 12 000 units

 R783 250 ÷ R65 = 12 050 units
 R330 600 ÷ 5 510 = R60,00
 R331 300 less R700 (R350 x R2,00) = R330 600
 Refer to quantity statement in question (g) above
 R116 920 ÷ 5 846 = R20,00
 R56 920 + R60 000 = R116 920

(i) From a process costing perspective, briefly contrast the treatment of a normal
[2]
loss value to that of an abnormal loss value in the income statement.

1. Normal loss value

▪ Depending on the wastage point, normal loss value is proportionally allocated to all or some of
the following items: Completed and transferred units; Abnormal loss units and/or Closing WIP
units.
▪ The value is not separately presented on the face of the income statement.

2. Abnormal loss value

▪ Abnormal loss value is treated as a period cost in the period it is incurred.
▪ It is presented as a separate line item on the face of the income statement.

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4.4 PEOPLES’ WAGON (PTY) LTD

(a) List three (3) different costs that are included in PW’s other direct variable [4]
manufacturing costs (DVMC), and briefly explain the rationale behind classifying
these costs as DVMC.

Listing: From PW’s perspective, in the main, the following direct costs are unavoidable in the
company’s vehicle manufacturing process and are thus included in other direct variable
manufacturing costs (DVMC*):
1. Metal, steel, or vehicle body shell costs (for example metal purchase costs)
2. Body shells/ vehicle building costs
3. Vehicle body shells painting costs
4. Electrical wiring costs
5. Entertainment centres costs
6. Upholstery and seat fitting costs
7. Engine costs
8. Engine fitting costs
9. Vehicle testing costs

Explanation:
▪ Direct variable manufacturing costs are costs incurred in the manufacturing process which varies
in direct proportion to the units/volumes (vehicles) being manufactured. Or
▪ These costs can be specifically and exclusively identified with a particular object (vehicle) being
manufactured (Drury, 2015:27). Or
▪ They are inherent and unavoidable costs in the manufacturing process. Or
▪ These costs consist mainly of direct materials costs and direct labour costs. Or
▪ In PW’s instance, for every additional motor vehicle (cost object) that is manufactured, additional
direct variable manufacturing costs will be incurred.

(b) (i) Briefly comment on the correctness of Ms. Prasattz’s suspicion that the [3]
reason why PW cannot “just manufacture and sell PHLs only” has
something to do with break-even point units.
Break-even point units – The level of output at which costs are balanced by sales revenue and
neither a profit nor a loss will occur.
Ms. Passattz’s view that the reason why PW cannot just manufacture and sell PHLs has to do with
break-even point units is incorrect, this is because:

1. PW’s market demand of 6:1 for PHL:TGD relates to the company’s sales mix and is not break-
even point units.
2. The fact that not only PHLs are manufactured and sold is not informed by the break-even point
units, it is a strategic decision aimed at catering for PW’s market segments and customer
preferences.

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(b) (i) Briefly comment on the correctness of Ms. Prasattz’s suspicion that the [3]
reason why PW cannot “just manufacture and sell PHLs only” has something
to do with break-even point units.
3. Break-even point is not dependent on a company’s sales mix. It only refers to a point where a
company is able to generate enough sales to cover all its costs.
4. Irrespective of a number of products that a company manufacture and sells, the break-even point
will always be a point where that company makes neither a profit nor a loss.
5. In essence, PW should be able to determine the company’s break-even point units, whether or
not the company manufacture and sell both the PHLs and the TGD’s.

(b) (ii) Calculate PW’s sales units’ budget per vehicle model for the 2020 financial [2]
year.
PHL: 28 000 x 6 ÷ 7 = 24 000
TGD: 28 000 x 1 ÷ 7 = 4 000
 Given

(b) (iii) Calculate PW’s budgeted break-even point in units for both PHL and TGD [10]
for the 2020 financial year.

Details Workings
Break-even point in units = Total fixed costs__….
Weighted contribution
Break-even point in units (SM) = R3 525,6m__….
R940 250
Break-even batches (SM) = 3 749,6411 ≈ 3 750 (always round up)
Break-even point units PHL: 3 750 x 6 = 22 500 units
TGD: 3 750 x 1 = 3 750 units

 Given
 Total fixed costs
Details Amount
Fixed manufacturing costs R3 116m*
Unskilled labour costs R54,6m
Management staff costs R350m
Fixed distribution costs R5m
Total R3 525,6m
*m = denotes million in all instances
 R38,6m less R33,6m ((24 000 + 4 000) x R1 200) = R5m

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(b) (iii) Calculate PW’s budgeted break-even point in units for both PHL and TGD for [10]
the 2020 financial year.
 Contribution per unit:
Details per unit PHL TGD
R R
Standard selling price 250 000 420 000
Less: Total variable costs 127 450 215 050
Other DVMC 119 500 204 000
Wheels costs 3 250 4 250
Variable distribution costs 1 200 1 200
Technical staff costs 3 500 5 600
Contribution per unit R122 550 R204 950

 R3 684m less R816m = R2 868 ÷ 24 000 = R119 500

 R816m ÷ 4 000 = R204 000
 Refer to question (b)(ii) sales units budget above
 R95m less R17m = R78m ÷ 24 000 = R3 250
 R17m ÷ 4 000 = R4 250
 PHL: 25hrs x R140 = R3 500; TGD: 40hrs X R140 = R5 600
 Weighted contribution: R735 300 + R204 950 = R950 250
 PHL: R122 550 x 6 = R735 300; TGD: R204 950 x 1 = R204 950

(c) Standard costing variances calculations for the 2020 financial year [12]
(i) Sales mix variance per vehicle model and in total
Product Actual Actual sales Difference Standard gross Variance
sales units @ std profit R
units proportion
PHL 13 650 15 600 -1 950 R19 300 R37 635K A
TGD 4 550 2 600 1 950 R40 200 R78 390K F
Total 18 200 18 200 R40 755K F
 Given
 13 650 + 4 550 = 18 200
 PHL: 18 200 x 6 ÷ 7 = 15 600; TGD: 18 200 x 1 ÷ 7 = 2 600
(ii) Wheels purchase price variance for vehicle model PHL only
Product Actual Standard Difference Quantity Variance
price price R
PHL R640 R650 R10 70 000 R700K F

 Given
 R44,80m ÷ 70 000 (14K x 5 wheels) = R640
 R3 250 ÷ 5 wheels = R650
 Refer to calculation  per question (b)(iii) above.

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(c) Standard costing variances calculations for the 2020 financial year [12]

(iii) Idle time variance for technical staff in total

Option 1: Idle hours
Details Actual idle Standard Difference Standard Variance
time hours allowed idle work hour R
time hours rate
PHL 43 750 70 000 26 250 R175 R4 593 750 F
TGD 25 000 40 000 15 000 R175 R2 625 000 F
Total 68 750 110 000 41 250 R175 R7 218 750 F
 Given
 350 000hrs + 200 000hrs = 550 000hrs x 12,5% = 68 750hrs or
350 000hrs + 200 000hrs = 550 000hrs x (1 ÷ 8) = 68 750hrs
 550 000hrs x 20% = 110 000hrs
 R140 ÷ (100% - 20%) = R175 or R140 ÷ 80% = R175
Option 2: Work hours
Details Actual work Standard work Diff Standard Variance
hours hours for work hour R
actual input rate
PHL 306 250 280 000 26 250 R175 R4 593 750 F
TGD 175 000 160 000 15 000 R175 R2 625 000 F
Total 481 250 440 000 41 250 R175 R7 218 750 F

 Given
 350 000hrs + 200 000hrs = 550 000hrs x (100% - 12,5%) = 481 250hrs
 550 000hrs x (100% - 20%) = 440 000hrs
 R140 ÷ (100% - 20%) = R175 or R140 ÷ 80% = R175

(iv) Fixed manufacturing overheads expenditure variance

Details Actual Budget Variance
Fixed manufacturing overheads R2 250m R3 116m R866 million F
 Given

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(d) Prepare PW’s actual statement of profit or loss and other comprehensive income [14]

Details R’ million
Sales 5 278
Less: Cost of Sales 4 865,50
Variable manufacturing costs 2 807,05
Wheels costs 66,80
Fixed manufacturing overheads 2 117,50
Unskilled staff costs # 45,76
Technical staff costs 77
Less: Closing inventory 248,61
Less: Fixed manufacturing overheads under-absorption 132,50
Gross profit 280
Less: Non-manufacturing operating expenses 458,28
Variable distribution costs 21,84
Fixed distribution costs 5,0
Unskilled staff costs 11,44
Administrative management costs 420
Net profit/(loss) before tax (R178,28)
 Given
 (350 000hrs + 200 000hrs) = 550 000 hrs x R3 850 = R2 117,50m
 R54,60m + R2,6m= R57,2m x 80% manufacturing staff = R45,76m
 (R500 x “13 months”) x 400 workers = R2,6m
 R2 250m less R2 117,50m = R132,50m
 (13 650 + 4 550) = 18 200 x R1 200 = R21,84m
 R57,2m x 20% admin staff = R11,44m

(e) (i) Briefly define linear programming [1]

According to Drury: “A mathematical technique used to determine how to employ limited resources
to achieve optimum benefits” (Drury, 2015:714).

(e) (ii) Mention to Mr Nine as to under which circumstances it is best to resort to the [1]
linear programming technique for determining optimum manufacturing mix
According to Drury: “When more than one scare resource exists, the optimum production
programme cannot easily be established by the process described in Chapter 9 (theory of
constraints). In such circumstances, there is a need to resort to linear programming technique to
establish the optimum production programme” (Drury, 2015:674).

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(e) (iii) Calculate PW’s budgeted optimum manufacturing mix in units per vehicle [14]
model for the 2021 financial year.
 Given
 Establishing limiting factor(s)
Details Body shell metal Technical staff
(tonnes) clock hours
PHL TGD PHL TGD Total
Required resources 12 300 3 280 615K 164K 779K
Available resources 12 500 3 300 567K
Surplus/(Shortage) 200 20 (212K)
Body shell metal is not a limiting factor Technical staff hours are a limiting factor

 PHL: 12 300 ÷ 0,5t = 24 600 units; TGD: 3 280 ÷ 0,8t = 4 100 units
 PHL: 24 600 x 25hrs = 615 000hrs; TGD: 4 100 x 40hrs = 164 000hrs
 1 000 x 30% (100% less 60% less 10%) = 300 staff x 45hrs x 42 weeks = 567K hrs
 Calculating standard contribution per limiting factor & optimal manufacturing mix
Details PHL TGD
Selling price R254 000 R420 000
Less: total variable costs (TVC) R152 000 R262 000
Variable manufacturing costs R150 500 R260 500
Variable distribution costs R1 500 R1 500
Contribution R102 000 R158 000
Contribution per limiting factor (CPLF) R4 080 R3 950
Ranking 1 2
Optimal manufacturing mix 22 680 0
 PHL: R102K ÷ 25hrs = R4 080; TGD: R158K ÷ 40hrs = R3 950
 567 000hrs ÷ 25hrs = 22 680
 PHL used all the available technical staff hours, therefore 0 TGD will be manufactured.

(e) (iv) Briefly discuss five (5) qualitative factors that PW will need to consider in the [5]
implementation of the headcount reconfiguration as instructed by the DoT.

No. Qualitative factors Discussion

1. The impact of the PW’s technical staff are highly skilled and responsible for
unplanned and/or ill- operating all the machinery in the manufacturing plant. An
informed reduction of the unplanned or ill-informed reduction of this staff complement
technical staff on could negatively impact PW’s ability to operate the
manufacturing. manufacturing plant optimally.
2. Possible technical staff All the technical staff are highly-skilled and imported from the
rebellion same country (Germany). A sudden termination of services
for some of their country-men/women could potentially trigger
a solidarity rebellion and/or solidarity industrial action.

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(e) (iv) Briefly discuss five (5) qualitative factors that PW will need to consider in the [5]
implementation of the headcount reconfiguration as instructed by the DoT.

No. Qualitative factor Discussion

3. Diminishing morale within the On the back of terminating the services of some technical
technical staff staff and the resulting additional workload, it will possibly be
difficult to uplift the morale of the remaining technical staff.
4. Possible impact of increased Reducing the technical staff will mean, in effort to keep up
workload on skills transfer with the current manufacturing requirements, the remaining
technical staff will need to spend more time on actually doing
their respective jobs and thus less time on transferring skills.
As per the Basic Conditions of Employment Act (BCEA), the
technical staff are already working the maximum normal
allowed time of 45 hours a week. The resulting increased
workload could possibly contravene the BCEA and/or alter
the conditions of their employment.
5. Reduced productivity due to The technical staff exclusively operate PW’s factory
increased factory machinery machines. A reduction in technical staff will lead to
idle time insufficient operators, extended machines’ idle time and may
thus translate into low productivity.
6. An issue of persistent Absenteeism amongst the company’s current 400 unskilled
absenteeism by the unskilled staff is widespread and increasing the unskilled staff
staff complement to 600 will further exacerbate the absenteeism
challenges. Immediate and plausible plans must be put in
place to address this matter once and for good.
7. Possibility of increasing total The company should consider the feasibility of increasing its
headcount beyond 1 000 total headcount beyond 1 000 so as to avoid lay-offs.
8. Legal implications of abrupt The abrupt service termination of the technical staff could
employment termination potentially be legally challenged by the dismissed technical
staff.
9. Unskilled staff’s demeanour The company’s current unskilled staff cohort demeanour
towards upskilling towards self-upskilling and learning is not encouraging.
themselves Therefore, there remains a strong possibility that,
notwithstanding the DoT’s directive to employ a further 200
youths, the reluctance to self-upskill will still persist.
10. Consideration of the labour With the risk of staff exploitation ever present at workplaces,
laws labour laws are necessary to protect the interest of the
workers and in most cases, the interest of the most
vulnerable workers. However necessary as they may be, a
company must always consider to what extent is the labour
law an impediment to doing business. From PW’s
perspective, there exist a possibility that “pro-labour” labour
laws might be enabling the absenteeism amongst the
unskilled labour.

>>>>>

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(e) (iv) Briefly discuss five (5) qualitative factors that PW will need to consider in the [5]
implementation of the headcount reconfiguration as instructed by the DoT.

No. Qualitative factor Discussion

11. Consideration of possible Before implementing the headcount reconfigurations, PW
protracted trade union should consult and engage the trade union(s) on the matter,
engagements this to avoid possible reactive prolonged engagements
thereafter.
12. Possible consumer rebellion A consideration should be made about possible consumer
rebellion in protest to the retrenchments.
13. Company reputation PW should consider the possible impact on the image of the
company as a result of the layoffs.
14. Possible wage deadlock for PW’s administrative management staff appears to be
the new and/or existing excessively remunerated. At 100 staff members, the
unskilled staff resulting from average budgeted annual remuneration was R3,5mil per
excessive management staff staff while the average actual annual remuneration was
remuneration. R4,2mil, a 20% rate variance from budget. On the other
hand, an annual budget for the 400 existing unskilled staff
was R54,60 million, that is R135,6K per annum per staff.
Therefore, on average, the management staff are paid 31
times more than the unskilled staff. Although still relatively
lower than the South African average pay ratio of 64,7 times
more1 in 2018, it is still alarmingly high. It would therefore not
be surprising if the wage negotiations for the new existing
unskilled staff (and possibly, renegotiations for the existing
unskilled staff) could potential hit a deadlock on the back of
salary parity and/or differentials between the management
staff and the unskilled staff.
15. Training requirements PW should consider upskilling the unskilled staff through the
provision of relevant training and not rely on self-upskilling.
1Pricewaterhouse Coopers: “Executive directors – Practices and remuneration trend report”
(July 2018) https://www.pwc.co.za/en/assets/pdf/2018-executive-directors-report.pdf

(f) (i) Identify and briefly discuss 5 ethical, social and/or business qualitative factors
[10]
that PW will need to consider in its assessment of whether to acquire SW.

No. Identification Discussion

1. SW’s continued PW’s intention is to leverage off SW’s wheels selling business. It is
existence is mainly therefore important to consider the extent to which the continued
reliant on illegal existence of SW’s wheels business is largely attributable to the drugs-
activities selling business.
2. SW operates an In the main, selling of drugs is socially unacceptable and is perceived
illegal drugs-selling to be not in line with being a good corporate citizen. An association
business with SW’s that is well-known for selling illegal drugs has the
propensity to harm the business reputation and the public image of
PW.

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(f) (i) Identify and briefly discuss 5 ethical, social and/or business qualitative factors
[10]
that PW will need to consider in its assessment of whether to acquire SW.

No. Identification Discussion

3. The quality of SW’s Word-of-mouth is crucial for the survival of any business organisation.
products is of The fact that a notable number of SW’s customers have raised
suspiciously low concerns about the low quality materials used in manufacturing could
quality potentially harm the continued existence of SW as more customers
relay their bad experiences to potential new customers of SW. Bad
customer experience could potentially lead to loss of confidence from
the current customer base as well.
4. Business warranties PW should also consider the impact of the warranties that are not
that are well below aligned to the industry norm on SW’s ability to continue attracting new
the industry norm and/or maintaining its current client base.
5. Untrustworthy The fact that SW’s management not only denied, but and also
management staff concealed that SW’s warranties are well below the industry norm
should be considered as a concern about the nature and demeanour
of the management staff in relation to their business ethics and their
fiduciary responsibilities.
6. SW employs Employment of underage children is not only unethical, it is also not
underage children acceptable by labour laws and also against the spirit of being a
socially responsible corporate citizen.
7. SW’s indirect These labour practices can be perceived as being exploitative and in
labourers’ wages are contravention of the labour laws. PW should consider how its
low in comparison to association with SW would be perceived by its current staff members,
the market, and the trade unions, and/or various government agencies in relation to
sometimes, these these labour practices.
labourers are not
paid at all.
8. Lobbying by SW A ferocious lobbying by an acquiree (SW) to prescribe the nature of
that, post the the business model/structure post the acquisition should be a cause
acquisition, SWD of concern to the acquirer (PW), more so when a notable number of
and PWD must the above factors points to an acquiree that has questionable and
operate unethical business practices.
autonomously with
separate
management team
9. Reaction of the trade What will the reaction of both SW and PW trade unions be on the
unions possible acquisition of SW?
10. Current public What is the current image/business reputation of SW and how will this
image/business affect PW’s business reputation and brand?
reputation of SW
11. The Competition Will the Competition Commission approve/reject the acquisition
Commission’s and/or will they require any changes to the terms of the acquisition?
evaluation

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(f) (i) Identify and briefly discuss 5 ethical, social and/or business qualitative factors
[10]
that PW will need to consider in its assessment of whether to acquire SW.

No. Identification Discussion

12. SW is a family- Consideration should be given to the impact of the change in
owned and ownership and management on business continuity, culture, and
managed business possibly customer retention.
13. No information about The extent to which financial information is not available could cast
the selling price is aspersion on the completeness, accuracy and validity of SW’s record
available keeping.

14. The integration of Common culture within group of companies is often seen as critical
company cultures to achieve harmonious and high-performance environment. However,
it is not always simple to infuse the acquirer's culture into the
acquiree's existing environment and it might prove to be a
cumbersome process.
15. Establishing PW and SW operates in different markets and service different
common (strategic) markets, as such, it might prove to be difficult to establish goals and
goals and objectives objectives that can be easily cascaded to the two divisions. This might
across the "new also cause unwanted frictions between the divisions due to possible
company" inconsistencies in performance management and/or measurement.

(f) (ii) Calculate the minimum transfer price per ELM wheel at which SWD will be
[9]
willing to transfer the total required wheels for the 21 600 PHLs to PWD
Minimum transfer price in this scenario = Incremental costs + lost contribution
Units to transfer

Alternative 1 Alternative 2

= R21 600 000 + R41 868 840 = R200 + R41 868 840
108 000 108 000

R63 468 840 R200 + R387,67

108 000
R587,67 per ELM wheel R587,67 per ELM wheel
 Given
 Determination of wheels to be sacrificed
Details ELM
Annual maximum manufacturing capacity 180 000
Less: External annual market demand 150 000
Available for internal transfer 30 000
Less: Required for internal transfer 108 000
Wheels to be sacrificed 78 000

 21 600 x 5 wheels = 108 000

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(f) (ii) Calculate the minimum transfer price per ELM wheel at which SWD will be
[9]
willing to transfer the total required wheels for the 21 600 PHLs to PWD
 Incremental costs
Details Amount
R
Incremental costs per ELM wheel R200
Rim and tyre costs per unit R150
Variable manufacturing overheads per unit R50
External distribution costs per unit R0
 Determination of lost contribution
Details Amount
R
Selling price per ELM model wheel R748
Less: Incremental costs per ELM wheel R200
Less: External distribution costs per unit R11,22
External contribution per unit R536,78
* External distribution costs not incurred on internal sales
 R680 x 1,1 = R748
 R150 + R50 = R200*
 R748 x 1,5% = R11,22
 78 000 x R536,78 = R41 868 840
 R200 x 108 000 = R21 600 000
 R41 868 840 ÷ 108 000 = R387,67

(g) (i) Using applicable information from PWD, calculate the cost of capital rate [2]
 Given
 Residual income
Details PWD
Controllable profit R1 037m
Less: Residual income/(loss) (R1,4m)
Forecasted cost of capital charge amount R1 038,4m
Controllable investment R12 980m
Therefore, cost of capital (CoC) rate per annum 8,0%
 R1 037m less (R1,4m) = R1 038,4m
 CoC rate = (Cost of capital charge ÷ Controllable investment)
= R1 038,4m ÷ R12 980m = 8,0%

(g) (ii) Calculate SWD’s forecasted residual income (RI) and SWD’s forecasted [11]
return on investment (ROI) for Year 1
Residual income = Controllable profit – controllable investment cost of capital charge
= R155 900 000 – R154 400 000
= R1 500 000
Return on investment (ROI)
Formula = Controllable profit = R155 900 000 = 8,08%
Controllable investment R1 930 000 000

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(g) (ii) Calculate SWD’s forecasted residual income (RI) and SWD’s forecasted return [11]
on investment (ROI) for Year 1
 Given
 Controllable profit
Details Notes SWD (R’000)
Net profit before interest and tax R30 900
Net adjustments R125 000
Less: Interest on long-term loans not yet accounted (R8 500)
Less: Interest income on staff loans not controllable (R3 000)
Add: Allocated administrative costs not controllable R135 000
Add: Staff loans written-off not controllable R1 500
Trade debtors’ bad debts write-off controllable R0
Controllable profit R155 900
 R540 000m x 15/60 = R135 000K
 R1 930m x 8,0% (as per g(i) above) = R154 400K
 Controllable investment
Details SWD (R’000)
Non-current assets R1 995 000
Plus: Current assets R65 000
Current assets (R77m less R12m – staff loans) R65 000
Controllable assets R2 060 000
Less: Controllable liabilities R130 000
Long term-loans R100 000
Plus: Current liabilities R30 000
Controllable investment R1 930 000

(g) (iii) By reference to the applicable given information and the calculations in g(ii) [2]
above, comment on the correctness of Mr Nine’s statement
The statement by Mr. Nine is not correct. Overall, there are strong arguments for all the alternative
performance measures and thus, it is not ideal to discard one measure in favour of another without a
proper and critical analysis. As such, the following discussion points provide a critical review of some
of the key performance measures in relation to the scenario and in reference to the statement by Mr.
Nine.

1. A review of the importance and appropriateness of controllable profit

1.1. According to Drury, controllable profit is the most appropriate measure to use for measuring
managerial performance as opposed to measuring economic performance (Drury, 2015:500).
1.2. From PSW Group’s perspective, SWD and PWD are expected to have separate management
teams who will operate autonomously. It is from this perspective that the managerial
performance of each division will be important.
1.3. By virtue of the comparison being made between the two separate management teams, it can
reasonably be concluded that the performance measurement of PWD and SWD should be
made from a managerial performance perspective and not from an economic performance’s
perspective. Based on this premise, controllable profit therefore appears to be an appropriate
measure to compare PWD to SWD.

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(g) (iii) By reference to the applicable given information and the calculations in g(ii) [2]
above, comment on the correctness of Mr Nine’s statement
1.4. Furthermore, “controllable profit provides a measure of divisional managerial performance
based on its ability to use only those resources under its control efficiently” (Drury, 2015:501).
Evident from question g(ii) above, the scenario provides for a number of items that are either
under the control of the divisions or under the control of the Head Office. This further supports
the appropriateness of controllable profit for comparing performance between PWD and SWD.
1.5. At R1 037 million, PWD’s controllable profit is R881,1 million more than SWD’s controllable
profit of R155,9m.
1.6. Conclusion: Based on the above explanations, Mr. Nine is therefore correct to utilise
controllable profit to compare PWD’s performance to SWD’s performance. With a forecasted
controllable profit difference of +/- R800 million between the two divisions, his assertion that
PWD is expected to exceptionally outperform SWD, appears to be correct.

2. A review of the importance and appropriateness of return on investment (ROI)

2.1. Notwithstanding the above views in support of controllable profit, controllable profit on its own
is often criticised for (i) its lack of consideration of the capital investment in relation to the returns
(profits) and (ii) profits are sometimes distorted by general and administrative expenses that are
arbitrarily allocated to the divisions.
2.2. In response to the criticism associated with divisional (controllable) profits, same as Mr. Nine,
some companies tend to rather focus on return on investment (ROI).
2.3. In this regard, ROI is often preferred because with ROI, (controllable) profits are not viewed in
isolation, but also as a percentage return on the capital that is invested. Generally, the
expectation is, the higher the investment, the higher the expected return.
2.4. As already alluded to, at face value, by reference to controllable profits only, Mr. Nine is correct
to say PWD is forecasted to outperform SWD. However, the same cannot be said from a ROI
perspective. A review of related ROIs paints a slightly different performance picture. In contrast
to controllable profit, at a ROI of 7,99%, PWD’s is however not forecasted to outperform SWD
whose ROI is forecasted at 8,08%. To Mr. Nine’s assertion, this indifference in performance
albeit the same divisions, illustrates both the importance and the appropriateness of also
considering ROI as a performance measure, this to counter some of the common drawback
associated with divisional profits.

3. A review of the residual income (RI)

3.1. Despite ROI being “the most widely used financial measure of divisional performance” (Drury,
2015:503), it also has a number of inherent problems. In the main, ROI does not encourage
goal congruence (Drury, 2015:503). Instead of using ROI, Drury recommends the RI approach
to overcome some of the dysfunctional consequences associated with ROI (Drury, 2015:503).

3.2. Although RI is often criticised for being an absolute value measure and thus difficult to use in
comparing the performance of the divisions of different sizes (Drury, 2015:504), it however
represent one of the important performance measures for evaluating the performance of
divisional managers ((Drury, 2015:503). In this regard, Drury argues that “if residual income is
used to measure managerial performance of investment centres, there is a greater probability
that managers will be encouraged when acting in their own best interests, also to act in the best
interests of the company” (Drury, 2015:504).

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(g) (iii) By reference to the applicable given information and the calculations in g(ii) [2]
above, comment on the correctness of Mr Nine’s statement
3.3. Despite some of the criticism levelled against RI, it is nevertheless still an important and
appropriate performance measure, therefore it seems irrational for Mr. Nice to simply disregard
it without advancing valid and sound arguments to support his position.
3.4. As noted by Drury, it is not always advisable to focus on one performance measure in isolation.
Although PWD’s forecasted RI is -R1,4 million and considerably smaller than SWD’s forecasted
RI of +R1,5 million, it is ill-informed for Mr. Nice to totally disregard RI, more so because a
comparison of the division’s ROI reflects that PWD will slightly outperform SWD, this despite
PWD’s negative RI.

4.5 JUNIOR SPORTS LTD

(a) (i) Calculate the total budgeted breakeven sales value of the Tennis Division for July
2015, ignoring the possibility of discontinuing the sales of the Wilson tennis racquets.

Sales mix (budgeted) = Babolat : Wilson = 400:200 = 2:1

Contribution of Babolat = R550 – R400 = R150 per unit
Contribution of Wilson = R350 – R220 = R130 per unit
Contribution per unit in sales mix: (2 X R150) + (1 X R130) = R430
Break-even units = Total Fixed cost .
Contribution per unit in sales mix

= R35 200 x 1,075

R430

= R37 840 = 88 batches

R430

Break-even value: Babolat = 88 batches x 2 Babolat racquets per batch x R550

= 176 racquets x R550 = R96 800

Break-even value: Wilson = 88 batches x 1 Wilson racquet per batch x R350

= 88 racquets x R350 = R30 800

Total Break-even value = R96 800 + R30 800 = R127 600

Alternative:
Sales mix (budgeted) = Babolat : Wilson = 400:200 = 2:1
Contribution of Babolat = R550 – R400 = R150 per unit
Contribution of Wilson = R350 – R220 = R130 per unit
Total contribution in sales mix: 400(R150) + 200(R130)
= R60 000 + R26 000
= R86 000

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Break-even value = Total Fixed cost .
Contribution margin ratio

= R35 200 x 1,075 .

R86 000/R290 000

= R37 840
29,66% (Rounding: also accept 29,7%)

= R127 579,23 (Rounding: also accept R127 407,41)

(a) (ii) Calculate the budgeted breakeven sales value of the Tennis Division for July 2015
assuming that management decides to discontinue the sales of the Wilson tennis
racquets.

Break-even units = Total Fixed cost .

Contribution per unit

= R35 200 x 1,075 .

(R550 x 90%) – R400

= R37 840 .
R495 – R400

= R37 840 .
R95

= 398,31
= 399 racquets rounded up
Break-even value: Babolat = 399 racquets x R495
= R197 505

Alternative:

Contribution = 600 racquets x [R495 – R400] = R57 000

Sales value = 600 racquets x R495 = R297 000

Break-even value =. Total Fixed cost .

Contribution margin ratio

= R35 200 x 1,075 .

R57 000/R297 000

= R37 840
19,19% (Rounding: also accept 19,2%)

= R197 186,03 (Rounding: also accept R197 083,33)

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(a) (iii) Advise management whether it would be a good business decision to discontinue the
sales of the Wilson tennis racquets or not. Assume that management was able to forecast
the respective sales levels accurately.
(Support your answer with calculations, comments about the different options and also
consider a non-financial factor).

Babolat & Wilson racquets:

Contribution for Babolat: 400 racquets x R150 = R60 000
Contribution for Wilson: 200 racquets x R130 = R26 000
Total contribution: R60 000 + R26 000 = R86 000
Profit = R86 000 – Fixed cost R37 840 = R48 160

Babolat racquets only

Contribution for Babolat: 600 racquets x R95 = R57 000
Profit = R57 000 – Fixed cost R37 840 = R19 160
Fixed costs do not have to be considered as they are unavoidable.
Or only consider the contribution as the fixed costs are unavoidable.
Babolat & Wilson racquets yield a higher total contribution to cover the fixed cost compared to
selling only Babolat racquets
(R86 000 vs R57 000)
Babolat & Wilson racquets gives a higher profit than if you only sell Babolat racquets
(R48 160 vs R19 160)
Conclusion: Do not discontinue the sales of the Wilson tennis racquets.
Non-financial factor:
Customers would appreciate having more than one racquet to choose from (a basket of goods),
continue to sell both.

(b) Prepare a statement reconciling the budgeted profit to the actual profit of the Gymnastics
Division for June 2015 in as much detail as permitted by the information provided.

Details R Ref
Budgeted profit 619 000 
Add: Sales margin volume variance 26 880F 
Standard profit 645 880 
Sales margin price variance 26 520F 
Material purchase price variance 49 000A 
Material mix variance 16 000F given
Material yield variance 33 600F given
Fixed overhead expenditure variance 53 000A 
Actual profit ( +  +  + 16 000 + 33 600 + ) R 620 000 

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 Budgeted profit R
Sales (10 000 units x (R168 x 1,8)) or (10 000 units x R302,40) 3 024 000
Less: Marginal cost/material cost 1 680 000
(10 000 units x R168)
Less: Fixed production overheads (R725 000 given) 725 000
Budgeted profit R 619 000

 Sales margin volume variance calculation

(Actual sales volume – budgeted sales volume) x standard contribution per unit
Actual sales Budgeted Difference Standard Sales margin
volume sales volume in volume contribution (R) volume variance
(units) (units) (units) (R)
(1) (2) (3) = (1) – (4) (3) x (4)
(2)
10 200 10 000 (200) 302,40 – 168 26 880F
= 134,40

Or alternative calculation:

= (Actual sales x standard contribution per unit) –

(Budgeted sales x standard contribution per unit)
= (10 200 x R134,40) – (10 000 x R134,40)
= R1 370 880 – R1 344 000
= R26 880 F

 Standard profit
(Budgeted profit + sales margin volume variance)
= [R619 000 + R26 880 F
= R 645 880

 Sales margin price variance

=(actual selling price – budgeted selling price) x actual sales volume
= [R305 – R302,40) x 10 200
= R2,6 x 10 200
= R26 520F

Alternative:
= (R305 x 10 200) – (R302,40 x 10 200)
= R3 111 000 – R3 084 480
= R26 520F

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 Material purchase price variance calculation
(Standard Price – Actual Price) x AQ purchased
Material Standard Actual price Difference in Actual Material
price (R per kg) price quantity purchase
(R per (R per kg) purchased price
kg) (kilograms) variance
(R)
(1) (2) (3) = (1) – (2) (4) (3) x (4)
X 30 1 260 000 ÷ 40 000 (1,50) 40 000 60 000 A
= 31,50
Y 16 288 000 ÷ 18 000 0,00 18 000 0
= 16,00
Z 8 165 000 ÷ 22 000 0,50 22 000 11 000 F
= 7,50
Total 49 000 A

OR alternative calculation:
Actual cost – (AQ purchased x SP) Or [AP x AQ] - (AQ purchased x SP)
X: R1 260 000 – (40 000kg x R30) = R1 260 000 – R1 200 000 = R60 000A
Y: R 288 000 – (18 000kg x R16) = R 288 000 – R 288 000 = R0
Z: R 165 000 – (22 000kg x R 8) = R 165 000 – R 176 000 = R11 000 F
Total variance: = R49 000A

 Fixed overhead expenditure variance

= actual fixed overheads – budgeted fixed overheads
= R778 000 – R725 000 = R53 000A 53 000A

 ACTUAL PROFIT R
Actual sales (10 200 units x R305) 3 111 000
Actual material cost: X: R 1 260 000 ; Y: R 288 000; Z: R 165 000 (1 713 000)
Fixed production overheads: ( 778 000)
620 000

(c) Provide possible reasons for the following variances:

(i) The material price variance is R49 000 adverse. This means that the company paid more
for the product than originally budgeted. The reason may be inflationary increases or failure
to identify the cheapest supplier.
(ii) The material mix variance is R16 000 favourable. The reason for this variance is because
the company used 2000kg less than expected of Material Y. The company also used 2000kg
more than expected of Material Z, however Material Z is cheaper per kg and thus the actual
mix contained a lower proportion of the more expensive ingredient Y, and a higher proportion
of the less expensive ingredients Z than prescribed by the standard mix.

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(d) Calculate the total contribution of the Rugby Division for July 2015 based on the
optimum product mix.
XTreme ball AveJoe ball Intro ball
Selling price per unit R675 R400 R280
Variable cost per unit R260 R250 R120
Contribution per unit R415 R150 R160
Hours required per ball 30/60 = 0,5 18/60 = 0,3 15/60 = 0,25
Contribution per hour R830 R500 R640

Rank (contribution per hour) 1 3 2

Sales demand (no of balls) 200 1 000 800

Hours required for meeting sales demand 100 300 200

Available hours 540

How to apply the available hours 100 Balance:240 200

Demand for split above 200 800 800

Contribution 200 x R415 800 x R150 800 x R160

R83 000 R120 000 R128 000

Total contribution R331 000

4.6 MEHLARENG (PTY) LTD

(a) Assume that MG decides to adopt procurement option (ii). The total number of logs that
the TPD will have to sacrifice from its existing external customers in order to fully supply
WWD’s log requirements.
Units
TPD’s total annual plantation capacity (trees in 5 sites) 12 500
Annual total capacity in trees for 1 site (12 500 / 5) 2 500
Annual total capacity in logs for 1 site (2 500 x 2) 5 000

TPD’s current sales to external customers (5 000 x 85%) 4 250

TPD’s current spare capacity per annum (5 000 – 4 250) 750

Logs required by WWD per annum 4 000

- Supplied from TPD’s current spare capacity 750
- Supplied from TPD’s existing external supply sacrifice 3 250

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(b) Advise which one of the two procurement options will be the most beneficial from the
MG group’s perspective. Ignore qualitative factors.

(i) Buying logs exclusively from an external supplier at R275 per log

• WWD’s annual requirement is 4 000 logs.

• The logs can be bought from an external supplier at R275 per log, and the supplier will allow
8% purchase discount if WWD purchases more than 3 500 logs per annum.
• As 4 000 > 3 500, WWD will therefore qualify for the 8% discount.
• The price that the MG group will pay for this option is R275 x 0,92 = R253 per log.

(ii) Internal transfer of logs from the TPD to the WWD

• TPD earns a contribution of R142,50 (R270 - R125 - R2,50) per log sold to external
customers.
• From the MG group’s perspective, the R142,50 is an intercompany profit that will be
eliminated for reporting purposes.
• If this option is chosen, the group will nevertheless lose contribution earned by virtue of
sacrificing 3 250 sales units to external customers.
• From the MG group’s viewpoint, at minimum, TPD will need to charge a transfer price that
will cover its variable cost of production + compensation for contribution lost on the external
sales, therefore
Transfer price (TP) = (Net) variable cost per unit + Lost contribution per unit
TP = (R125 – R2,50) + R117,81 ((R270 - R125 x 3 250)/4 000)
TP = R240,31 per log

Conclusion
The option of buying the logs from an external supplier will cost the group R253 per log, whereas
transferring the logs from the TPD to the WWD will cost the group R240,31 per log. It will be beneficial
for the group to transfer the logs from the TPD to the WWD in the short term. It should, however, be
noted that in the long term, a number of variables/inputs directly relating to this decision might change
and as such the group might need to revisit the decision-making process.

(c) The transfer pricing method(s) that can used for intermediate products that have a
perfectly competitive market.
Market-based transfer prices – “In most circumstances, where a perfectly competitive market for
an intermediate product exists it is optimal for both decision-making and performance evaluation
purposes to set transfer prices at competitive market prices. A perfectly competitive market exists where
the product is homogeneous, and no individual buyer or seller can affect the prices” (Drury 2015, 9th
ed., page 527).

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(d) The production budget in units for the 2017 financial year.

2017 production budget TN MS

Sales 13 970. 20 955.
Plus: Closing inventory (balancing) 4 755. 1 370.
Units required 18 725. 22 325.
Less: Opening inventory  (3 100) (2 450)
Units to be produced  15 625. 19 875.

 TN: 12 500 (2016 production units) / 80% = 15 625

 MS: 15 900 (2016 actual production units) / 80% = 19 875

 2016 production budget

TN MS
Sales 13 500. 20 250.
Plus: Closing inventory (balancing) 3 100. 2 450.
Units required 16 600. 22 700.
Less: Opening inventory (4 100) (6 800)
Units produced 12 500. 15 900.

 TN: R5 657 850 / 13 970 = R405 per unit = 2017 budget selling price
R405/1,08 = R375 per unit = 2016 actual selling price
Therefore 2016 actual sales volume = R5 062 500 / R375 = 13 500 units

 MS: R6 789 420 / 20 955 = R324 per unit = 2017 budget selling price
R324/1,08 = R300 per unit = 2016 actual selling price
Therefore 2016 actual sales volume = R6 075 000 / R300 = 20 250 units

(e) The concept of computerised budgeting briefly explained and listing two types of software
that are useful in the planning and control functions of the budget.

• It refers to budgeting by means of computer-based financial models consisting mainly of

mathematical inputs and outputs. (Drury 9th ed., page 387).
• Budgeting activities are performed by simply altering the mathematical statements (Drury 9th
ed., page 387).
• A detailed budget is typically loaded in the finance and other modules of the software, such as
production and inventory, and actual performance is measured against it (MO001/4/2017,
page 97).
• Types of useful software packages in the planning and control function of the budget:
1. Enterprise resource planning (ERP)
2. Enterprise resource management (ERM)
3. Accounting information systems (AIS)

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(f) The margin of safety concept briefly explained.

Margin of safety is the amount of sales in excess of a company’s break-even point and is calculated as
Expected sales less Break-even sales. It indicates the amount of sales a company can lose before it
no longer makes a profit. It is generally expressed in rand-sales value, but it can also be expressed as
a percentage.
The percentage margin of safety is calculated as: Expected sales – Break-even sales
Expected sales
(Drury 9th ed., page 178)

(g) Based on the 2017 financial year budget. The margin of safety percentages for each of the
two products (TN and MS). (Ignoring implications of: opening inventories, closing
inventories, and the proposal to change the costing method)

Budgeted margin of safety = (Expected sales – budgeted break-even sales)/Expected sales

TN MS
= (R5 657 850 - R4 455 810)/ R5 657 850 = (R6 789 420 - R5 346 972) / R6 789 420
= 21,25% = 21,25%

 Budgeted break-even sales

Formula = Total fixed costs  /Contribution per batch 

= R1 950 098 / R 354,50

= 5 500,9816... batches
≈ 5 501 baches
TN MS
Break-even units 11 002 16 503
TN: 5 501 batches x 2 ; MS: 5 501 batches x 3

Budgeted break-even sales R4 455 810 R5 346 972

TN: 11 002 units x R 405,00 (from question (d) above)
MS: 16 503 units x R 324,00 (from question (d) above)
 Budgeted fixed cost
Manufacturing overheads ((R1 278 000 x 10% x [(50% x 10%) R1 405 800
+ (30% x 11%) + (20% x 8,5%)]) + R1 278 000
Allocated head office cost (R320 325 + R129 675) R450 000
Selling cost (R38 328 + R55 970) R94 298
R1 950 098

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 Contribution per batch (Weighted contribution)

Contribution per unit TN MS

Budgeted selling price per unit (from question (d)) R405,00 R324,00
Less: Budgeted variable cost per unit  R312,50 R267,50
Budgeted contribution per unit R92,50 R56,50

Contribution per unit R92,50 R56,50

Sales mix 2 3
Contribution per sales mix R185,00 R169,50

Contribution per batch (R185 + R169,50) = R354,50

 Budgeted variable cost per unit

Calculations Cost per unit

TN MS TN MS
R R
Direct raw material R195 + R15 R170 + R15 210,00 185,00
Direct labour R45 + R15 R30 + R15 60,00 45,00
Variable manufacturing overheads R25 + R15 R20 + R15 40,00 35,00
Variable selling cost 2,50 2,50
Total variable cost per unit R312,50... R267,50...

(h) The reasons why the proposal to adopt IFRS would require a change in the costing system
from direct costing to the absorption costing method.
• MG is currently using the direct costing method.
• As a private company and not trading on any public stock exchange, there is no prohibition on
the group to use a direct costing method.
• With the adoption of IFRS as the primary financial reporting framework, it means that the direct
costing method can no longer be used for external reporting.
• This is because in terms of the inventory Standard of IFRS, International Accounting Standard
2 (IAS2), companies that present their annual financial statement in terms of IFRS are required
to adopt the absorption costing method.
• Therefore, post the adoption of IFRS, a company that was previously using the direct costing
method is expected to change its costing method to the absorption costing method.
• However, for internal reporting and decision-making purposes, the direct costing method can
and should be used.

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(i) Budgeted income statement for the 2017 financial year based on the absorption costing
method.

Details Calculations TN MS
R R
Sales TN: 12 600 x R405(d) 5 103 000. 5 961 600.
MS:18 400 x R324(d)
Less: Manufacturing cost of sales (4 420 800) (5 603 650)
Opening inventory TN: 2 200 x R310 682 000. 980 500.
MS: 3 700 x R265
Production cost TN: 13 400 x R359,50 4 817 300. 5 063 450.
MS: 16 100 x R314,50
Closing inventory TN: 3 000 x R359,50 (1 078 500) (440 300)
MS: 1 400 x R314,50
Gross profit 682 200. 357 950.
Less: Selling cost (69 827) (101 970)
Variable selling cost TN: 12 600 x R2,50 31 500. 46 000.
MS: 18 400 x R2,50
Fixed selling cost 38 327. 55 970.
Less: Allocated head office cost (204 407) (245 593)
Net profit for the period R 407 966. R 10 387.

, ,  and  Unit cost per product for each of the two financial years
Financial year 2016 2017
Product TN MS TN MS
Direct raw material cost R195,00 R170,00 R210,00 R185,00
Direct labour cost R45,00 R30,00 R60,00 R45,00
Variable manufacturing overheads R25,00 R20,00 R40,00 R35,00
Fixed manufacturing overheads R45,00 R45,00 R49,50 R49,50
Total unit cost per product R310,00 R265,00 R359,50 R314,50

 (R320 325 + R129 675 ) x 13 400/29 500 = R204 407

 (R320 325 + R129 675 ) x 16 100 /29 500 = R245 593

(j) (i) The budgeted return on investment (ROI) for the 2017 financial year for each of the two
divisions and advise if MG should accept an invitation to join the BIDP. Qualitative factors
were ignored.

Return on investment (ROI) = Controllable profit / controllable investment

TPD WWD
= R403 950 ÷ R2 710 000 = R485 450 ÷ R2 960 000

= 14,91% = 16,40%

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 Controllable profit TPD WWD
R R
Net profit before depreciation and tax 718 950. 775 450.
Less: Depreciation (490 000) (740 000)
R2 700 000 x 20% 540 000.
(R250 000 x 4) x 20% 200 000.
(R3 200 000 – R1 500 000) x 20% 340 000.
R1 500 000 x 20% x 6/12 150 000.
Plus: Allocated head office expense 175 000. 450 000.
Controllable profit 403 950. 485 450.

 Controllable investment TPD WWD

R R
Before BIDP 1 700 000. 2 700 000.
Plus: New assets 1 500 000. 1 000 000.
TPD: given ; WWD: (R250 000 x 4)
Less: Depreciation  (490 000) (740 000)
Controllable investment 2 710 000. 2 960 000.
Conclusion
• Target ROI for TPD = 14,00% (12,50% + 1,50%) and for WWD = 14,50% (13,00% + 1,50%).
• The calculated ROIs 14,91% and 16,40% for TPD and WWD, respectively, as per above.
• MG should therefore accept the invitation to join the BIDP because with the programme, the group’s
ROIs for the 2017 financial year are projected to be higher than the targeted ROIs for each of the
two divisions. TPD: 14,91% > 14,00% and WWD: 16,40% > 14,50%.

(ii) The budgeted residual income (RI) for the 2017 financial year for each of the two divisions.

Residual income = Controllable profit - Cost of capital of controllable investments

TPD WWD
= R403 950 - R338 750 = R485 450 - R384 800
Residual income = R65 200 = R100 650

 Controllable profit: Refer to  in question j(i) above

 Cost of capital of controllable investments

TPD: R2 710 000 x 12,5% = R338 750

WWD: R2 960 000 x 13,0% = R384 800

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4.7 AFRiTECH MOBILE (PTY) LTD

(a)(i) List and briefly discuss two (2) indicators evident from the scenario in support of the
[4]
view that ATM struggled to successfully penetrate the low-cost mobile phone market.
“Market penetration refers to the successful selling of a product or service in a specific market. It is
measured by the amount of sales volume of an existing good or service compared to the total
market of the product of service”
Source: Wikipedia, https://en.wikipedia.org/wiki/Market_penetration
Listing Discussion
1. Reduction in selling price ▪ The fact that while still in its infancy (first year of operation),
ATM was forced to sell AzaMobis at 25% discount from the
initial budgeted selling price supports the view that the
company struggled to penetrate the market.
▪ The decision to sell at a discount also appears to be more of
a “forced” reactive measure to a possible hostile market as
opposed to a “business-as-usual” measure.
2. Low actual sales volume ▪ Substantially less units were sold than produced. The
scenario indicates that 135 000 each of the three key
components were issued to production and the related actual
variable production costs were R19 575 000. Although 135
000 AzaMobis were actually produced, only 5 000 units were
actually sold.
▪ ATM’s initial hope was to revolutionise the low-cost mobile
phone market. At a meagre 5 000 actual units sold, ATM’s
performance can hardly be referred as a revolution of the low-
cost mobile phone market.
3. An assertion from Ms ▪ In most instances, a company’s financial performance is
Zondo that “ATM’s actual predominately driven by the customer (market) uptake of the
financial performance for product/service that the company provides. Therefore, if the
the 2019 financial year is product/service uptake is subdued, the majority of the time so
regrettably way off what will the financial performance of that company be. Worded
was budgeted for”. differently, in most instances, the financial performance of the
company will be subdued if the company struggled to
appease its customers/market.

(a)(ii) Identify the single most obvious but critical factor that could have led to ATM’s
[1]
struggles to successfully penetrate the low-cost mobile phone market.
“Marketing refers to activities undertaken by a company to promote the buying or selling of a
product or service. Marketing includes advertising, selling, and delivering products to consumers or
other businesses. Professionals who work in a corporation’s marketing and promotion departments
seek to get the attention of key potential audiences through advertising.”
Source: Investopedia, https://www.investopedia.com/terms/m/marketing.asp

▪ ATM did not market its entrance into the industry, the company could have held a product launch
to make a resounding entry into the low-cost mobile phone market.
▪ The fact that the financial reports do not mention or reflect any marketing and advertising
investment and/or expenditure supports this view about not marketing its entry into the market.
▪ One would expect from a new entrant with a new product in a possibly highly-competitive market,
to seek attention of key potential customers through various marketing campaigns. However, in
the absence of information to the contrary, it appears as if that was not done.

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(b) Calculate ATM’s budgeted contribution per unit for the 2019 financial year. [9]

Details R
Sales 200
Less: Variable production costs 120
Three key components 75
Direct labour costs 30
Variable production overheads 15
Less: Variable non-production costs 7
Distribution costs 5
Sales commission 2
Contribution per unit R73
 Given
 R29 100 000/145 500 = R200
 ATM’s production budget (in units) for the 2019 financial year:
Details Workings Units
Opening inventory 0
plus: Production 200 000 x 75% 150 000
Available for sale 150 000
less: Closing inventory 4 500
Sales units 0 + 150 000 – 4 500 145 500
 (R12 + R60 + R18) = R90 ÷ 1,2 = R75
 R20 x 1,5 hours = R30
 R0,01 ÷ R1,00 x R200 = R2

(c) Advise Ms Zondo as to whether or not the NEF is entitled to call-on the loan repayment [6]

Details R
Sales 750 000
Less: Variable production costs 19 575 000
Plus: Closing inventory 18 850 000
Less: Other expenses 8 826 000
Selling commission 9 000
Distribution costs 278 000
Fixed production overheads 395 000
Interest on long-term loan: NEF 6 500 000
Office building rent expense 144 000
Administrative employee costs 1 500 000
Net profit/(loss) before tax (R8 801 000)
 Given
 R150 x 5 000 = R750 000
 R200 x 0,75 = R150
 R145 x 130 000 = R18 850 000
 R12 + R60 + R18 + R35(R25 x 1,4) + R20 = R145
 Alternative: R19 575 000 ÷ 135 000 = R145
 Opening inventory units plus Production units less Sales units = Closing inventory units
 0 + 135 000 – 5 000 = 130 000
 R750 000 x 1,20% = R9 000
 R12 000 x 12 = R144 000
 R2 100 000 less R600 000 = R1 500 000
 Refer to question (b) calculation  above

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(c) Advise Ms Zondo as to whether or not the NEF is entitled to call-on the loan repayment [6]
Advice:
ATM’s actual net loss before tax of R8,801 million for the 2019 financial year is less than the
budgeted net profit before tax of R1,45 million. Therefore, as at 31 March 2019, the NEF’s long-term
loan condition that ATM is required to generate actual net profit before tax that is more than the
related budgeted net profit before tax is breached. Based on this breach, the NEF is thus entitled to
call-on the full repayment of the R100 million long-term loan as at 31 March 2019.

(d) Calculate the following variances for the 2019 financial year: [11]
(i) Sales price variance
Standard Actual Difference Actual sales Variance
price price quantity
R200 R150 -R50 5 000 R250 000 A

 Given
 Refer to question (b) calculation  above
 R200 x 0,75 = R150
 100% - 25% = 75%

(ii) Direct material price variance for the cover-shells

Material Actual Standard Difference Actual quantity Variance
type price price purchased
Cover shell R12 R10 -R2 135 000 R270 000 A

 Given
 R12 ÷ 1,2 = R10

(iii) Direct labour idle time variance

Allowed idle Actual idle Difference Standard Variance
hours hours hours work hour
rate
18 900 13 230 5 670 R22,22 R125 987,40 F

 Given
 135 000 x 1,40 hours x 10% = 18 900 hours
 135 000 x 1,40 hours x 7% = 13 230 hours
 R20 ÷ (1-10%) = R22,22

(iv) Sales commission expenditure variance

Standard Actual Difference Actual sales Variance
rate rate quantity
R1,50 R1,80 -R0,30 5 000 R1 500 A

 Given
 R150 x 1,0% (R0,01÷ R1,00)  = R1,50
 R150 x 1,2% = R1,80
 R200 x 0,75 = R150
 Refer to question (b) above

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(e)(i) Explanation of ATM’s necessity to change the costing system from variable costing to
[2]
absorption costing resulting from MG’s equity take-over.
▪ With proposal 1, Majakathata Group Limited (MG), a JSE listed company, is to acquire 90% of
Ms Zondo’s 100% stake in ATM. Post the acquisition of 90% of Ms Zondo’s stake in ATM, ATM
will operate as a subsidiary of the MG group.
▪ In accordance with the JSE listing requirements section 3.22(a) and section 8.57, as a JSE listed
company, MG (inclusive of all its subsidiaries) is required to prepare and present its annual
financial statements in terms of the International Financial Reporting Standard (IFRS).
▪ Any company/group that prepares its annual financial statement in terms of IFRS is obliged to
adopt an absorption costing system as prescribed by IAS 2 (IFRS standard on inventory).
▪ By virtue of ATM being part of the MG group, ATM will thus be required to adopt the absorption
costing system hence the necessity for ATM to change its costing system from variable costing
to absorption costing.

(e)(ii) Prepare ATM’s envisaged budgeted income statement for the 2020 financial year as
per proposal 1 and briefly comment on whether or not the calculated net profit before [12]
tax is consistent with the commitment by MG.

Details R
Sales 27 761 400
Less: Cost of sales 19 225 900
Opening inventory 19 110 000
plus: Variable production costs 114 000
plus: Fixed production overheads 1 900
less: Closing inventory 0
Gross profit 8 535 500
Less: Other expenses 4 904 364
Variable distribution costs 654 750
Sales commission 277 614
Fixed distribution costs 253 000
Interest on long-term loan 1 625 000
Office building rent expense 144 000
Administrative employee costs 1 950 000
Net profit/(loss) before tax R3 631 136
Commentary on MG’s commitment:
In terms of proposal 1, ATM’s budgeted net profit before tax for the 2020 financial year is expected
to be R3 631 136. Therefore, ATM’s net profit before tax for the 2020 financial year is not consistent
with MG’s commitment that ATM will generate at least R5,5 million per financial year.
 Given
 (145 500 ÷ 12 x 1,2) x 9 = 130 950 units x R212 (R200 + R12) = R27 761 400
 R18 850 000 + (130 000 x R2) = R19 110 000
 R18 850 000 ÷ R145 (R12 + R60 + R18 + R35 + R20) = 130 000 (Opening units)
 Actual direct labour costs: R25 x 1,40 hours = R35
 950 units x R120 (variable production costs are the same as 2019 budget levels) = R114 000
 Production units = Budgeted sales units – Opening inventory units + Closing inventory units
 130 950 – 130 000 + 0 = 950
 130 950 x R5 = R654 750
 R27 761 400 x 1% = R277 614

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(e)(ii) Prepare ATM’s envisaged budgeted income statement for the 2020 financial year as
per proposal 1 and briefly comment on whether or not the calculated net profit before [12]
tax is consistent with the commitment by MG.
 Fixed distribution costs
= R980 500 – (R5 x 145 500)
= R980 500 – R727 500
= R253 000
 R100 000 000 x 6,5% x 3/12 = R1 625 000
 R12 000 x 12 months = R144 000
 (R2 100 000 – R600 000) + R600 000 ÷ 12 x 9 = R1 950 000
 950 x R2 = R1 900
 Refer to question (b) above
 Refer to question (c) calculation  above

(e)(iii) Draft a report to Ms Zondo in which you list and briefly explain four (4) qualitative
factors that she should consider as part of assessing the acceptance or non- [10]
acceptance of MG’s equity take-over proposal.
REPORT ON THE QUALITATIVE FACTORS TO CONSIDER AS PART OF ASSESSING THE
ACCEPTANCE OR NON-ACCEPTANCE OF THE MG’s EQUITY TAKE-OVER PROPOSAL
To: Ms Zondo
From: Student/Your audit firm
Subject: Explanation of qualitative factors to consider for the proposed equity take-over by the
MG
Date: 15 June 2019

With regards to your request about outlining and explaining some of the qualitative factors you
should consider in your assessment of MG’s proposal, we present the following for your attention:
No. Listing Explanation
1. Loss of autonomy With the majority stake (90%) to be held by the MG, ATM will lose the
business decision-making and operational independence it currently
enjoys.
2. Loss of ownership Ms Zondo should consider whether or not she is willing to lose the
ownership and control of ATM.
3. Loss of self-pride Businesspeople and/or entrepreneurs that start their own business
of starting own establishments often have a sense of pride in what they have achieved
business with their business. In selling her business to MG, Ms Zondo should
also take this aspect into consideration.
4. Impact on the BEE With the equity take-over, ATM’s shareholding structure will change
scoring for future significantly from a wholly black female-owned entity to a majority
contracts foreign owned entity (Germany-based telecommunications company).
As a result, there is a possibility that ATM could miss-out on future
contracts at the back of an insufficient BEE score.
5. Possible over- From the scenario, it appears that the turnaround strategy is heavily
reliance on reliant on future business with various government departments. ATM
government should thus consider the possibility of over-reliance on government
contracts contracts to sustain the business into the future. MG’s proposal could
potentially have a negative impact on ATM’s going concern assumption
as a result of customer-concentration risk.

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(e)(iii) Draft a report to Ms Zondo in which you list and briefly explain four (4)
qualitative factors that she should consider as part of assessing the acceptance [10]
or non-acceptance of MG’s equity take-over proposal.

6. Impact of possible Ms Zondo should consider possible implications of associating her

political influence business establishment with political figures. Positive or negative, ATM
faces the risk of possible political influence, and such influence could
have an impact on the business decisions and on ATM’s existing
customer base.
7. Competition Both ATM and MG operate in the South African telecommunication
commission industry. There is a possibility that this equity take-over transaction
approval might need to be approved by the Competition Commission as part of
its responsibility to thwart possible anti-competitive motive and also
promote and maintain competition in South Africa.
8. Possible customer To an extent that some of ATM’s existing customers could take pride
rebellion resulting in supporting a locally based business establishment, ATM should
from foreign consider the possibility of customer rebellion resulting from foreign
ownership ownership.
9. Possible The proposed new majority shareholder is a foreign entity and there is
imposition of the always a possibility that the new shareholder might impose a culture
holding company’s change in ATM to align it with the culture of the entire MG group.
culture
10. Retrenchments Business take-over often involves the possibility of workforce scale
down. Ms Zondo should consider the social, economic and human
impact (including the impact on the morale of the remaining staff) on
the workers and their families.
11. Access to Being part of the MG group may provide ATM access to new/advanced
new/advanced technology, which could potentially be of benefit to ATM’s customers.
technology
12. Access to MG’s Being part of the MG group might give ATM the opportunity to tap into
supplier base MG’s existing supplier base for various value-added services.
13. Access to new As part of the MG group, ATM will leverage off the groups entire market
markets base and potentially have access to new markets and new customers.
14. Job creation Access to new markets and new/advanced technology might increase
possibilities ATM’s market share which in the long-run may create new jobs in ATM.
15. Expanded learning Being part of a larger international group might offer the current
and opportunities employees’ opportunity to learn new skills, expanded job opportunities
and for current and even international work experience within the MG group of
employees companies.

In conclusion, you are advised to take note that the above identified qualitative factors are not
meant to be an exhaustive list, they are provided to you as guidelines to assist in your assessment
processes. Other valid factors could still be identified. On the same breadth, your assessment
could still deem some of the above identified factors as irrelevant for your decision-making
purposes.

You are welcomed to contact us should you require further clarity on any matter we have reported
on.

Regards,
Student/Your audit firm

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(f)(i) Calculate ATM’s budgeted optimal production mix in units for the 2020 financial
[15]
year.

Details Sets of key components Assembly

AzaMobi AzaSmart time
Required production resources 950 65 475 119 280
Available production resources 1 100 66 000 118 155
Surplus/(Shortage) in production resources 150 525 (1 125)
Therefore, only Assembly time is a limiting factor.

Details Aza Aza

Mobi Smart
Contribution per unit R73 R153
Direct labour assembly time required per unit 1,5 1,8
Contribution per limiting factor (CPLF) R48,67 R85,00
Ranking according to contribution per limiting factor 2 1
Budgeted optimal production mix units 200 65 475
 Given
 Refer to production units in question (e)(ii), calculation above
 7 275 x 9 months = 65 475
 1 425 + 117 855 = 119 280
 AzaMobi: 950 x 1,5 hours = 1 425; AzaSmart: 65 475 x 1,8 (1,5 x 1,2) = 117 855
 130 950 less 130 000 = 950
 Refer to question (c) calculation  above
 R600 less R447 = R153
 R376 + R36(Labour) + R15 (VPO*) + R12(Charger) + R5(VDC*) + R3(SC*) = R447
 AzaMobi: R73 ÷ 1,5 = R48,67
 AzaSmart: R153 ÷ 1,8 = R85,00
 118 155 less 117 855 = 300 hours ÷ 1,5 = 200
 Refer to question (b) above
 R350 (processing unit) + R10 (cover shell) + R16 (battery) = R376
VPO* = Variable production overheads
VDC* = Variable distribution costs
SC* = Sales commission

(f)(ii) Calculate AsD’s budgeted return on investment (ROI) for the 2020 financial year and
[10]
comment on whether AsD is budgeted to achieve BKn’s ROI loan condition
Controllable profit R4 185 500 = 13,61%
Controllable investment R30 745 000

 Controllable profit
Details Calculations Amount
Net profit before tax and errors given R1 250 000
Add back adjustments: R2 935 500
Lease termination costs (not controllable) R60k ÷ 2 R30 000
Interest on loan – NEF (not controllable) (R100m x 6,50% x 3/12) ÷ 2 R812 500
Interest on loan – BKn (not controllable) (R120m x 4,75% x 9/12) ÷ 2 R2 137 500
Office building rent expense (not controllable) (R144k÷12) x 3 ÷ 2 R18 000
Allocated HO expenses (not controllable) R625k ÷ 2 R312 500
Less: Administrative staff costs (controllable) given R375 000
Controllable profit R4 185 500

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(f)(ii) Calculate AsD’s budgeted return on investment (ROI) for the 2020 financial year and
[10]
comment on whether AsD is budgeted to achieve BKn’s ROI loan condition
 Controllable investment
Details Amount
Trade debtors R36 250 000
Property, plant and equipment (not controllable) R0
Less: Bank overdraft R1 005 000
Less: Trade creditors R4 500 000
Less: Long-term loan – BKn (not controllable) R0
Controllable investment R30 745 000

Comment:
AsD’s budgeted ROI for the 2020 financial year is 13,61%. The division is therefore not budgeted
to achieve BKn’s ROI loan condition of 14,50% for the 2020 financial year.

(g) Calculate the budgeted number of units per product that ATM will need to produce and
[11]
sell to achieve the company’s 2020 financial year target profit.
Total fixed costs (TFC) + target profit (TP)  Target profit (TP)
Weighted contribution per unit (WC p/u) = (R5 850K x 70%) + (R6 100K x 30%)
= R4 095K + R1 830K
= R5 925 000
= R10 181 500+ R5 925 000
R299  Weighted contribution per unit
Details Aza Aza
= 53 867,8930
Mobi Smart
≈ 53 868 Per unit
Contribution per unit R73 153
Sales mix (SM) 2 1
Units to produce and sell: Contribution per unit x SM R146 R153
AzaMobi: 53 868 x 2 = 107 736
AzaSmart: 53 868 x 1 = 53 868 Weighted contribution per unit: R146 + R153 =
R299

Workings:  Refer to question (b) above

 Given  Refer to question (f)(i) calculation above
 Total fixed costs (TFC)  130 950 ÷ 65 475 = 2
Cost item R’000  65 475 ÷ 65 475 (7 275 x 9 months) = 1
Interest on loan: NEF 1 625  R100 000K x 6,50% x 3/12 = R1 625 000
Interest on loan: BKn 4 275  R120 000K x 4,75% x 9/12 = R4 275 000
Production overheads 982,5  R12 000 x 3 = R36 000
Rental expenses 36  Fixed distribution costs
General head office costs 625
= R980 500 – (R5 x 145 500)
Lease termination costs 60
= R980 500 – R727 500
Distribution costs 253
= R253 000
Administrative staff costs 2 325  Refer to question (b), calculation 
Total 10 181,5
 R1 950 000 + R375 000 = R2 325 000

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(h)(i) Calculate the total budgeted fixed production overheads to be allocated to AM and
[7]
AS for the 2020 financial year according to the ABC system.

Overheads AzaMobi AzaSmart

Testing overheads R145 000 R162 500
Inspection overheads R375 000 R15 000
Floor-space overheads R228 000 R57 000
Total R748 000 R234 500

 Given
 AM: R307 500 x 5 800/12 300 = R145 000
 AS: R307 500 x 6 500/12 300 = R162 500
 AM:145 000 ÷ 25 = 5 800; AS: 65 000 ÷ 10 = 6 500
 5 800 + 6 500 = 12 300
 AM: R390 000 x 2 500/2 600 (2 500 + 100) = R375 000
 AS: R390 000 x 100/2 600 (2 500 + 100) = R15 000
 AM: R285 000 x 1 520/1 900 = R228 000
 AS: R285 000 x 380/1 900 = R57 000
 R982 500 less R307 500 less R390 000 = R285 000
 2 000 m2 x 95% = 1 900 m2
 1 900m2 – 1 520m2 = 380 m2

(h)(ii) Briefly define the term “quality costing” and classify ATM’s testing overheads and
[2]
inspection overheads each into appropriate “quality costs category”.

“Quality costing – is the measurement and management of costs related to providing a customer
a required level of product or service performance including costs incurred to monitor and prevent
problems in product performance, and costs incurred to remedy the problems that do occur.”

Source: Unisa MAC3701 Study Guide,2019:250)

Cost item Quality cost category

Testing overheads Prevention cost
Inspection overheads Appraisal costs

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4.8 BEANCINO (PTY) LTD

(a) Ignore the possibility of the internal transfer of instant coffee. Advise the Cappuccino
Division based on the budgeted information if the FCAP product should be discontinued
or not. Ignore all qualitative factors. Show all your calculations.

Discontinue Do not
FCAP discontinue
R FCAP (given)
R
Revenue 38 530 000 40 392 000
RCAP [R47 x 490 000] = 23 030 000
UCAP [R50 x 310 000] = 15 500 000

Direct material cost (20 490 000) (21 299 000)

[R8 294 000/ 319 000kg x 490 000kg] =
RCAP R12 740 000
[R7 125 000/ 285 000kg x 310 000kg] =
UCAP R7 750 000

Direct labour (5 424 500)

Fixed element [R2 400 000 - (R588 000 x 60%)] = R2 047 200 (2 047 200)
OR [(R957 000 + R855 000) + (R588 000 x
40%)
Variable element: (RCAP + UCAP = R3 174 000) (3 174 000)
RCAP [(R1 116 500/ 319 000kg x 120%) x 490 000kg]
= R2 058 000
UCAP [R1 026 000/ 285 000kg x 310 000kg] =
R1 116 000

Advertising [RCAP: R1 650 000 + UCAP: R1 650 000] (3 300 000) (3 300 000)
Depreciation [RCAP: R147 000 + UCAP: R93 000] (240 000) (240 000)

Other
overheads (6 009 000)
[(R 6 009 000 x 10%) - (1 764 000 x 10% x
50%)] = R 512 700 OR
Fixed element (512 700)
[((R2 392 500 + R1 852 500) x 10%) +
(R1 764 000 x 10% x 50%)
Variable element (RCAP + UCAP = R5 121 000) (5 121 000)
[(R 2 392 500 x 90%)/319 000kg x490 000kg] =
RCAP R3 307 500
[(R1 852 500 x 90%)/285 000kg x 310 000kg] =
UCAP R1 813 500
3 645 100 4 119 500

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CONCLUSION
The profit with FCAP being produced is R474 400 (R4 119 500 - R3 645 100) higher than when FCAP
is discontinued. FCAP should therefore not be discontinued.

(b) Briefly discuss five qualitative factors that should be considered before the
discontinuation of the FCAP product decision is taken.

▪ Impact of possible retrenchments/uncertainty on staff morale of both divisions. This may have a
negative effect on the output of employees.
▪ Labour law requires that trade unions be consulted before making a final decision on
retrenching employees. The possibility of retrenchments may lead to labour unrest on the
premises, which could disrupt production.
▪ Customers that buy a basket of cappuccino products may consider switching their whole basket
to another supplier.
▪ The possible impact of the discontinuation of FCAP on Beancino (Pty) Ltd’s brand value and/or
reputation in the market place should be considered.
▪ Investigate if there are other unexplored markets FCAP can be sold too and/or what impact a
revised marketing campaign may have on customers buying behaviour towards FCAP
▪ Investigate the impact of a revised marketing campaign on customers buying behaviour towards
FCAP
▪ Consider if there are any substitutes, except RCAP and UCAP that could be manufactured in
the place of FCAP.

(c) Ignore the discontinuation decision. Determine

i. the minimum price per kg the Coffee division will be willing to transfer the instant
coffee at;
ii. the maximum price per kg the Cappuccino division will be willing to pay.

(i) Minimum transfer price

Minimum transfer price per kg R

Variable cost 20,00

Opportunity cost per kg  9,90
Additional packaging 0,00
Minimum transfer price per kg R 29,90

Calculations:

Opportunity cost per kg

Total contribution on lost sales

(90 000kg  x R22 ) R1 980 000
Opportunity cost per kg transferred (R1 980 000 ÷ 200 000kg) R9,90

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 Coffee division lost sales quantity

Total available capacity 2 200 000 kg

Current capacity @ 95% (2 200 000kg x 95%) or (2 200 000 x 5%) 2 090 000 kg
Spare capacity (2 200 000kg – 2 090 000kg) 110 000 kg
Instant coffee quantity required by Cappuccino Division
[800 000kg x 0,25) i.e. 250g needed to produce 1kg] 200 000 kg
Quantity shortage i.e. lost sales quantity
(110 000kg – 200 000kg) (90 000 kg)

 Contribution per kg on lost sales R

External selling price per kg (given) 50,00.

Less: Variable cost per kg (20,00)
Less: Additional packaging and delivery cost to external customers (8,00)
Lost sales contribution per kg R 22,00

(ii) Maximum transfer price.

R

Cappuccino division external supplier’s selling price 40

Add: Procurement saving* 3
Maximum transfer price per kg R43

*Procurement costs are incurred in the instant coffee is purchased externally

(d) List four non-financial measures that can be used to evaluate the divisions’ performance
in terms of the quality and efficiency of the manufacturing process.
▪ The actual coffee and cappuccino quantity manufactured vs the budgeted quantity to be
manufactured.
▪ Kg and percentage of defect coffee and cappuccino manufactured.
▪ Abnormal wastage kg and percentage for both coffee and cappuccino products.
▪ Number and percentage of customer complaints relating to coffee and cappuccino product
quality.
▪ Kg and percentage of coffee and cappuccino returned due to poor quality.
▪ Number and percentage of unplanned downtime of the plant.
▪ Kg and percentage of instant coffee/cappuccino recalled.
▪ Efficiency of labour based on idle time percentage and hours (standard vs actual).

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(e) Compare the performance of the two divisions actual results based on:
i. Return on investment (round your answer to 1 decimal place)
ii. Residual income Performance management

(i) Return on investment (ROI)

Formula: ROI = Controllable profit / Controllable investment 
Coffee: R13 905’ ÷ R52 600’ = 26,4%
Cappuccino: R4 610’ ÷ R15 000’ = 30,7%

Coffee division Cappuccino division

 Controllable profit R'000 R'000

Net income 28 200 9 400

Add: Controllable income
Discount received from creditors 0 25
Less: Controllable expenses
Interest paid on long term loans 0 0
Interest paid on bank overdrafts (55) (15)
Training services (2 160) (720)
Discount allowed on debtors (80) (30)
Depreciation (1 200) (450)
Head office administration fee 0 0
Sundry expenses (10 800) (3 600)
Controllable profit R 13 905 R 4 610

 Controllable investments Coffee division Cappuccino division

R'000 R'000
Non-current assets 43 000 14 000
Debtors 10 800 3 600
Creditors - (2 200)
Bank overdraft (1 200) (400)
Long-term loan - -
Controllable investments R 52 600 R 15 000

(ii) Residual income

Formula: Residual income = Controllable profit - Cost of capital of controllable investment
Coffee: R13 905’ [from e(i)] - R9 468’  = R 4 437’
Cappuccino: R4 610’ [from e(i) ] - R2 700’ = R 1 910’

Calculation
 Cost of capital of controllable investment
Coffee: (R52 600’  x 18%) = R9 468’
Cappuccino: (R15 000’ x 18%) = R2 700’

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Conclusion:
Even though Cappuccino division has a much lower residual income (R1 910 000) compared to the
Coffee divisions residual income (R 4 437 000) the Cappuccino division’s return on investment is 4,3%
higher than that of the Coffee division (30,7% vs 26,4%). When evaluating performance Beancino
should determine a fair weighting that will be allocated to each of these performance measurement
tools.

4.9 HISE RISE LTD

(a) The minimum price that Fine Pine should charge for the 20 tables
R
1 Designer Fee – It is incurred specifically for the order. 5 000
2 Raw Wood ((20 tables X 3 metres) X R100) – Incremental costs. 6 000
2 Wood Varnish ((20 tables X 3 metres) X R20) – Incremental costs. 1 200
2 Salaries – Varnishing workers – Irrelevant – It is paid by their employer. 0
3 Nails – Original cost of nails in inventory represent a historic/ sunk cost. 0
3 Nails - Incremental costs. 600
(20 tables X [R1200 per kg / 40] = 20 tables x R30 for 25g).
4 Glue – Original cost of glue is a historic/ sunk cost. 0
4 Glue – Savings on the disposal as glue will now be used on this order. (5 000)
5 Machine – Original cost of the machine is a sunk cost. 0
5 Machine – Depreciation is not a cash flow item. 0
5 Machine – Scheduled annual maintenance is not a cost specific to this order, as it 0
has to be done whether or not the order is accepted.
6 Casual employees - (R2 500 X 3 employees x 2 months) – Incremental costs. 15 000
6 Factory supervisor – Supervisor is permanently employed by the company and will 0
be paid whether or not the order is accepted.
7 Monthly rates – Rates are not specific to the order. 0
7 Warehouse rental – Irrelevant as it is not specific to the order. 0
8 Fixed overheads – ((R58 000 – R55 000) X 2 months) – Incremental costs. 6 000
8 Fixed overheads – R55 000 is irrelevant as it will continue to be incurred whether 0
or not the order is accepted.
Minimum price R 28 800

(b) Other factors Fine Pine should take into consideration

• The credit profile of ABC Ltd to ensure the company will be able to pay for the order.
• The designer’s experience and profile to do the design of the tables required for the order.
• If there will be any form of additional training required by casual employees.
• Consider if Fine Pine will have all the necessary capacity to take on the order.
• Consider the impact of the order on the capacity of the machine and its normal performance.

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(c) The minimum transfer price which Division A will be willing to transfer at:

These are the variable costs which are unavoidable by Division A. R

Direct materials 2 740 000

Direct labour 2 000 000
Variable manufacturing overheads 430 000
Variable external selling costs 0
Total variable costs R 5 170 000
Units produced 10 000
Variable cost per unit (R5 170 000 ÷ 10 000) 517
Lost contribution per unit (4 000 x R318) ÷ 4 000 318
The minimum transfer price per unit is therefore R 835

 Determining units to be sacrificed.

Full manufacturing capacity in units 10 000
Less: Sales units to export clients (10 000 x 80%) 8 000
Less: Sales units to local clients (10 000 x 20%) 2 000
Available capacity in units 0
Internal transfer requirements 4 000
- Supplied from available excess capacity 0
- Supplied from sacrificing units to external clients 4 000

 Refer to question (e) below

(d) The maximum transfer price which Division B will be willing to buy at:

This is the current purchase price plus all the savings. R

The current purchase price (R8 800K ÷ 10K) 880

Add: Delivery costs savings 5
Ordering costs savings 2
The maximum transfer price R 887

(e) Determine whether the management of Division A would be willing to transfer 4 000
motherboards to Division B as opposed to selling to their export clients. Motivate your
answer and show all calculations. Compare contribution from selling externally and
contribution from transferring:

Budgeted contribution from selling externally: R

Sales price per unit (R8 800 000 ÷ 10 000) 880 or 3 520 000
Less: Variable costs ((R517 + (R450 000/ 10 000)) (562) or (2 248 000)
Contribution per unit – selling externally R 318 or R 1 272 000

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Budgeted contribution from transferring 4 000 internally and selling balance externally: R

Agreed transfer price 825 or 3 300 000

Unavoidable variable costs ((562 – (450 000/ 10 000)) (517) or (2 068 000)
Internal contribution R 308 or R 1 232 000

The external contribution per unit is R10 more if Division A sell to the external clients (R40 000 total).

The management of Division A will be reluctant to transfer the 4 000 completed computer units to
Division B given the higher contribution from external sales (or alternatively as the transfer price is
below the minimum. The weaker rand against its major export currencies means that Division A will be
receiving more from its exports. The management of Division A will, therefore, require further
compensation for this as the minimum transfer price will increase.

However, the overall company financial objectives will have to be taken into consideration in
determining if the units should be transferred between the divisions to ensure goal congruence within
the company, for example unreliability of the existing supplier of motherboards or decrease in quality of
their product.

(f) Determine the budgeted return on investment of Division B. Ignore the internal transfer:

Formula = Controllable profit / Controllable investment

= R820 000 ÷ R4 000 000
= 21%

Controllable profit calculation: R

Total contribution (21 000 000 – 18 800 000) 2 200 000
Fixed costs (1 200 000 + 180 000) (1 380 000)
Controllable profit 820 000

(g) Determine the budgeted residual income of Division B. Ignore the internal transfer:

Formula = Controllable profit – Capital charge

= R820 000 – (R4 000 000 X 10%)
= R820 000 – R400 000
= R420 000

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4.10 TENNIS BALL (PTY) LTD

(a) The total budgeted fixed manufacturing overheads allocated to each product for June 2016
using activity-based costing (ABC) technique.

Activity Deuce (R) Ace (R)

Crushing and extrusion of core compounds
Deuce: (R5 808 x 172/484); or (172 x R12/hour)
Ace: (R5 808 x 312/484); or (312 x R12/hour) 2 064,00 3 744,00
Adding glue
Deuce: (R1 484 x 215/371); or (215 x R4/hour); 860,00 624,00
Ace: (R1 484 x 156/371) or (156 x R4/hour)
Fabric covering
Deuce: (R3 795 x 43/69); or (43 x R55/prod. run)
Ace: (R3 795 x 26/69); or (26 x R55/prod. run) 2 365,00 1 430,00
Branding of balls
Deuce: (R3 220 x 43/95); or (43 x R33,89/hour);
Ace: (R3 220 x 52/95); or (52 x R33,89/hour); 1 457,00 1 762,00
Quality inspections
Deuce: (R6 693 x 86/138); or (86 x R48,50/inspection)
Ace: (R6 693 x 52/138); or (52 x R48,50/inspection) 4 171,00 2 522,00
Total R 10 917,00 R 10 083,00
WORKINGS FOR (a)
Calculation: number of activities per product type Deuce Ace Total
Actual production volume (tennis balls) (given) 860 1 040 1 900
Total no of production runs
(860 balls/20 balls per production run = 43);
(1 040 balls/40 balls per production run = 26) 43 26 69
Total no of crushing and extrusion machine hours
(12min/60 x 860 balls = 172);
(18min/60 x 1 040 balls = 312) 172 312 484
Total no of tumbling machine hours
(15min/60 x 860 balls = 215);
(9min/60 x 1 040 balls = 156) 215 156 371
Total no of branding machine hours
(3min/60 x 860 balls = 43);
(3min/60 x 1 040 balls = 52) 43 52 95
Total no of quality inspections
(860 balls/10 = 86);
(1 040 balls/20 = 52) 86 52 138

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OR Alternative calculation:
Calculation of overhead activity rates
Activity Cost driver Manufacturin Total Activity rate
g cost per cost
overhead cost driver driver R
R (see
above)
① ② ①/②
Crushing and extrusion Crushing and extrusion
of core compounds machine hours 5 808,00 484 12,00
Adding glue Tumbling machine hours 1 484,00 371 4,00
Fabric covering No of production runs 3 795,00 69 55,00
Branding of balls Branding machine hours 3 220,00 95 33,89
Quality inspections No of quality inspections 6 693,00 138 48,50

(b) The budgeted contribution per tennis ball for both Deuce and Ace product type for the
month ending June 2016 according to the direct costing system.
Deuce Ace
Description PER UNIT PER UNIT
R R
Selling price per ball (given) 40,00 35,00
Less: Direct material – rubber
(49 x 16c); (50 x 16c) 7,84 8,00
Less: Direct material - fabric cover
(9 x 8c); (6 x 8c) 0,72 0,48
Less: Direct labour
(18/60 x R20); (15/60 x R20) 6,00 5,00
Less: Variable overheads
(18/60 x R2); (15/60 x R2) 0,60 0,50
Budgeted contribution per tennis ball R 24,84 R 21,02

(c) Sales price variance per product and in total for June 2016

(Actual selling price – standard (budgeted) selling price) x actual sales volume
Product Actual Standard Difference Actual sales Sales price
selling price selling price in unit price volume variance
R R R (units) R
Deuce 39 40 1 860 860 A
Ace 38 35 3 1 040 3 120 F
Total R 2 260 F

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(d) The sales volume contribution variance per product and in total for June 2016.

Product Budgeted Actual Difference Standard contribution Sales volume

sales sales in (from (b)) variance
volume volume volume R R
Deuce 800 860 60 24,84 1 490,40 F
Ace 1 000 1 040 40 21,02 840,80 F
Total R 2 331,20 F

(e) Sales mix variance per product and in total for June 2016.

Sales mix variance = (Actual sales quantity - actual sales quantity in budgeted
proportions) x Standard contribution per unit for each product.

Standard
Actual contribution Sales mix
sales Actual sales p/u from (b) variance
Product volume in budget proportions Difference R R
844
Deuce 860 (1900 x 8/18 = 844,40) 16 24,84 397,44 F
1 056
Ace 1 040 (1900 x 10/18 = 1 055,60) 16 21,02 336,32 A
Total 1 900 1 900 R 61,12 F

(f) Discuss the significance of the sales mix variance and give two possible reasons for a
favourable sales mix variance.

Significance:
• The sales mix variance explains how much of sales volume variance is due to a change in the
sales mix.
• The sales mix variance is of significance only when there is an identifiable relationship
(proportions) between the products and these relationships are incorporated into the planning
process.
• Where relationships between products are not expected, the mix variance does not provide
meaningful information, since it incorrectly suggests that a possible cause of the sales variance
arises from a change in the mix.
• Sales mix variances provide insight into market movements between Deuce and Ace products.

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Possible reasons for a favourable sales mix variance: (2 marks available)
• Demand for the more profitable product (Deuce) being higher than anticipated.
• Increase in the production of the more profitable product (Deuce).
• Concentration of sales and marketing efforts (advertising) towards selling the more profitable
product (Deuce)
• Increase in the demand for the higher margin product (Deuce) (where demand is a limiting factor)
• Increase in the supply of the more profitable products due to for example addition to the
production capacity (where supply is a limiting factor)
• Decrease in demand or supply of the less profitable product (Ace)

(g) If direct labour hours for July 2016 is limited to 550 hours and it is the only expected
constraint, calculate how many Deuce and Ace tennis balls should be produced for July
2016 in order to maximise contribution for Tennis Ball Ltd. Round all your workings to
2 decimal places.

Details Deuce Ace

Contribution per tennis ball (given) R30,36 R27,62
0,3 hours 0,25 hours
Direct labour hours or minutes required per or or
tennis ball (18/60; 15/60) or (18 min; 15 min) 18 min 15 min
Contribution per direct labour hour R110,48 per
(R30,36/0,3; R27,62/0,25) R101,20 hour
Or per hour or
Contribution per direct labour minute or R1,84 per
(R30,36/18; R27,62/15) R1,69 per minute minute
Rank (according to contribution/direct labour hour) 2 1
Direct labour available:
550 hours or 33 000 minutes
Direct labour hours needed for full production of 315 hours
Ace (1 260 balls x 0,25 hours per ball): or or
(1 260 balls x 15 minutes per ball): 18 900 min
Remainder available for production of 235 hours
Deuce (550 hours – 315 hours ) or or
(33 000 minutes – 18 900 minutes ) 14 100 min
No of Ace tennis balls to be produced:
(315/0,25 hours) or (18 900 / 15 min)
(full production) 1 260 balls
No of Deuce tennis balls to be produced: 783,3333333
(235/0,3 hours) or (14 100 / 18 min) or ≈783 balls

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(h) Advise the production manager how to go about determining the optimum production
program if the Rubber raw material also becomes a scarce resource.

Linear programming is a mathematical technique that can be applied when more than one scarce
resource (being the direct labour hours and Rubber raw material) exist in order to determine the
optimum production program.

4.11 iNKUNZI TYRES (PTY) LTD

(a) Budgeted selling price per unit of BB tyre for the 2017 financial year based on the CVP
analysis report as presented by the CFO on 1 April 2016.

Details Calculations Amount Ref

R
Profit (given) 320 000 A
Direct raw material R150 x 5 000 750 000 B
Direct labour R75 x 5 000 375 000 C
Variable manufacturing overheads R112,50 x 5 000 562 500 D
Fixed manufacturing overheads R300 x 6 000 1 800 000 E
Selling and administrative cost 562 500
- Variable R112,50 x 40% x 5 000 225 000 F
- Fixed R112,50 x 60% x 5 000 337 500 G

Therefore, CVP sales value (A+B+C+D+E+F+G) R4 370 000

Budgeted selling price per unit (R4 370 000 ÷ 5 000) R 874

(b) Briefly explain the difference between break-even point and margin of safety.
Break-even point is:

• that level of quantities where the entity will start making profit, sometimes referred to a
point where the entity neither makes a profit nor a loss.

• that is, a point where contribution made covers all the fixed cost. Because fixed cost
does not vary with sales volumes as does the variable cost, break-even analysis is therefore
based on the entity’s ability to match the fixed cost OR ability to match the cost that do
not change with the sales volume, that is fixed cost.

• Break-even formula = Total Fixed cost/contribution per unit.

Margin of safety (MOS) is:

• Margin of safety is the amount of sales over a company’s break-even point OR indicates
the amount of sales a company can lose before it actually stops to make a profit.

• Margin of safety formula = (Expected sales less break-even sale)/Expected sales

or = Expected sales unit less break-even unit

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(c) Budgeted break-even sales units for the 2017 financial year

Formula = Fixed Cost/Contribution per unit

Details Calculations Value Ref
Selling price per unit Refer to (a) above R874 A
Less: Variable cost per unit R382,50
− Direct raw material cost Given R150 B
− Direct labour cost Given R75 C
− Variable manufacturing Given R112,50 D
overheads
− Variable selling and admin cost R112,50 x 40% R45 E
Therefore, Contribution per unit A - (B+C+D+E) R491,50 F
Total Fixed cost R1 800 000 + R337 500 R2 137 500 G
Therefore, break-even units (R2 137 500 ÷ R491,50) 4 349

(d) Actual Income Statement according to the Absorption costing method

Details Income Statement
Period 1 Period 2
R R
Sales  2 042 500 2 042 500
Less: Cost of sales (1 490 312) (1 514 063)
Opening inventory  295 000 812 813
Cost of production  2 008 125 1 275 000
Less Closing inventory  (812 813) (573 750)
Over recovery  45 000
Under recovery  (300 000)
Gross profit 597 188 228 437
Selling & administrative costs (275 625) (275 625)
- Variable  106 875 106 875
- Fixed  168 750 168 750
Net profit(loss) before taxation R321 563 (R47 188)
Calculations:

 Given
 R2 042 500 = R860 x 2 375
 R295 000 = R590 [R300 + R290] x 500
 R812 813 = 1 275 x R637,50 (R150 + R75 + R112,50 + R300)
 Cost of production:
Item Period 1 Period 2
Calculations R Calculations R
Direct Material 3 150 x R150 472 500 2 000 x R150 300 000
Direct Labour 3 150 x R75 236 250 2 000 x R75 150 000
Variable manufacturing 3 150 x R112,50 354 375 2 000 x R112,50 225 000
overheads
Fixed manufacturing 3 150 x R300 945 000 2 000 x R300 600 000
overheads
Total 2 008 125 1 275 000

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 R812 813 = R637,50 x 1 275; R573 750 = R637,50 x 900
 R106 875 = R45,00 (R112,50 x 40%) x 2 375
 R168 750 = R67,50 (R112,50 x 60%) x 2 500 (5 000/2)
 Fixed Manufacturing Overheads (FMO) over/(under) recovery calculations:
Details Calculations Amount
Period 1 Period 2 Period 1 Period 2
Normal capacity 6 000 ÷ 2 = 3K 6 000 ÷ 2 = 3 000 3 000 3 000
Production units 3 150 2 000

Actual FMO 3 000 x R300 3 000 x R300 900 000 A 900 000
Absorbed FMO 3 150 x R300 2 000 x R300 945 000 B 600 000

Over(under) recover (B less A) R45 000 (R300 000)

(e) Actual variable costing income statement for Period 1

Details Calculations/Ref Period 1

R
Sales 2 375 x R860 2 042 500
Less: Variable cost of sales (782 812)
Opening inventory 500 x R300 150 000
Cost of production 3 150 x R337,50 1 063 125
Closing inventory 1 275 x R337,50 (430 313)
Less variable selling & admin 2 375 x R45 (106 875)
Contribution 1 152 813
Less: Fixed cost (1 068 750)
- Manufacturing overheads 3 000 x R300 (900 000)
- Selling and admin cost 2 500 x R67,50 (168 750)
Net profit before taxation R84 063
 Given
 Variable manufacturing cost per unit: R150 +R75 +R112,50 = R337,50
 Refer to related calculation in question (a) above.
 Refer to calculation  in question (d) above.
 Refer to calculation  in question (d) above.

(f) Period 1 profit reconciliation and explanation between absorption and variable costing
system

Details Calculations/Ref. Period 1

R
Absorption profit period 1 From question (d) 321 563
Opening inventory 500 x R290 (given) 145 000
Closing inventory 1 275 x R300 (given) (382 500)
Variable profit period 1 From question (e) R84 063

The difference between variable and absorption costing will always the net change in inventory valued
at the fixed manufacturing overhead absorption rate of the related period.

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(g) Tyre levy/tax implications (3 marks available)

1. The proposed tyre levy of R2,30 per kg is another form of an indirect taxation.
2. It will therefore be treated the same way as VAT is currently being treated.
3. Because each BB weighs 5kg, the unit selling price will be increased by R11,50 (that is R2,30 x
5kg’s).
4. It should however be noted the additional R11,50 (“additional revenue”) per each unit of BB does
not accrue to i-Nkunzi but accrues to the Republic of South Africa through the South African
Revenue Services (SARS).
5. i-Nkunzi will thus only be acting as a tax collecting agency on behalf of the South African
Revenue Services (SARS).
6. Therefore, each R11,50 collected for each tyre sold will be paid over to SARS on terms to be
determined by SARS.
7. In summary, i-Nkunzi financial accounts will not be impacted by the proposed tyre levy because
the “additional cash” to be collected will not be for the benefit of i-Nkunzi and it will only be acting
as a conduit.
8. Increased selling price could lead to loss of competitive advantage in the tyre market.

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4.12 BUMBULO MILLING (PTY) LTD

(a) Briefly discuss the characteristics, classification and the treatment of product Chaff in the
management accounting records of Bumbulo Milling (Pty) Ltd.
• Chaff emerges incidentally from the production of Maize meal and Chop.
• The company’s continued operation is not dependent on the production of Chaff.
• The sales value of Chaff is relatively immaterial (minor) compared to Maize meal and Chop.
• Chaff can be classified and treated as a by-product in the management accounting records.
• The net proceeds from the sales of the Chaff should be used to reduce the total joint costs
before they are allocated to joint products.

(b) Prepare the actual marginal income statement of Bumbulo (Pty) Ltd for the month ended 31
May 2017. Joint costs are apportioned to joint products on the basis of net realisable value.
The total column is required. Show all your workings.

Details Maize Chop Total

R R R
Sales (R8 900 X 480) and (R6 900 X 280) 4 272 000 1 932 000 6 204 000
Less: Variable cost of sales 3 080 698 1 376 302 4 457 000
Joint costs  2 929 498 1 366 502 4 296 000
Grinding (R80 X 480) 38 400 0 38 400
Vitamins (R1 X 200g) x 480 ) 96 000 0 96 000
Packaging (R20 X 480) and (R20 X 280) 9 600 5 600 15 200
Selling costs (R15 X 480) and (R15 X 280) 7 200 4 200 11 400
Contribution 1 191 302 555 698 1 747 000
Less: Fixed costs 220 000
Selling and administration costs 220 000
Net profit R 1 527 000

 Joint production costs R

Maize price per ton (R4 900 X 800) 3 920 000
Delivery cost per ton (R 100 X 800) 80 000
Offloading and pre-cleaning (R 80 X 800) 64 000
Water and electricity (R 150 X 800) 120 000
Processing and grading (R 60 X 800) 48 000
Direct labour cost (R 100 X 800) 80 000
Total joint cost before net proceeds from the by-product 4 312 000
Less: Net sales value of by-product (R20 000 – R4 000) 16 000
(R500 X 40) - (R100 X 40) = R 16 000
Total joint costs to be allocated R4 296 000

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 Net realisable value of the joint products
Details Maize Chop
R R
Sales  4 272 000 1 932 000
Less: Further processing costs 151 200 9 800
Grinding (R80 X 480) 38 400 0
Vitamins (R1 X 200g x 480 ) 96 000 0
Packaging (R20 X 480) and (R20 X 280) 9 600 5 600
Selling costs (R15 X 480) and (R15 X 280) 7 200 4 200
Net realisable value R 4 120 800 R 1 922 200
Total net realisable value (R4 120 800 + R1 922 200) = R6 043 000

Allocation

Maize ((R4 120 800 / R6 043 000) X R4 296 000)) R2 929 498
Chop ((R1 922 200 / R6 043 000)) X R4 296 000)) R1 366 502

(c) On the basis of return on investment determine if the animal feed processing plant manager
will receive a bonus or not. Show all your workings on an annual basis.

Calculation of controllable income R

Sales ((150 X R9 900) X 12)) 17 820 000
Less: Controllable costs 16 153 000
Depreciation of Machinery (R7 200 000/ 10 years) 720 000
Plant Manager Salary 550 000
Animal feed specialist 300 000
Depreciation on truck (R350 000/ 5 years) X 60% 42 000
Purchase price of chop ((150 X R6 900) X12)) 12 420 000
Additional material cost ((150 X R300) X12)) 540 000
Employees ((3 X R6 500) X12)) 234 000
Variable manufacturing overheads ((150 X R400) X12)) 720 000
Fixed manufacturing overheads (R50 000 X12) 600 000
Finance costs Not controllable 0
Selling costs ((150 X R15) X12)) 27 000
Controllable income R1 667 000

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Calculation of controllable investment R

Processing machinery 7 200 000

Depreciation – Processing machinery (720 000)
Delivery truck R350 000 x 60% 210 000
Depreciation – Delivery truck (42 000)
Controllable investment R 6 648 000

The return on investment of processing plant:

Formula = Controllable profit / Controllable investment

= R1 667 000 / R6 648 000
= 25,08%

Conclusion

The return on investment of 25,08% is higher than the target of 20%. Therefore, the animal feed
processing plant manager will receive a bonus.

(d) Based on Bumbulo (Pty) Ltd’s entire operational activities and its management structure
briefly discuss whether or not you consider return on investment to be a fair tool of
performance measurement.

• The plant managers are fully responsible for the operations of the plants. This means that
they have full control over the controllable income, costs and investments in their respective
plants.

• Return on investment is a fair performance measurement tool as the managers fully control
the operating activities of their respective plants.

• Return on investment can encourage plant managers to make dysfunctional decisions.

Plant managers may decline investment opportunities with ROI, which is lower than their current
ROI, even if it may be more than the company’s target ROI.

• It is always better to have multiple performance measures.

• Return on investment does not consider qualitative factors.

• ROI is a relative measure (% return). This % return makes it easier to compare the divisions to
each other as well as to other companies with similar businesses.

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(e) List the purposes of a transfer pricing system with reference to Bumbulo (Pty) Ltd.

• To provide information that motivates divisional managers to make good economic decisions.
(or prevent dysfunctional decision making) The transfer pricing system will encourage the miller
and animal processing plant manager to make decisions which will benefit the company as a whole
and not only their respective plants and can therefore lead to goal congruence.

• To provide information that is useful for evaluating the managerial and economic performance
of the divisions and/or the divisional managers. Given that the return on investment is the
performance measurement tool in place, each manager’s performance will be assessed based on
what they have control over.

• To ensure that divisional autonomy is not undermined. The miller and animal feed plant manager
are fully responsible for their operations and make all the daily operational decisions.

• To intentionally move profits between divisions or locations. Profits will be moved between the
mill site and processing plant, as chop will be transferred resulting in transferred profits to the animal
feed processing plant.

• To make the managers of the divisions aware of the value of the goods transferred between the
divisions.

(f) Briefly discuss the possible implications of the proposed transfer pricing system on the
current performance measurement system of Bumbulo (Pty) Ltd

• Return on investment is calculated based on controllable profit of the Mill manager and the
Processing plant manager. The introduction of the transfer pricing system will affect the
controllable profit of both managers.

• The manager whose controllable profit will be negatively affected by the introduction of the
proposed transfer pricing system will be reluctant to agree to a transfer pricing system.

• The animal processing plant will have a monthly capacity of 150 tons; this will result in the milling
site having to sacrifice 150 production and sales units. The Milling site will require to be
compensated for lost contribution on the 150 tons.

• The introduction of the proposed transfer pricing system may result in conflict of interests
between the Mill manager and the Processing plant manager due to the current performance
measurement system.

• However, the overall company financial objectives will have to be taken into consideration on
the proposed transfer pricing system visions to ensure goal congruence within the company.

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4.13 CHEMICAL EXPERIMENTS COMPANY (PTY) LTD

(a) Calculate and allocate the budgeted joint cost to product Cl2 and product NaOH for May
2017 if Normal Division uses the physical measures method to allocate joint cost.

As a regular market exists, the joint cost for the period will be reduced (credited) by the total NRV
of the production of the by-product in the period concerned.

Calculation of joint cost:

R480 000 (given) – R130 900 = R349 100

 Net-proceeds from the by-product:

(R8,85 x 17 000kg) – (R1,15 x 17 000kg)
= R150 450 – R19 550
= R130 900

Joint cost allocated between the joint products based on physical measures:

Cl2 = 607 000kg/(607 000 + 684 000)kg x R349 100

= 607 000kg/1 291 000kg x R349 100
= R164 139,19

NaOH = 684 000kg/(607 000 + 684 000)kg x R349 100

= 684 000kg/1 291 000kg x R349 100
= R184 960,81

(b) Determine whether the product Cl2 and product NaOH should be sold to the external market
by the Normal Division at split-off point or further processed into products SCC and TSSH
in Extraordinary Division and then sold to the external market.

Product Incremental income

SCC Value after further processing: R
(607 000 x 0,90) x R5 2 731 500
Value at split-off point:
607 000 x R2,24 1 359 680

1 371 820
TSSH Value after further processing: R
(684 000 x 0,90) x R8 4 924 800
Value at split-off point:
684 000 x R2,20 1 504 800

3 420 000

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Product Incremental costs
SCC Further processing costs: R
(607 000 x 0,90) x R0,75 409 725

TSSH Further processing costs: R

(684 000 x 0,90) x R2,80 1 723 680

Product Conclusion on further processing or not

SCC Difference between incremental income and cost:

R1 371 820 – R409 725 = R 962 095

Conclusion: Process product Cl2 further into product SCC

TSSH Difference between incremental income and cost:

R3 420 000– R1 723 680 = R1 696 320

Conclusion: Process product NaOH further into product TSSH

(c) Calculate the sales price variance per product and in total for May 2017.

(Actual selling price – standard (budgeted) selling price) x actual sales volume

Product Actual Standard Difference Actual sales Sales price

selling price selling price in unit price volume variance
R R R (units) R
SCC 4,85 5,00 (0,15) 558 500 83 775 A
TSSH 8,04 8,00 0,04 610 750 24 430 F
Total R 59 345 A

A = Adverse; F = Favourable

(d) Provide two possible reasons for a favourable sales price variance.

• Decrease in the number of competitors in the market.

• Better marketing and aggressive sales campaign.

• Market prices increasing (price increase by competitors), followed by a price increase by

Extraordinary Division.

• Improved product differentiation and market segmentation allowing for sales price increases

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(e) Calculate the sales volume contribution variance per product and in total for May 2017.

Product Budgeted Actual Diffe- Standard contribution Sales

sales sales rence volume
volume volume R variance
R
SCC 546 300 558 500 12 200 R5 – R0,75 – R2,24 = R2,01 24 522 F
TSSH 615 600 610 750 (4 850) R8 – R2,80 – R2,20 = R3,00 14 550 A
Total R 9 972 F

 607 000 x 90% (Cl2 budget – net loss) = 546 300

 684 000 x 90% (NaOH budget – net loss) = 615 600

(f) Calculate the idle time variance for product TSSH for May 2017.

Idle time variance

= (actual productive time – standard work time) x standard work rate

= (4 110 560  – 4 021 200 ) minutes x R0,20/minute 
= 89 360 minutes x R0, 20/minute
= R17 872 F

Calculations:

 Actual productive time = 4 468 000 clock minutes – 357 440 minutes or

= 4 110 560 work minutes

Standard work time = actual clock time x (1 – allowed idle time %)

= 4 468 000 clock minutes x 90%
= 4 021 200 minutes
 Standard work hour rate:
Standard clock minutes per unit of TSSH = 8 clock minutes (given)
Standard work minutes per unit of TSSH = 8 clock minutes x (1-10%)
= 7,20 work minutes
Standard clock direct labour cost per unit of TSSH (given) = R1,44 per unit
How many units can be manufactured per clock hour = 60 min/8 clock min per unit = 7,5 units
Standard labour cost for clock time per clock hour = R10,80 (7,5 units x R1,44 per unit)
Standard labour cost per unit of TSSH = R10,80/0,9 = R12 per work hour
= R12/60 = R0,20 per work minute

Alternatively:

Alternatively = (allowed idle time – actual idle time) x standard work rate
= (446 800  – 357 440 ) minutes x R0,20/minute 
= 89 360 minutes x R0,20/minute
= R17 872 F

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The Actual productive time was 8% less than actual time clocked.

 Allowed idle time = actual clock time x allowed idle time %

= 4 468 000 clock minutes x 10%
= 446 800 clock minutes

 Actual idle time = R6 478 600/R1.45 = 4 468 000

= 4 468 000 clock minutes x 8%
= 357 440 minutes

(g) Calculate the maximum contribution for Extraordinary Division for June 2017.

Details
SCC TSSH

Contribution per unit R5,50 R8,96

Sales (R5 x 1,1; R8 x 1,12)
Less: Transfer costs R2,24 R2,20
Less: Variable further processing cost
R0,70 R2,72
(R0,75 – R0,05; R2,80 – R0,08)
Contribution per unit R2,56 R4,04

Direct labour minutes required per unit 5 min 8 min

Contribution per direct labour minute
(R2,56/5; R4,04/8) R0,512 per min R0,505 per min
Rank (ito contribution/direct labour time) 1 2
Sales demand (units): 600 930 584 820
Direct labour minutes required to meet the 600 930 x 5min
expected sales demand (minutes): 584 820 x 8min
= 3 004 650 minutes
3 004 650 + 4 678 560 = 7 683 210min = 4 678 560 minutes

OR alternatively:
Total direct labour minutes required: 3 004 650 + 4 678 560 = 7 683 210 minutes
Total direct labour minutes available: 100 000 hours x 60 min = 6 000 000 minutes
Shortage: 1 683 210 minutes

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Allocation:

First allocate direct labour minutes needed for 600 930 x 5

SCC limited to the expected sales demand:
= 3 004 650
minutes

6 000 000
– 3 004 650
Remainder available for TSSH: = 2 995 350 min
2 995 350/8
= 374 418,75
600 930 units
Optimum Number of units to be produced ≈ 374 418 units
600 930 x R2,56 374 418 x R4,04
= R1 538 380,80 = R1 512 468,72
Budgeted optimum contribution:

(h) From the viewpoint of the manager of the Normal Division, briefly discuss the issues
arising from the suggested transfer price by Head Office.
• If Normal Division were to make the transfers as suggested, their divisional profits would be
much lower than if it were to sell both products externally at split-off point as an external market
exists for their products.
• Extraordinary Division’s profits, however, would be much higher.
• Normal Division would be able to recover its variable cost of producing product Cl2 and product
NaOH, however, there is no profit for Normal Division under the suggested policy.
• Normal Division would be reluctant to transfer any products to Division Extraordinary.
• Normal Division will not have the opportunity to recover any apportioned fixed costs since
marginal cost does not include these.
• Normal Division’s manager would feel extremely demotivated if forced to transfer the
products to Extraordinary Division as it would make performance look poorer.
• Due to the fact that actual cost would be used rather than standard cost, Normal Division would
have little incentive to control the variable costs properly as it would pass all of the costs on to
Extraordinary Division.
• One of the primary purposes of creating a divisional structure is that autonomy (decision-making
power) gets granted to the divisions. If Normal Division is forced to transfer their products to
Extraordinary Division, their autonomy would be lost.
• The imposed transfer will result in Normal Division losing its external market and/or customer
confidence.

(i) Calculate the maximum transfer price per kilogram of Cl2 at which Normal Division would
ideally want to transfer to Extraordinary Division if they were not forced to transfer their
products at actual variable cost.

Cl2 = R2,24/kg – R0,10/kg

= R2,14/kg

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4.14 ENERSOLAR (PTY) LTD

(a) Determine the total budgeted number of each panels required by the Solar Panel Division
for the month of March 2017 to break-even.

Formula = Total fixed costs ÷ Weighted contribution per unit

= (R10 000 000 + R125 000 + R261 000) ÷ R15 140
= R10 386 000 ÷ R15 140
= 685,99 batches
≈ 686 batches (Rounded up)

Break even units

Regular = 3 430 Panels (686 batches X 5 sales mix)
Super = 2 058 Panels (686 batches X 3 sales mix)
Hyper = 1 372 Panels (686 batches X 2 sales mix)

 Weighted contribution
Details Regular Super Hyper Workings
Contribution R1 954 R1 594 R294 A
Sales mix 5 3 2 B
Weighted contribution R9 770 R4 782 R588 AxB

Total weighted contribution (R9 770 + R4 782 + R588) = R15 140

 Contribution per unit

Details Regular Super Hyper
R R R
Sales 16 000 18 500 24 000
Less: Direct raw materials 5 800 6 500 10 000
Less: Direct labour 4 940 6 900 9 200
Less: Variable manufacturing overheads 3 300 3 500 4 500
Less: Variable selling costs 6 6 6
Contribution per unit R1 954 R1 594 R294

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(b) Briefly discuss two (2) benefits to the Solar Panel Division of using the just-in-time (JIT)
direct raw materials procurement technique.

• Inventory holding costs. It reduces inventory-holding/storage costs due to the minimum

inventory volumes of steel and other components warehoused at any given point in time.

• Working capital/Opportunity costs. It reduces the working capital tied up (investment) in the
steel and components’ inventory.

• Risks of holding inventory. It reduces the risks associated with holding inventory namely, the
risk of damaging inventory, theft and inventory becoming obsolete.

• Inventory handling costs. It reduces the inventory-handling costs, as suppliers are required to
perform stringent quality inspections on the steel and other components before delivery and
guaranteeing their quality.

• Supplier service. It improves the quality of supplier services by giving fewer suppliers long-
term contracts thereby ensuring that they can plan in accordance with the panels manufacturing
schedules.

• Set-up times. It reduces the set-up times for each production run for the panels.

• Discounts. Receiving quantity discounts based on the long-term orders placed with suppliers.

• Saving in supplier management cost. Savings in negotiating time and paperwork due to
working with fewer suppliers.

(c) Assume a budgeted controllable investment of R250 000 000 for March 2017. Calculate
the Solar Panel Division’s annualised budgeted return on investment (ROI) for March 2017

Details R
Net profit (Given) 4 754 000
Add back: Head office allocate cost 125 000
Monthly controllable profit (A) 4 879 000
Annualised controllable profit (A X 12) * 58 548 000
Controllable investment 250 000 000
ROI = Annualised controllable profit/ Controllable investment
= 58 548 000 ÷ 250 000 000
ROI = 23,42%

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(d) Assume that Solar Panel Division implements the proposal to revise the allocation of the
fixed manufacturing overheads. Calculate the revised budgeted gross profit percentage of
each type of panel.
Details Regular Super Hyper Total
R’000 R’000 R’000 R’000
Gross profit (given) 4 800 1 800 (1 400) 5 200
Add back: Traditional FMO* 5 000 3 000 2 000 10 000
Less: ABC FMO*  1 939,2 2 591,55 5 469,25 10 000
Production runs 660 495 330 1 485
Machine hours 430 516 653,6 1 599,6
Purchase orders 414,45 276,3 138,15 828,9
Quality inspections 434,75 1 304,25 4 347,5 6 086,5
Revised gross profit 7 860,8 2 208,45 (4 869,25) 5 200
Revised GP %  9,83% 3,98% -10,14% 2,83%

*FMO = Fixed manufacturing overheads

*ABC = Activity-based costing

 ABC Fixed manufacturing overheads allocation

Activity driver Regular Super Hyper

Production runs R33 000 x 20 = R660k R33 000 x 15 = R495k R33 000 x 10 = R330k
Machine hours R344 x 1 250 = R430k R344 x 1 500 = R516k R344 x 1 900 =
R653,60k
Purchase orders R69 075 x 6 = R414,45k R69 075 x 4 = R69 075 x 2 = R138,15k
R276,30k
Quality R43 475 x 10 = R43 475 x 30 = R43 475 x 100 =
inspections R434,75k R1 304,25k R4 347,50k

 Gross profit percentage calculations

Regular: (R7 860,80/ R80 000) = 9,83%

Super: (R2 208,45/ R55 500) = 3,98%
Hyper: (-R4 869,25))/ R48 000) = -10,14%

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Activity driver Regular Super Hyper Total R’000 R
A B C D = A+B+C E F = E/D
Production runs (5 000/ 250); 20 15 10 45 1 485 33 000
(3 000/ 200); (2 000/ 200)
Machine hours ((15/ 60) X 1 250 1 500 1 900 4 650 1 599,6 344
5 000)); ((30/ 60) X 3 000));
((57/ 60) X 2 000))
Purchase orders  6 4 2 12 828,9 69 075
Quality inspections 10 30 100 140 6 086,5 43 475
(5 000/ 500); (3 000/100)
(2 000/20)

 Purchase order schedule:

R 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 6
S 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 4
H 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 2
12

(e) Prepare the March 2017 actual income statement for product Hyper only based on the direct
costing method

Details Workings R
Sales (R48m/2 000 x 0.98) x 2 150 50 568 000
Less: Variable Cost of sales 52 964 700
Opening inventory (R1,715m - (R800 x 70) 1 659 000
Direct raw materials (R10 500 x 2 200) 23 100 000
Direct labour (R9 660 x 2 200) 21 252 000
Variable manufacturing costs (R4 500 x 2 200) 9 900 000
Less: Closing inventory (R24 660 x 120) 2 959 200
Variable selling costs (R6 x 2 150) 12 900
Contribution -2 396 700
Less: Fixed costs 2 005 500
Manufacturing overheads 1 950 000
Salary costs 55 500
Net profit(loss) (R4 402 200)

 Variable manufacturing costs

Details Budget per unit Actual per unit
Direct raw material R20m/2 000 R10 000 R10k x 1,05 R10 500
Direct labour R18,4m/2 000 R9 200 R9,2k x 1,05 R9 660
Variable manufacturing overheads R9,0m/2 000 R4 500 R4 500
Variable manufacturing cost R23 700 R24 660

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(f) Determine the total price to be quoted by the Energy Turbines for the twenty-five (25) high
tech energy turbines as per Agrie SA’s request.
Give a reason for inclusion or exclusion of all items. Show all your calculations.

No Item Reason R

(1) Component A - Relevant as the components are used regularly 42 500,00

Replacement cost in manufacturing. (Incremental cost)
(2) Component Z - Relevant as the component is required 30 000,00
Purchase price specifically for the proposal or not in inventory,
(Incremental cost) (In regular use)
(3) Machine - Variable Relevant as it varies with the number of turbines 5 000,00
running cost manufactured. (Incremental cost)
(3) Machine - Original cost Irrelevant as a sunk/ past cost -
of R8 Million
(3) Machine - Interest on the Irrelevant as it is a financing decision -
loan/ Loan
(3) Machine - Depreciation Irrelevant as it is a non-cash item -
on original cost
(4) Direct labour - Normal Relevant as it varies with the number of turbines 1 200,00
hours manufactured. (Incremental cost)
(4) Direct labour - Overtime Relevant as it will be worked due to turbines 864,00
hours proposal. (Incremental cost) Or 874,80
(5) Divisional manager trips Irrelevant as it has been incurred already. It is -
sunk/past cost
(6) Fixed manufacturing Irrelevant - will be incurred even if the proposal is -
overheads not taken. Sunk cost
Opportunity cost of 10 Relevant as the contribution will be lost on the 12 000,00
regular turbines regular market.
Total relevant costs 91 564,00
Add: Profit (R91 564 x 20%) 18 312,80
Total price 109 876,80

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Calculations
(1) Component A - Replacement cost (R1 700 X 25 turbines)
(2) Component Z - Purchase price ((R20 000/ 50) X 3 components X 25 turbines))
(3) Machine - Variable running cost ((40/ 60 minutes) X R300 X 25 turbines)
(3) Machine - Original cost of R8 Million
(3) Machine - Interest on the loan
Machine - Depreciation on original
(3) cost
(4) Direct labour - Normal hours ((16/ 60 minutes) X R180 X 25 turbines))
(4) Direct labour - Overtime hours ((16/ 60 minutes) X (R180 X 1,5) X 12 turbines))
(5) Divisional manager trips
(6) Fixed manufacturing overheads
Opportunity cost of 10 regular
turbines ((R3 800 - R2 600) X 10 turbines))

(g) Briefly discuss four (4) qualitative factors which the Energy Turbines division should
consider before accepting the proposal from Agrie SA.

• Customer goodwill. A loss of customer goodwill due to the sacrifice of ten (10) turbines sold
in the current existing market.

• Increased demand. The actual demand in the current existing market could be more than the
expected demand and this can result in lost sales from regular customers.

• Credit profile. The ability of Agrie SA to pay for the turbines as the agricultural sector has
suffered from a persistent drought over the last few years, and this could have resulted in cash
flow difficulties.

• Future orders: The possibility of getting similar orders from Agrie SA in the future as there is
an increased emphasis on renewable energy in the agricultural sector due to carbon
emissions.

• Employee morale. The morale of the manufacturing employees regarding working overtime
in order to make the deadline for the proposal.

• Contractual obligations. The consequences if Enersolar do not meet the contractual

implications as contained in the contract. (i.e. penalties, etc.)

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4.15 SENO-MAPHODI (PTY) LTD

(a) Comment on whether the available prepared water would have been sufficient for
SM to fully meet its 2019 financial year manufacturing budget for all units of both [6]
product types.

Product variations Manufacturing units ‘000 Prepared

Fizzy Fizzy Total water litres
Orange Cola ‘000
Cans (330ml) 450 3 450 3 900 1 287
Buddy (450ml) 320 2 100 2 420 1 089
Jumbo (1 250ml) 25 12,2 37,2 46,5
Total budgeted manufacturing units 795 5 562,2 6 357,2
Required litres after loss 2 422,5
Required litres before loss 2 550
Less: Available litres before loss 2 400
Surplus/(shortage) before loss (150)

Product variations Prepared water units Total prepared

FizzyOrange FizzyCola water litres

Cans (330ml) after loss 148 500 1 138 500 1 287 000
Buddy (450ml) after loss 144 000 945 000 1 089 000
Jumbo (1 250ml) after loss 31 250 15 250 46 500

Comment:
SM’s budgeted prepared water manufacturing requirements for the 2019 financial year is 2,55 million
litres. However, only a maximum of 2,4 million litres of prepared water is made available to SM per
annum. Therefore, with a shortage of 150 000 prepared water litres, SM will not be able to fully meet
its 2019 financial year’s manufacturing budget for all the products.

 Given
 3 900 000 x 330ml ÷ 1 000ml = 1 287 000 litres
 2 420 000 x 450ml ÷ 1 000ml = 1 089 000 litres
 37 200 x 1 250ml ÷ 1 000ml = 46 500 litres
 1 287 000 + 1 089 000 + 46 500 = 2 422 500 litres
 2 422 500 ÷ 95% (100% less 5% given normal loss) = 2 550 000 litres
 2 400 000 less 2 550 000 = (150 000) litres

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(b) The budgeted optimal manufacturing mix per product type for “buddy” variations. [11]
 Given
 Establishing if the available prepared water allocated to “buddy” is a limiting factor
Details Net loss litres
Available prepared water allocated to “buddy” 1 008 000
Required prepared water for “buddy” units 1 089 000
Shortage (1 008 000 less 1 089 000) 81 000

 Calculating optimal manufacturing mix per product type for buddy product variation
Details Fizzy Fizzy
Orange Cola
Standard selling price R8,70 R8,70
Less: Standard total variable costs R4,136 R4,55
In-house variable manufacturing overheads R2,736 R3,15
Prepared water R0,45 R0,45
Container costs R0,80 R0,80
Variable distribution costs R0,15 R0,15
Standard contribution R4,564 R4,15
Standard contribution per limiting factor (CPLF) R0,010 R0,009
Ranking based on CPLF 1 2
Available prepared water litres for “buddy’s” 1 008 000
Litres allocated to FO “buddy” first 144 000
Remaining prepared water litres after FO 864 000
Optimal manufacturing mix 320 000 1 920 000

 R1,44 + R0,64 + R0,80 + R1,20 + R2,00 = R6,08 ÷ 1 000 litres x 450ml = R2,736
 R2,40 + R0,80 + R0,60 + R1,20 + R2,00 = R7,00 ÷ 1 000 litres x 450ml = R3,15
 R1,00 ÷ 1 000 litres x 450ml = R0,45
 FizzyOrange: R4,56 ÷ 450ml = R0,010; FizzyCola: R4,15 ÷ 450ml = R0,009
 320 000 units x 450ml ÷ 1 000ml = 144 000 litres
 1 008 000 less 144 000 = 864 000 litres
 864 000 x 1 000ml ÷ 450ml = 1 920 000

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(c) (i) FizzyOrange budgeted contribution value at break-even point [8]

Details FizzyOrange
Cans Buddy Jumbo
Contribution per unit R3,60 R4,30 R1,50
Standard sales mix (SSM) 15 10 1
Contribution per unit x SSM R54,00 R43,00 R1,50
Weighted contribution R98,50
Total budgeted fixed costs R2 570 000
Fixed distribution costs R360 000
Fixed rental expenses R510 000
Fixed manufacturing overheads R1 700 000
Break-even batches 26 091,37
Batches rounded up 26 092
Break-even contribution values R1 408 968 R1 121 956 R39 138
 Given
 Can: 540K ÷ 36K = 15; Buddy: 360K ÷ 36K = 10; Jumbo: 36K ÷ 36K = 1
 Can:R3,60 x 15 = R54,00; Buddy:R4,30 x 10 = R43,00; Jumbo: R1,50 x 1 = R1,50
 R54,00 + R43,00 + R1,50 = R98,50
 R50 000 x 12months x 60% = R360 000
 850m2 x R100 p/m2 x 12months x 50% = R510 000
 R360 000 + R510 000 + R1 700 000 = R2 570 000
 Multiproduct break-even formula: Total fixed costs ÷ Weighted contribution
 R2 570 000 ÷ R98,50 = 26 091,37 ≈ 26 092
 Cans: 26 092 x 15 x R3,60 = R1 408 968
 Buddy: 26 092 x 10 x R4,30 = R1 121 956
 Jumbo: 26 092 x 1 x R1,50 = R39 138

(c) (ii) Sales mix variance [2]

Product Actual Actual sales Difference Standard Variance

sales units units @ std contribution R
proportion
Can* 405 000 363 750 41 250 R3,60 R148 500 F
Buddy* 207 500 242 500 (35 000) R4,30 R150 500 A
Jumbo 18 000 24 250 (6 250) R1,50 R9 375 A
630 500  630 500
*For completeness, although not asked, the other sales mix variances are also provided.
 Given
 405 000 + 207 500 + 18 000 = 630 500
 C:630,5K x 15/26 = 363 750; B:630,5K x 10/26 = 242 500; J:630,5K x 1/26 = 24 250
 Standard sales mix (SSM) proportions as calculated in question (c)(i) above.
 363 750 + 242 500 + 24 250 = 630 500

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(d) Calculate the number of fabric-sacks per order needed for FizzyCola sugar
[8]
requirements

Alternative 1: sugar kilograms Alternative 2: sugar sacks

2xUxC 2xUxC
√H + (P x i) √H + (P x i)

2 x 424 900 x R375 2 x 8 498  x R375

=√(R2,50 =√(R2,50
+ (R12,60 x 10,50%) x 50kg) +[(R12,60 x 50kg) x (10,50%)]

R318 675 000 6 373 500

=√ =√
R3,82 R191,15

= 9 133,607 = 182,6005
≈ 9 134 ≈ 183 fabric sacks per order
= 9 134 ÷ 50kg = 182,68 ≈ 183
 Given
 Calculation of demand/usage (D/U)
Details FizzyCola Total
Cans Buddy Jumbo
Budgeted manufacturing units 3 400 000 2 200 000 10 000 5 610 000
Required prepared water litres 1 122 000 990 000 12 500 2 124 500
Standard sugar requirements per litre 0,2 kg
Total required sugar kg’s 424 900
Total required sugar in sacks 8 498

 3 400 000 x 330ml ÷ 1 000ml = 1 122 000 litres

 2 200 000 x 450ml ÷ 1 000ml = 990 000 litres
 10 000 x 1 250ml ÷ 1 000ml = 12 500 litres
 1 122 000 + 990 000 + 12 500 = 2 124 500 litres
 R2,40 ÷ R12,00 = 0,2kg per litre OR 200 grams per litre
 2 124 500 x 0,2 kg = 424 900kg OR 424 900 000 grams ÷ 50kg = 8 498 sugar sacks

(e) (i) Identification of ethical dilemmas apparent from the telephonic enquiry [4]

1. Invitation to manipulate the tender price you are required to calculate and quote DFAL.
2. Invitation to act on inside information that may otherwise not be available to other potential
bidders.
3. Being a party to the leaking of confidential information from DFAL’s NFE.
4. Turning a blind-eye to gaining unfair advantage over other potential bidders.
5. Invitation to share on the proceeds (facilitation fee) from fraudulent activities.

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(e) (ii) From a quantitative perspective only, advise SM if it should tender for the
[11]
“DFAL” request or not.
 Given
 Required FizzyCola buddy units: 5 000 x 6 = 30 000 units
 Tender price calculations
Details Notes Amount
Variable costs Incremental costs R153 600
Variable distribution costs Not relevant, DFAL to collect R0
Youth – stipend Incremental costs R96 000
Youth – subsidy Incremental income (R29 400)
Plant net costs Net incremental costs R20 000
Plant depreciation Non-cash item not relevant R0
Plant interest on loan Finance costs not relevant R0
Profit on sale of plant Non-cash item not relevant R0
Lost contribution Opportunity costs R126 000
Total relevant costs R366 200
Profit margin R128 170
Minimum tender price R366 200 + R128 170 R494 370

Advice:
From a quantitative perspective, SM should tender for the DFAL’s request. At R650 000 the company
stand to make R155 630 (R650 000 less R494 370) additional profit from the tender.

 R3,150 + R0,45 + R0,80 = R4,40 x (100% + 5% increase) = R4,62 + R0,50 = R5,12
 Refer to the 2019 variable manufacturing costs per question (b) above
 R5,12 x 30 000 = R153 600
 8 x 3 months x R4 000 p/m = R96 000
 8 x 3 months x R1 225 [(R3 500 – (R3 500 p/m x 65%)] = R29 400
 R1 500 000 (purchase price) less R1 480 000 (resale value) = R20 000
 30 000 x R4,20 = R126 000
 R366 200 x 35% mark-up = R128 170
 Emblem and slogan costs

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4.16 PEARS LTD

(a) Calculate the actual closing inventory as at 31 August 2017 by completing the table below:

Details DPM DPT

units units
Sales (given) 16 800 11 000
Closing inventory 31 August 2017 750 1 000
Units required 17 550 12 000
Opening inventory 01 September 2016 550 1 200
Units produced 17 000 10 800

 DPM: 20 000 x 85% = 17 000; DPT: 12 000 x 90% = 10 800

(b) Briefly discuss four (4) reasons as to why would Pears use an absorption costing system for
external reporting, but also use direct costing system for internal reporting.
1. As a JSE listed company, Pears is required to prepare and present its annual financial statement
in terms of IFRS (financial accounting standards) which requires that inventory should be valued
using the absorption costing method/system (IAS 2).
2. Absorption costing system is consistent with the decision-usefulness requirement of the financial
statements. It would therefore be beneficial to the external users/investors/potential investors
wishing to make economic, financial or investment decision about Pears.

3. Proponents of variable costing claim that is enables for the presentation of more useful
information for decision-making.

4. Pears’ management will require management accounts on a weekly/monthly or quarterly intervals

to be used for decision-making and variable costing method will provide such information.

5. Variable costing does not capitalise fixed overheads in unsaleable inventories and thus reduce
the extent of investment in inventories.

6. Direct costing system is able to reflect how much each product contributes to cover the fixed
costs.

7. Pears’ management has thus concluded that variable costing provides the more meaningful
information in assessing the economic and managerial performance of divisional managers.
Available marks [7] limited to maximum marks [4]
Source: Drury 9th Edition, page 152/153 and 162/163

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(c) Prepare the actual income statement for Division PearMobile only for the 2017 financial
year based on the absorption costing system.

Details DPM
R’000
Sales 120 960
Less: Manufacturing cost of sales (79 110)
Opening inventory 2 475
Production (R56 763K + R23 409K) 80 172
Less: Closing inventory 3 537
Less: Fixed overhead under recovery (4 131) 
Gross profit 37 719
Less: Selling and administration cost (1 181,60)
Variable 201,60
Fixed 980
Less: Other expenses (28 000)
Fine – Competition commission 24 000
Audit fees 250
Legal fees 3 750
Profit before tax 8 537,40

 Given
16 800 x R7 200 = R120 960K
 17 000 x R4 716(R3 339 + R1 377) = R80 172K OR
 (17 000 x R3 339 = R56 763K) + (17 000 x R1 377 = R23 409K) = R80 172K
 [(R4 500 x 70% = R3 150 x 1.06= R3 339) + (R4 500 x 30% = R1 350 x 1.02) = R1 377)]
 (R2 475k x 70%)/550 = R3 150 x 1.06 = R3 339); (R2 475k x 30%)/550=R1 350 x 1.02= R1 377
 R2 475 000/550 = R4 500
 750 x R4 716 (R3 339 + R1 377) = R3 537K
 [(20 000 x R1 377) = R27 540K] less [(17 000 x R1 377) = R23 409 ] = R4 131K
 (20 000 less 17 000) x R1 377 = R4 131K
 16 800 x R12 = R201,6K
 R80 000k x 50% x 60% = R24 000K
 R7 500/2 x 1 = R3 750K
 Refer to calculations in question (a) above

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(d) Based on the actual results, assume that the actual profit before tax and performance
bonus for the financial year ended 31 August 2017 is R7 800 000 for DPT.
(i) Calculate the actual residual income (RI) for DPT for the financial year ended 31
August 2017

Details DPT
R’000
Profit before tax (given) 7 800
Add back non-controllable expenses 20 000
Fine – competition commission 16 000
Audit fees 250
Legal fees 3 750
Controllable profit 27 800
Less: cost of capital charge (22 000)
Residual income (RI) 5 800
Controllable investment 220 000

 R80 000k x 50% x 40% = R16 000K

 R220 000k(given) x 10,00% (10,50% less 0,50%) = R22 000K or
 (R220 000k(given) x 9,75% x 6/12) + (R220 000k(given) x 10% x 6/12) = R21 725K

(ii) Calculate the performance bonus, if any, that the head office will pay to DPT only for
the financial year ended 31 August 2017.
Details DPT
Controllable profit (see (d)(i)) R27 800 000
Controllable investment (given) R220 000 000
Return on investment 12,64%
Required ROI 11,50%
Conclusion: bonus requirement met because the actual
ROI of 12,64% is > than the required ROI of 11,50%
Bonus amount R1 886 500

 R27 800K ÷ R220 000K = 12,64%

 11 000(given) above x R9 800(given) x 1,75% (given) = R1 886,5k

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(e) Calculate the budgeted margin of safety percentage for each of the three products for the
financial year ending 31 August 2018.

Details DPM DPT DPW

Expected demand and sales 18 000 12 000 3 000
Sales mix (alternatives in brackets) 18 (6) 12 (4) 3 (1)
Sales mix (alternative) 54,55% 36,36% 9,09%
Sales R7 800 R10 400 R4 700
Less: Variable manufacturing cost R4 950 R8 100 R3 200
Less: Variable selling cost R14 R16 R5

Contribution per unit R2 836 R2 284 R1 495

Weighted contribution (WC)  R17 016 R9 136 R1 495
WC Alternative mix (18,12,3) R51 048 R27 408 R4 485
Weighted contribution per batch R27 647
Fixed cost R58 850 000
Break even sales in batches R58 850 000 ÷ R27 647 = 2 128,622
Rounded batches 2 129
Break even units 12 774 8 516 2 129
Expected break even value R99 637,2K R88 566,4K R10 006,3K
Expected sales  R140 400K R124 800K R14 100K
Margin of safety percentage 29,03% 29,03% 29,03%

 DPM: R2 838 x 6 = R17 016; DPT: R2 284 x 4 = R9 136; DPW: R1 495 x 1 = R1 495
 R17 016 + R9 136 + R1 495 = R27 647
 R42 000K + R16 850K = R58 850 000
 DPM: 2 129 x 6 = 12 774; DPT: 2 129 x 4 = 8 516; DPW: 2 129 x 1 = 2 129
 DPM: 12 774 x R7,8K = R99 637,2K; DPT: 8 516 x R10,4K = R88 566,4K; DPW: 2 129 x R4,7K
= R10 006,3K
 DPM: 18 000 x R7,8K = R140 400K; DPT: 12 000 x R10, 4K = R124 800K; DPW: 3 000 x R4,7K
= R14 100K
 Margin of safety (Rand values alternative)
DPM: (R140 400K – R99 637,2K)/R140 400K = 29,03%
DPT: (R124 800K – R88 566,4K)/R124 800K = 29,03%
DPW: (R14 100K – R10 006,3K)/ R14 100K = 29,03%
 Margin of safety (units values alternative)
DPM:(18 000 – 12 774/18 000); DPT: (12 000 – 8 516/12 000); DPW: (3 000 – 2 129k/3 000)

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(f) Optimum number of products that can be available for sale based on the 31Aug2018 budget

Details PM PT PW Total
Expected annual demand and sales 18 000 12 000 3 000
Testing time per unit in minutes (mins) 15mins 30mins 12mins
Annual testing time need in minutes 270 000 360 000 36 000 666 000
Available testing time in minutes 600 600
Shortage (666 000 less 600 600) 65 400
ALTERNATIVE WORKINGS IN HOURS
Testing time per unit in hours (hrs) 0,25hrs 0,50hrs 0,20hrs
Annual testing time need in hours 4 500 6 000 600 11 100
Available testing time in hours 10 010
Shortage (10 010 less 11 100) -1 090
Because of the shortage, testing time is therefore a limiting factor
Contribution per unit [see (e) above] R2 836 R2 284 R1 495
Contribution per limiting factor (mins) 189,07 76,13 124,58
Contribution per limiting factor (hrs) 11 344 4 568 7 475
Ranking it terms of “CPLF” 1 3 2

CPLF = Contribution per limiting factor

 PM: 18 000 x 15 = 270 000; PT: 12 000 x 30 = 360 000; PW: 3 000 x 12 = 36 000
 PM: 18 000 x 0,25 = 4 500; PT: 12 000 x 0,50 = 6 000; PW: 3 000 x 0,20 = 600

 Available testing time

Available testers (given) 7
Working day in a year (given) 240
Less: compulsory leave days a year (given) (20)
Productive working days a year per staff 220
Productive working hours per day (given) 6,5
Total working hours per year (7 x 220 x 6,5) 10 010hrs
Total working minutes per year (10 010hrs x 60) 600 600mins

 PM: R2 836/15min = R189,07; PT: R2 284/30min = R76,13; PW: R1 495/12mim = R124,58

 PM: R2 836/0,25 = R11 344; PT: R2 284/0,50 = R4 568; PW: R1 495/0,20 = R7 475

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(f) Optimum number of products that can be available for sale based on the 31Aug2018 budget

Details PM PT PW
All PearMobiles units produced first 18 000
Total testing times used in minutes 270K
Total testing times used in hours 4,5K

Remaining mins after PM (600,6K – 270K) 330 600

Remaining hrs after PM (10 010 – 4 500) 5 510
Number of PearWatches produced second 3 000
Minutes used for 3 000 PW units 36 000
Hours used for 3 000 PW units 600

Remaining mins (330 600 – 36 000) 294 600

Remaining hours (5 510 – 600) 4 910
PT to produce 294 600/30min 9 820
PT to produce 4 910/0,5hrs 9 820

(g) List four (4) qualitative factors that Pears would have considered when the decision to centralise
all the testing functions at a Johannesburg warehouse was made:

1. The physical capacity/size of the warehouse to perform all the required testing functions.
2. Logistical arrangements of transporting all the products to the testing warehouse from their
respective manufacturing plants (Polokwane, Cape Town and Nelspruit).
3. Lead time consideration resulting from logistical arrangement.
4. Safety consideration regarding the transportation and the safekeeping of products to/at the
warehouse in Johannesburg.
5. Turn-around time regarding the delivering the products to the retail outlets from the testing
plant.
6. Regional labour unions consideration with respects to moving the testing functions to
Johannesburg after manufactured at different plants.
7. Inventory movement control and safety thereof.
8. The need to maintain the same level of quality testing for all the products.
9. The impact of the loss of testing function autonomy by the divisions.

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(g) List four (4) qualitative factors that Pears would have considered when the decision to
centralise all the testing functions at a Johannesburg warehouse was made:

10. Employment/hiring of temporary workers.

11. Availability of time needed to train the newly hired staff.
12. South African labour laws.
13. Labour court disputes and possible damage to reputation as a result of these disputes
14. Possibility of utilising the spare manufacturing capacity at the plants for the testing function.
15. Consideration of the increased workload due to increased product offering.
16. Willingness to work overtime by the testers.

17. Possible resignations from testers who are unable/unwilling to relocate.

18. Possible retrenchments of testers who are unable/unwilling to relocate.
19. Consider the ability of the testers to transport themselves and report to duty.
20. Possible negative impact on the morale of the remaining testers/staff mainly due to resignation
and/or retrenchments of their colleagues.

4.17 DELIGHT SPREADS (PTY) LTD

(a) The budgeted number of units per spread that DS will need to produce and sell to
achieve the target profit of R350 000 for the 2017 financial year.

Formula = (Total fixed costs + Target profit)/ Weighted contribution per batch
= (R488 320 + R350 000) ÷ R31,38
= 26 715,11 batches
≈ 26 716 batches

Units to reach target profit

MNS (Breakeven units): 26 716 batches x 1,5 sales mix = 40 074 units
MSS (Breakeven units): 26 716 batches x 1 sales mix = 26 716 units

 Common fixed costs R

Fixed manufacturing overheads 286 320

Computer depreciation 16 000
Insurance premiums 46 000
Cleaning contract fee 50 000
Administrative employee costs 60 000
Sundry fixed costs 30 000
Total common fixed costs R488 320

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 Contribution per batch (Weighted contribution)

Contribution MNS MSS

R R
Selling price per unit 55,00 60,00
Less: Direct raw material 27,25 25,75
Less: Direct labour 6,25 7,00
Less: Variable overheads 7,00 7,50
Less: Packaging material 1,20 1,20
Less: Selling costs 2,75 3,00
Contribution per unit R10,55 R15,55

Contribution per unit R10,55 R15,55

Sales mix 1,50 1,00
Weighted contribution R15,83 R15,55

Contribution per batch (R15,83 + R15,55) = R31,38

(b) The optimum production mixture that will maximise DS’s budgeted profit for the 2017
financial year based on the impact of the Grahamstown Arts Festival market research.

Optimum production mixture based on the ranking

MNS units (60 000 minutes required) = 40 000

MSS units ((114 000 minutes – 60 000 minutes)/2,25 machine minutes per unit)) = 24 000

 Required machine minutes

MNS ((40 000 units x 250 g)/1 000 g))/10kg x 60 minutes = 60 000 minutes
MSS ((30 000 units x 250 g)/1 000 g))/10kg x 90 minutes = 67 500 minutes
Total required minutes 127 500 minutes
Available machine minutes (1 900 hours x 60 minutes) = 114 000 minutes
Shortage = 101 500 minutes
Therefore, machine time is a limiting factor.

 Contribution per limiting factor MNS MSS

Contribution per unit from (a) R10,55 R15,55
Machine minutes per unit 1,5 2,25
((60 minutes/(10kg x 4 units per kg)) and
((90 minutes/(10kg x 4 units per kg))
Contribution per limiting factor R7,03 R6,91
Ranking in terms of contribution per limiting factor 1 2

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Calculations based on machine hours
This calculation can also be based on machine hours. The calculations will be as follow:
Optimum production mixture based on the ranking
MNS-production (1 000 hours required) = 40 000 units
MSS-production:
(1 900 hours – 1 000 hours) = 900 hours available
900 hours /1,5 hours per 10kg = 600 batches of 10kg
600 batches x (10kg x 4 units per kg) = 24 000 units

 Required machine hours

MNS ((40 000 units x 250 g)/1 000 g))/10kg x 1 hour = 1 000 hours
MSS ((30 000 units x 250 g)/1 000 g))/10kg x 1,5 hours = 1 125 hours
Total required hours 2 125 hours
Available machine hours = 1 900 hours
Shortage = 225 hours
Therefore, machine time are a limiting factor.

 Contribution per limiting factor MNS MSS

Contribution per unit from (a) R10,55 R15,55
Machine hours per unit 0,0250 0,0375
(1 hours/(10kg x 4 units per kg)) and
(1,5hours/(10kg x 4 units per kg))
Contribution per limiting factor R422,00 R414,67
Ranking in terms of contribution per limiting factor 1 2

(c) DS can improve on its budgeting process to closely align it with the actual results as follow:

▪ Sales and production per month should be adjusted to include seasonality, i.e. which months do
they produce and sell more or less.
▪ The selling prices should include the expected price increase due to inflation and market forces.
▪ Raw material prices should include the expected price increases due to market forces.
▪ Other expenses should be adjusted with inflation and/or other expected price increases.
▪ Periodically revise the master budget, for example revise the budget every quarter to incorporate
new information that did not exist at the initial budgeting process.
▪ Monitor the production and sales actual outcomes and respond to deviations from planned
outcomes.
▪ Allocate to each manager the responsibility to prepare the budget for their area of speciality, for
example Sibongile should be responsible for the marketing, procurement and finance budgeting,
while Parusha and Ester should be responsible for production budget.

(d) With reference to the 2017 financial year budget identify the type of costing system

Absorption costing system.

DS’s total manufacturing cost also includes fixed manufacturing overheads.

DS’s budgeted income statement correctly refers and calculated “gross profit” instead of “contribution”
which is synonymous with a variable costing system.

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(e) Variances for the quarter ending January 2017:

(i) The macadamia nut chips and pieces purchase price variance for MNS.

= (Actual price per unit – Standard price per unit) x Actual quantity purchased
= [(R251 160/2 093 kg) – (R99/900 grams x 1 000) x 2 093 kg
= (R120 – R110) x 2 093 kg
= R20 930 Adverse

(ii) Direct raw material mix variance for the MSS.

Direct raw material Actual Actual usage in Standard Variance
usage budgeted mix price R
Nut chips and pieces 1 224 1 260 R110 R3 960 F
Nut oil 144 180 R100 R3 600 F
Honey 432 360 R80 R5 760 A
1 800 1 800 R1 800 F

 700/1 000 x 1 800 = 1 260

 100/1 000 x 1 800 = 180
 200/1 000 x 1 800 = 360

(iii) Variable overheads expenditure variance per product and in total

Products Standard Actual units Allowed Actual cost Variance
cost cost R
MNS R7,00 9 100 R63 700 R72 800 R9 100 A
MSS R7,50 7 200 R54 000 R50 400 R3 600 F
Total R5 500A

(f) Possible reasons for the macadamia nut chips and pieces purchase price variance.
▪ The severe drought negatively affected the supply of direct raw material and this in turn could
have resulted in unexpected increases in the purchase price.

▪ The budget process implemented by DS did not take into consideration inflation price
increases.

▪ Sibongile could have failed to negotiate better prices with the suppliers.

▪ Sibongile could have failed to negotiate and obtain a purchase discount.

▪ Careless purchasing could have resulted in higher purchase prices

▪ Higher quality macadamia nut chips and pieces were purchased resulting in a higher price

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(g) The total budgeted fixed manufacturing overheads for both MNS and MSS for the 2017
financial year on an activity-based costing system.

MNS MSS Total

R R R
Direct raw material ordering  41 280 27 520 68 800
Quality inspections  24 869 27 631 52 500
Factory rental  74 259 57 757 132 016
Total R140 408 R112 908 R253 316

 (R68 800 x 3/5) and (R68 800 x 2/5)

 (R52 500 x 6 528/13 781) and (R52 500 x 7 253/13 781)
 (R165 020 x 45%) and (R165 020 x 35%)

(h) Contrast between Activity-based costing (ABC) and traditional costing method.
Details Traditional costing method ABC
Allocation • Allocate fixed manufacturing • Allocate fixed manufacturing
basis overhead cost to products and/ or overhead cost to products and/ or
services on an arbitrary “one services on the basis of activities.
volume”-driven basis. • Multiple activity rates based on actual
• A single absorption rate which is operation capacity.
calculated based on budgeted
operation capacity.
Costs Inexpensive to implement and Costly to implement and maintain.
maintain.
Ease of use Straightforward to use and implement. Complex to use and implement due to a
diverse set of activities which must be
identified, recorded and assigned to
each product and/or service.
Decision Product decisions are not Improved decision making as a result of
making independent resulting in often a more accurate allocation of overhead
distorted decisions. costs.

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4.18 TEDDY FRENZY (PTY) LTD

(a) Variances

(i) Fake fur fabrics purchase price variance for FW teddy bears.

= (Actual purchase price – standard purchase price) x actual quantity purchased

= [(R24 200/1 100 metres) – R20/metre (given)] x 1 100 metres

= (R22/metre – R20/metre) x 1 100 metres
= R2/metre x 1 100 metres
= R2 200 Adverse

(ii) Synthetic leather purchase price variance for FW teddy bears.

= (Actual purchase price – standard purchase price) x actual quantity purchased

= [(R37 240/980 metres) – R8 per unit/0,2(given)] x 980 metres

= (R37 240/980 metres – R40/metre) x 980 metres
= R1 960 Favourable

(iii) Fibre material mix variance per type opf fibre and in Total for FW teddy bears.

Direct raw Actual Actual quantity Standard Variance

material usage issued in budgeted price R
proportions
Very fine fibre 475 490 R12,40/0,1 R1 860 F
= R124
Thick wavy fibre 1 275 1 242,50 R15,00/0,25 R900 A
= R60
Total 1 750 1 750 R960 F

 1 750 X 100/350 = 490kg

Becuause of rounding, the accceptable range is 490kg to 507,50kg
 1 750 X 250/350 = 1 275kg
Becuause of rounding, the accceptable range is 1 242,50kg to 1 260kg

(b) Two reasons for possible total favourable fibre material mix variance

▪ A favourable mix variance may be the result of substituting the expensive fibre (VFF) with
cheaper fibre (TWF).
▪ There was a move towards using more of the cheaper input (TWF).
▪ A larger proportion of cheaper materials (TWF) is included in the mixture.
▪ Using a different mix of materials than initially expected. If the total material mix variance was
favourable, it indicates better efficiency, however product quality might suffer as a result or
output may be reduced.
▪ A favourable material mix variance will be the result of a cheaper mix of raw material than the
standard suggested, perhaps due to a shortage of a certain material component.

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(c) Optimum number of orders of plastic buttons that BB has to place in order to meet the
annual expected demand for FW teddy bears.

Number of orders to be placed annually

Number of orders = Total annual demand 

EOQ 

= 120 000 
34 642 

= 3,464

≈ 4 orders per annum (round-up principle)

 Calculation of total annual demand = expected sales per month x 12 months

= 5 000 teddies x 12 = 60 000 x 2 buttons per teddy

= 120 000 buttons

 Calculation of EOQ

2xDxO
EOQ = √
H

2 x 120 00x R100

= √
0,02

24 000 000
= √
0,02

= 34641,01615

≈ 34 642 units (Rounded-up)

(d) The actual total machine-related direct labour charge for BB for October 2017.

(4 880 teddies in Oct / [60/15 teddies per hour]) = 1 220 hours X R54 = R65 880

OR

Alternative: 4 880 teddies in Oct X R13,50 per teddy = R65 880

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(e) The actual total direct labour charge for BB for October 2017 for the temporary sowing
workers.

2 440 work hours X R60 = R146 400

 4 880 / 2 teddy bears per work hour = 2 440

 R54,00 (clock hour rate given) / ( 1 – 0,1) = R60,00 p/hr
 10% Idle time allowance rate (given)

(f) Based on the manufacturing overheads observations and using the high-low method

Total cost for November 2017:

Cost function: y = mx + c
= 2x + R10 220
= 2 X (5 000) + R10 220
= R20 220
x = variable manufacturing overhead per unit
x = R600/300 units
x = R2 p/u

High-low method: Quantity Cost

Highest observation: August 2017 5 180 units R20 580

Lowest observation: October 2017 4 880 units R19 980
Difference:  300 units  R 600

(g) Advise the COO of BB whether to purchase the high-quality stuffing machine. Consider
quantitative and qualitative factors. Limit your qualitative factors to two (2) reasons.
Ignore the time value of money.
Details Comprehensive approach* Incremental
Retain current Buy high- approach*
machine quality
(R) stuffing
machine
(R)
Relevant income 9 000 9 032 000 32 000
000
Sales 9 000 000 9 027 000 27 000
Current resale value 0 5 000 5 000
Less: Relevant costs 132 000 144 000 12 000
Original cost price 0 80 000 80 000
Accumulated depreciation to date 0 0 0
Estimated variable operating cost 100 000 40 000 -60 000
Electricity and other fixed operating costs 32 000 24 000 -8 000
NET-REVELANT INCOME 8 868 000 8 888 000 20 000

 (0,10 x R9 050 000) + (0,4 x R9 030 000) + (0,5 x R9 020 000) = R9 027 000
 25 000 X 4 years = R100 000
 10 000 X 4 years = R40 000

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 8 000 X 4 years = R32 000
 6 000 X 4 years = R24 000
 R9 000 000 – R132 000 = R8 868 000; R9 032 000 – R144 000 = R8 888 000
* Either one of these approaches (comprehensive or incremental) is acceptable.

Conclusion:

Based on the above calculations, the new high-quality stuffing machine should be purchased because
it would lead to increased net-income of R20 000 (R8 888 000 less R8 868 000) over the next/following
four years.

Qualitative factors:
(i) The safety of the workers are improved if the new machine is purchased.
(ii) The working conditions should improve if the new machine is bought.
(iii) The new machine should lead to increased productivity of workers.
(iv) Improved health of employees due to less airborne fluff and thus reduced allergies and reduced
sick leave.
(v) Training might be required to master the operation of the new machine due to unfamiliarity thereof.
(vi) Better staff morale due to improved working conditions, better health, etc.
(vii) Increased customer satisfaction as the cuddliness and thus quality of the teddy bears are improved

(h) Assume that the external selling price is of R150 and the related contribution is R56,50 per
FW teddy bear. Ignoring the possible replacement of the stuffing machine, calculate the
minimum transfer price per FW teddy bear which BB would be willing to accept if they are
required to transfer 1 000 of these bears to EB.

Minimum transfer price = Total incremental costs + lost contribution from external sales
Total number of units to transfer

= [(R93,50 – R0,50 (avoidable variable cost) X 1 000) + (R56,50 x 400)] / 1 000

= [(R93 X 1 000) + R22 600] / 1 000
= R93 000 + R22 600 / 1 000
= R115 600 / 1 000
= R115,60 per teddy

 Variable cost = Selling price per teddy – contribution earned from external sales
= R150 (given) – R56,50 (given)
= R93,50

 Avoidable cost = R1,50 x 1/3 = R0,50

 Lost sales
= Units transferred less spare capacity
= 1 000 – [(5 600 (given) – 5 000 (given)]
= 400 units lost sales

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(i) Categorise each of the quality cost incurred by EB into the correct quality category

Cost Category
Reworking costs Internal failure costs
Quality inspection costs Appraisal costs
Warranty repair costs External failure costs
Training costs Prevention costs

(j) Identify the pricing policy that EB intends to apply with their new proposed range of GG
teddy bears and identify in which stage these teddy bears are in the product life cycle.
Supply a reason for each of your answers.

Pricing policy: Price skimming

Reason: EB initially sets high prices and exploits the market for GG teddy bears.

Stage: Introduction phase

Reason: Management of TF (Pty) Ltd suggested that EB launches a new product range.

4.19 ZAMA-ZAMA (PTY) LTD

(a) Identify Z-Z’s current method of allocating the fixed manufacturing overheads and briefly
compare the identified method to the other (second) method.

▪ ZZ’s current method being used is the traditional costing system.

▪ The traditional costing system allocates fixed manufacturing overheads to cost objects on
an arbitrary basis. This is done based on a single allocation base, which is the normal
operating capacity.
▪ The second method, namely the activity-based costing system, allocates fixed
manufacturing overheads to cost objects based on cause-and-effect cost allocations. This
is done on the basis of activities consumed by each cost object.
(b) Calculate the total budgeted fixed manufacturing overheads allocated to the uranium and
clay products respectively for January 2017.

Budgeted allocated fixed manufacturing overheads

Uranium Clay
R R
Allocated overheads  270 000 216 000

 Separation of manufacturing overheads using the high-low method

Cost Tonnes
R
Highest observation 2 300 000 800
Lowest observation 1 610 000 500
Difference 690 000 300

Variable manufacturing overheads per unit (R690 000/300) R2 300

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 Calculation of the fixed manufacturing overheads R

Total budgeted manufacturing overheads (given) 2 556 000

Variable manufacturing overheads (R2 300  x 900 tonnes) (2 070 000)
Budgeted fixed manufacturing overheads R 486 000

 Allocation of fixed manufacturing overheads

Uranium Clay
Total monthly production capacity in tonnes 500 400
Budgeted absorption rate (R486 000 /900 tonnes) R 540 R 540
Allocation (R540 x 500) (R540 x 400) R270 000 R216 000

(c) Determine the budgeted residual income (RI) of the Open-cast mining division for the month
ending 31 January 2017. Ignore the internal transfer.

Formula = Controllable income less cost of capital of controllable investments

= R1 776 450 – R1 728 000
= R48 450

Uranium Clay Total

 Budgeted controllable income R R R
Sales 5 445 000. 3 430 000. 8 875 000.
Less: Cost of sales (6 468 550)

Direct labour 2 475 000. 1 568 000. 4 043 000.

Inspection and quality control 150 000. 112 000. 262 000.
Manufacturing overheads  1 420 000. 1 136 400. 2 556 000.
Less: Closing inventory  (40 450) (352 000) (392 450)
Gross profit R2 406 450.

Less: Administration and selling costs (630 000)

Administrative employees' salaries 120 000.
Allocated corporate expenses 0.
Selling and distribution costs 510 000.

Budgeted controllable profit R1 776 450

Uranium Clay
 Manufacturing overheads R R
Fixed overheads (from part (b)) 270 000 216 000
Variable overheads
(R2 300 (from part (b)) X 500; R2 300 x 400) 1 150 000 920 000
R1 420 000 R1 136 000

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 Closing inventory Uranium Clay
Uranium production cost
(R2 475 000 + R1 420 000 + R150 000) R4 045 000
Clay production cost
(R1 568 000 + R 1 136 000 + R112 000) R2 816 000
Budgeted production units 500 400
Production cost per unit
(R4 045 000/500) (R2 816 000/400) R8 090 R7 040
Closing inventory (R8 090 x 5) (R7 040 x 50) R40 450 R352 000
Uranium: 500 – 495 = 5 units; Clay: 400 – 350 = 50 units
R
 Cost of capital charge on controllable investment

Budgeted controllable investment 14 400 000

Non-current assets 12 800 000
Trade receivables 3 600 000
Long-term borrowings (not controllable) 0
Less: Trade payables (2 000 000)

Cost of capital charge on controllable investment

(R14 400 000 x 12%) R1 728 000

(d) Determine the budgeted return on investment (ROI) for the Open-cast mining division for
the month ending 31 January 2017. Ignore the internal transfer.

= Budgeted controllable profit/Budgeted controllable investment

= R1 776 450 (from part (c))/R14 400 000 (from part (c) )
= 12,34%

(e) Briefly discuss the purposes of a transfer pricing system within the context of Z-Z.

A transfer pricing system provides information that motivates divisional managers to make good
economic decisions. This happens when actions that divisional managers take to improve the
reported profit of their divisions also improve the profit of the company as a whole. The transfer
pricing system provides the management teams of Open-cast Mining and Ready Mixture with the
incremental costs of and revenues from the transfer of clay, which enables the management teams
to compare these with sales to external customers. This motivates managers to implement
decisions which will benefit Z-Z as a whole and not just the individual divisions.

A transfer pricing system provides useful information for evaluating the managerial and economic
performance of divisions. The appropriate implementation of a sound transfer pricing system
ensures that the profits reported by the Open-cast Mining Division and the Ready Mixture Division
do not result in misleading divisional and managerial performance measuring.

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A transfer pricing system ensures that divisional autonomy is not undermined. The autonomy of the
Open-cast Mining Division and the Ready Mixture Division should be maintained to ensure that they
both work towards the same overall objectives of Z-Z.

A transfer pricing system intentionally moves profits between divisions. A sound transfer pricing system
can ensure the moving of profits between the Open-cast Mining Division and the Ready Mixture Division
through the sale of clay.

(f) Calculate the budgeted minimum transfer price per tonne that the Open-cast mining division
will be willing to accept for the transfer of the tonnes required by the Ready mixture division.

Budgeted minimum transfer price per tonne R

Direct labour (R1 568 000/400) 3 920,00
Variable manufacturing overheads (from part (b)) 2 300,00
Inspection and quality control (R112 000/400) 280,00
Selling and distribution costs -
Unavoidable variable costs 6 500,00
Lost contribution  2 526,40
Minimum transfer price per tonne R9 026,40

 External contribution per tonne R

Selling price per tonne (R3 430 000/350) 9 800,00.
Less: Direct labour (R1 568 000/400) (3 920,00)
Less: Variable manufacturing overheads (from part (b)) (2 300,00)
Less: Inspection and quality control (R112 000/400) ( 280,00)
Less: Selling and distribution costs (R49 700/350) ( 142,00)
External contribution per tonne R3 158,00

 Lost contribution per tonne

Total budgeted monthly production 400
Less: External sales tonnes (350)
Tonnes available for transfer without lost contribution 50

Total tonnes required for transfer including 2% loss (245/0,98) 250

Total tonnes to be sacrificed (250 – 50) 200
Total lost contribution (R3 158,00  x 200) R631 600,00
Lost contribution per tonne (R631 600,00/250) R2 526,40

(g) Calculate the budgeted maximum transfer price per tonne that the Ready mixture division
will be willing to pay for the tonnes transferred from the Open-cast mining division.

R
Current external purchase price per tonne 9 780,00
Add: Ordering cost per tonne 10,00
Maximum transfer price per tonne 9 790,00

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(h) Calculate the total price that the Ready mixture division should charge for the 15 tonnes.

Item Reason Amount Amount for

per tonne 15 tonnes
Direct raw material Relevant. Incurred in the 9 780,00 146 700,00
(R2 445 000/250) production of tonnes.
Direct labour Relevant. Incurred in the 2 469,60 37 044,00
(R617 400/250) production of tonnes.
Variable manufacturing Relevant. Incurred in the 490,00 7 350,00
overheads production of tonnes.
(R122 500/250)
Fixed manufacturing Irrelevant. Incurred irrespective 0 0
overheads of the proposal.
Packaging costs Relevant. Incurred in the 310,00 4 650,00
(R75 950/245) production of tonnes.
Administrative employees’ Irrelevant. Incurred irrespective 0 0
salaries of the proposal.
Selling costs Relevant. Incurred to sell the 58,70 880,50
(R30 000 x 45%)/230 tonnes.
Delivery costs Irrelevant. These costs are for 0 0
Molefee’s account.
Total cost per tonne 13 108,30 196 624,50
Add: 10% profit 1 310,83 19 662,45
Maximum price per tonne 14 419,13
Total price (R14 419,13 x 15) 216 286,95

(i) Briefly discuss five (5) qualitative factors that the Ready mixture division should take into
consideration before accepting the proposal from Molefee (Pty) Ltd.

Credit profile: The credit profile of Molefee should be considered to assess their ability to pay for
the tonnes. Credit checks and references should be done on Molefee.
Current selling price: The impact of the price for these tonnes on the current selling price. Is
there a possibility that the current market selling price will drop as the result of this?
Possible future orders: Is there a possibility of similar orders coming through from Molefee in
the future? Is there is a possibility that Molefee could become a full-time customer?
Increase in demand: There is a possibility that the actual demand in the regular market will
exceed the budgeted sales. The company may incur losses as there would be no tonnes to sell.
Instability in the mining sector: The ability to produce and deliver the tonnes within the required
timeframes given the instability of the mining sector owing to strikes. Are there penalties
associated with late delivery of tonnes to Molefee?

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4.20 MULAUDZI INVESTMENTS LIMITED

(a) (i) Explain the term “goal congruence” from MULA’s perspective and provide one
[2]
example to illustrate your explanation.
“Goal congruence in an organisation means that individuals and units take actions that are in their
self-interest and simultaneously also in the best interest of the organisation as whole” (Roos et.al,
2011:457).
Explanation: From MULA’s perspective, goal congruence means that, although each company
within MULA’s divisionalised organisational structure has the latitude to pursue its individual interests,
the companies are still expected to act in the best interest of the entire MULA’s organisational
structure.

Example: Although Tronix has the autonomy to service its external market for the central processing
units (CPUs) it produces, Tronix is still required to also honour the internal market with MULA’s
organisational structure by selling some of its CPUs to Tablet, this at a price and at conditions that
are not to the detriment of (or to the benefit of) MULA as the entire organisation.

(a) (ii) Discuss how MULA could be affected by the potential negative consequences
[5]
of decentralisation.
No. Consequence Discussion
1. Increased risk of acting ▪ MULA has investments in various companies across different
against the best interest industries. In making decision that are division- and/or
of the organisation as a industry-specific, possible conflicts may arise regarding the
whole. manager’s responsibility to act in the best interest of the
organisation whilst still expected to advance the interest of
their respective division.
2. Undesirable duplication ▪ Within MULA’s organisational structure, the companies
of assets and activities. operate autonomously and with independent management
teams. This can potentially lead to duplication of business
and/or day-to-day activities that can otherwise be centralised
(including lost synergies). For example, MULA can centralise
the following activities at the structure’s head offices: banking
activities, human resource activities, finance activities and
engagement with auditors about generic matters.
3. Risk of competition ▪ MULA’s investment portfolio includes some companies within
between units rather the same industry, for example, it has the East-Coast Hotel
than co-operation and the ZMB Game Reserve within the hospitality & leisure
industry, leading to possible unhealthy competition to the
detriment of the entire organisation. Although this can be seen
as an opportunity for both companies to leverage off each
other’s expertise, experience and also learn from each other,
there is always a risk that the two companies might see each
other is rivals and compete unnecessarily.

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(a) (ii) Discuss how MULA could be affected by the potential negative consequences
[5]
of decentralisation.
No. Consequence Discussion
4. Higher information ▪ With autonomous and independent divisions, MULA is at risk
management costs of higher costs relating to the monitoring, controlling, and
performance management costs of each independent
company (division) unlike an environment where a centralised
structure is in place and some of the information costs can be
minimised and/or avoided.
5. Loss of control and ▪ By being removed from each company’s individual decision-
knowledge by senior making processes, MULA’s ultimate top management
management structure can possibly be deprived of the much-needed
exposure, control and experience about managing the
operations of these independent companies.
Source: Roos et al., 2011:456/57

(b) TAB’s variances analysis for the 2019 financial year [6]
(i) Sales mix variance for product type PfT only
Product Actual sales Actual sale Difference Standard Variance
quantity Quantity @ gross
Standard mix profit
PfT 59 000 59 400 -400 R145 R58 000 A
 Given
 238K + 59K = 297 000
 297 000 x 1 ÷ 5 = 59 400
 (PfT: 60K ÷ 60K = 1) + (BhT: 240K ÷ 60K = 4) = 5
 R3 500 less R3 384 = R116 ÷ 0,8 (100% less 20%) = R145
 R1 650 + R162 + R1 140 + R432 = R3 384
 R120 (R150 less R30) x 3,6 hours = R432
(ii) Direct labour idle time variance for product BhT only
Allowed idle Actual idle Difference Standard Variance
hours hours hours work hour
rate
71 400 85 680 14 280 R48 R685 440 A

Alternative
Allowed work Actual work Difference Standard Variance
hours hours hours work hour
rate
642,6K 628,32K 14 280 R48
R685 440 A
 Given
 238K x 3hrs = 714 000 x 10% = 71 400 hours
 (3,0hrs less 2,64hrs) x 238K = 85 680 hours OR
 238K x 3hrs x 12% [100% less (2,64hrs ÷ 3hrs)] = 85 680 hours
 R31,104m ÷ 720K = R43,20 ÷ 90% (100% less 10%) = R48
 714 000 x 90% = 642,6K; 714 000 x 88% (100% less 12%) = 628,32K
 240K x 3 hours = 720 000 hours

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(c) Prepare TAB’s budgeted statement of profit or loss and other comprehensive
[8]
income (income statement) for the 2020 financial year
Details R’000
Sales 1 137 960
Less: Cost of sales 1 064 448
Opening inventory R0
Plus: Manufacturing costs 1 108 800
Less: Closing inventory 44 352
Gross profit 73 512
Less: Non-manufacturing costs 26 900
Net profit before tax R46 612
Budgeted gross profit percentage* 6,46%

Commentary:
TAB is in the telecommunication industry. MULA’s target gross profit percentage for its investments
in the telecommunication industry is 15%. Therefore, at a budgeted gross profit percentage of 6,46%
for the 2020 financial year, TAB is not budgeted to achieve MULA’s 15% GP percentage target.
 Given
 (288K x R2 995 = R862 560K) + (72K x R3 825 = R275 400K) = R1 137 960K
 (300K x R2 625 = R787 500K) + (75K x R4 284 = R321 300K) = R1 108 800K
 BhT: R1 200 + R175 + R875 + R375 = R2 625
 PfT: R2 000 + R224 + R1 580 + R480 = R4 284
 (BhT: R150 x 2,5 = R375; PfT: R150 x 3,2 = R480)
 R31 500K + R12 852K = R44 352K
 (300K less 288K x R2 625 = R31 500K) + (75K less 72K x R4 284 = R12 852K)
 R23,5m + R3,4m = R26,9m
 R73 152 ÷ R1 137 960 = 6,43%

(d) Calculate the budgeted units of BhT and PfT that TAB will need to manufacture and
[8]
sell during the 2020 financial year to achieve MULA’s target annual profit before tax.

Total fixed costs + target profit (R172,52m + R15,6m) = R188,12m

Weighted average contribution per unit (R2 948 + R13) = R2 961
= 63 532,5903
≈ 63 533 PfT units (always round-up)
Units to manufacture and sell to achieve the target profit:
BhT: 63 533 x 4 = 254 132; PfT: 63 533 x 1 = 63 533
 Given
 R148,5m + R23,5m + R0,52m = R172,52m
 (BhT: 300K x 2,5 = 750K) + (75K x 3,2 = 240K) = 990K x R150 = R148,5m
 R3,4m less R2,88m ((288K + 72K) x R8) = R520K
 BhT: R2 995 less R2 258 (R1,2K + R175 + R875 + R8) = R737 x 4 = R2 948
 PfT: R3 825 less R3 812 (R2K + R224 + R1 580 + R8) = R13 x 1 = R13
 BhT:288K ÷ 72K = 4; PfT: 72 ÷ 72K = 1

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(e) Critically evaluate and comment on the view that the minimum transfer price is the
[10]
best suited budgeted transfer price.
1. According to Roos et al, “Where opportunity cost is incurred owing to the transfer of the product…,
the minimum transfer price…ensures that the transferring unit is compensated for revenue
forgone.…..“To compensate for lost contribution, the minimum transfer price should therefore be
the transferring unit’s incremental costs per unit of product or service, plus opportunity costs of
the product” (Roos et al 2011:493).

2. As part of establishing whether the minimum transfer price is the best suited price, TRONIX
should first determine, as per below, if the internal transfer of the BCUs will result in lost
contribution:
Details BCU
units
Maximum manufacturing capacity 400 000
Less: Internal transfer sales requirements 300 000
Available for external sales 100 000
Less: needed for sales to external customers 160 000
Projected external sales to be sacrificed (60 000)

 Given
 400 000 x 40% = 160 000
3. TRONIX should be able to recover from TAB the incremental costs it would incur in the production
of the required units plus lost contribution on sacrificed units. Therefore, these costs should make
up the minimum transfer price. Fixed (overhead) costs, which would have been incurred
regardless, would not be part of the incremental costs.

4. By sacrificing 60 000 of external sales, TRONIX will incur lost contribution (opportunity cost).
Therefore, in an effort to avoid possible conflicts between TRONIX and TAB and to subsequently
encourage both companies to act in the best interest of MULA (goal congruence), TRONIX should
be compensated for the envisaged lost contribution resulting from sacrificing external sales.

5. Considering the above points, the budgeted minimum transfer price for the BCUs should be
calculated as “Incremental costs + lost contribution” as per below:

= R342 000K + R27 300K

300 000

= R369 300K OR R1 140 + R91

300K

= R1 231

Concluding commentary:
Taking into account all the above-mentioned points and calculations, in comparison with the
calculated budgeted minimum transfer price of R1 231, at the current transfer price of R1 200 per
BCU as arbitrarily determined by MULA, TRONIX will lose an opportunity to generate an additional
R31 per BCU for the internal transfer of BCUs to TAB. As such, from TRONIX’s perspective, the R1
231 minimum transfer price therefore appears to be the best suited price for the internal transfer of
BCU during the 2020 financial year.

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(e) Critically evaluate and comment on the view that the minimum transfer price is the
[10]
best suited budgeted transfer price.

 300 000 x R1 140 = R342 000K

 Incremental costs: R1 200 x 95% (25% + 60% + 10% + 0%) = R1 140
 Lost contribution: R1 620 less R1 165 = R455 x 60 000 = R27 300K
 R1 200 x 1,35 = R1 620
 R1 140 + R25 = R1 165
 Refer to point 2 above
 R27 300K ÷ 300 000 = R91

(f) From a quantitative perspective, advise on the possible implication of discontinuing

[11]
TRONIX on its 2021 financial year only.

Details Comprehensive Incremental

approach approach
Continue Discontinue
Non-current assets book values 0 0 0
Depreciation – Administrative assets 0 0 0
Non-current assets resale value 0 55 075 000 55 075 000
Non-current assets sales commission 0 (1 101 500) (1 101 500)
Retrenchment costs 0 (20 000 000) (20 000 000)
Accumulated leave pay-out 0 (140 000) (140 000)
Penalties and fines 0 (2 500 000) (2 500 000)
Winding-up costs 0 (1 500 000) (1 500 000)
Liabilities settlement 0 (32 000 000) (32 000 000)
Annual loss from continued operations (625 000) 0 625 000
Net profit(loss) (R625) (R2 166,5) (R1 541,5)

 Given
 R75K + R55 000K = R55 075K
 R55 075K x 2% = R1 101,5K
 350 days x R400 = R140K
Advice:
By reference to the 2021 financial year only, TRONIX will incur an annual cash loss of R625K from
continued operations as compared to an annual cash loss of R2 166,5K from discontinuance.
Therefore, from a quantitative perspective only, the discontinuance of TRONIX will generate
R1 541,5K in additional losses for the company. TRONIX should therefore not be discontinued.

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(g) (i) Using the Price/Earnings (P/E) multiple valuation method, establish the
reasonableness of the cash offer tabled by MULA to the shareholders of ELX for [12]
their 85% equity stake in ELX as at 1 November 2020.

Details Value 2020 2019 2018 2017

Rm Rm Rm Rm Rm
Net profit/(loss) after tax 13 3,6 (4,8) 17,6
Adjust for exceptional items 0 +15 +21 0
Maintainable earnings* 13 18,6 16,2 17,6
Weighted average R15,78*
Adjusted P/E multiple (APEM) 6
APEM x maintainable earnings R94,7
Less: marketability discount R11,4
ELX established value R83,3
Value of the 85% stake R70,81
*Fluctuating/no trend in earnings, therefore, use weighted average (Skae et al (2017:435)
 Given
 R20m x 0,75 (100% less 25%) = R15m
 R28m x 0,75 (100% less 25%) = R21m
 (R157,8m ÷ 10) = R15,78m
 [(R13m x 4) + (R18,6m x 3) + (R16,2m x 2) + (R17,6m x 1)] = R157,8m
 (4 + 3 + 2 + 1) = 10
 Adjusted P/E multiple for ELX
P/E multiple – JSE listed (electronics) entities 4
Control premium +1
Unstable growth in earnings -1
Not a local (South African) company (jurisdiction) -1
Cooperation of family members & operations similar to TRONIX +1
Management stability (note: negative – key man dependency) +2
P/E multiple – unlisted electronics (Namibian/SADC) entity 6
 1/25% = 4
 R15,78m x 6 = R94,68m ≈ R94,7m
 R94,7 x 12% = R11,364 ≈ R11,4m
 R94,7 less R11,4m = R83,3m
 R83,3m x 85% = R70,805m ≈ R70,81m

Comment:
The value of the 85% equity stake in ELX as at 1 November 2020 is R70,81m. MULA has however
tabled a R50m cash offer for an equity stake that is worth +/- R71m. The tabled acquisition price is
therefore +/- R21m below the calculated “fair” value and thus unreasonable offer to the current
shareholders of ELX.

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 MAC3761/QB001
(g) (ii) Discuss four non-financial factors that MULA will need to consider in its
[8]
assessment of ELX for acquisition
No. Factor Discussion
1. ELX is a privately family- ▪ The family might be reluctant to sell the company or become
owned company. the minority shareholders, in order to keep the business in
the family for pride and legacy.
▪ Decisions (e.g. people employed or suppliers used) might
have been taken to advance family interest at ELX expense.
2. ELX is a foreign ▪ Albeit within the SADC region, ELX is a Namibian company
company. and will be a foreign entity to a South African parent. This
has propensity to present the following challenges to MULA,
amongst others:
o Inability to integrate culturally within the MULA portfolio of
investments.
o Cross border reporting, trade treaties, tax compliance,
legal compliance and other legislative compliance and
country political challenges.
3. Possible averseness by ▪ Negotiation with regards to labour conditions with the
ELX to concede to the Namibian authorities are still underway, as such there is a
conditions by the possibility that ELX might not agree to the seemingly
Namibian authorities.
exploitative labour practices being proposed.
4. Compliance to various ▪ The possible acquisition of ELX is subjected to various
approvals and co- approvals from various entities and organisations. This might
operations. prove difficult to achieve, especially considering that the
acquisition could potentially affect competition within the
SADC’s electronics’ industry.

▪ Within the SADC region, ELX and TRONIX are like-for-like

competitors. If the required co-operation(s) and/or
approval(s) is(are) not granted or is(are) subsequently
revoked, while TRONIX is already discontinued, this could
potentially put TAB’s going concern at risk.
5. ELX’s management has ▪ The resulting institutional memory will create and maintain
been the same since its the much-needed operational stability, technical knowledge
inception. and management experience that are important for post-
acquisition period.
6. ELX has a history of ▪ MULA holds investments across various industries,
stable dividend payout presumably for returns and growth. With a history of a stable
(15% payout ratio) which dividend payout, the company has created dividend pay-out
is expected to be
expectations of which could potentially conflict with MULA’s
maintained into the
future. investment strategy to the dissatisfaction of the minority
shareholders based on the historical expectations.

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 MAC3761/QB001
(g) (ii) Discuss four non-financial factors that MULA will need to consider [8]

No. Factor Discussion

7. Consideration of the ▪ MULA can consider the extent and nature to which it can
possibility of future and leverage off the acquisition of ELX for future market
further growth prospect by growth prospects within the rest of SADC countries and
leveraging off ELX’s for a possible gateway to the rest of Africa.
presence in SADC
8. ELX has a history of ▪ In recent years, penalties and fines were levied on ELX
contravening labour laws for breaching various labour legislations. This can
(reputational damage and potentially be an indictment on the demeanour and
staff morale can also be reputation of ELX’s management team, this considering
considered). that post the acquisition, the same management team
will remain at the helm of the company.
9. The financial statements of ▪ To an extent that these audits were performed in
ELX have been audited in accordance with the prescribed and acceptable audit
each of the given/latest four standards, and by a duly qualified auditor, MULA should
financial years.
be able to place reliance on the financial results of the
ELX.

▪ MULA should therefore have some level of confidence

that ELX’s financial statements are a true and fair
reflection of ELX financial performance and position.

4.21 RATA-TEA (PTY) LTD

(a) Calculate the following variances for the rooibos-ginger loose tea for the month of June
(i) Sales price variance
= [Standard selling price less Actual selling price] X Actual sales volume
= [R40 – R256 200 / 6 100 units] x 6 100
= R 12 200 F
(ii) Material mix variance
= [Actual quantity in standard mix less Actual quantity used] X Standard price.
Material Actual Actual Units Standard Mix variance
quantity(kg) in quantity difference price per
standard mix (kg) in kg
proportions actual
kg proportions
kg
Dried
rooibos
leaves 546 585 -39 R30 R 1 170 A
Dried
ginger 136,5 97,5 39 R200 R 7 800 F
682,5 kg 682,5 kg R 6 630 F

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 MAC3761/QB001
 682,5 x 80% = 546; 682,50 x 20% = 136,5
 R 172 800 / R30 = 5 760 kg 80%
R 288 000 / R 200 = 1 440 kg 20%
7 200 kg 100%
(iii) Material yield variance
= [Input allowed for actual output less Actual quantity in standard mix] X Standard price
Material Input allowed Actual quantity Units Standard Yield
for actual in standard mix difference price per variance
output proportions kg kg
kg kg
Dried rooibos
leaves 520 546 -26 R30 R780 A

Dried ginger 130 136,5 -6,50 R200 R1 300 A

650 kg 682,5 kg R 2 080 A

 Given  1 440 kg/ 72 000 boxes = 0,02kg per box

 6 500 boxes x 0,08kg = 520kg  From a(ii) above
 6 500 boxes x 0,02kg = 130kg
 5 760 kg/ 72 000 boxes = 0,08kg per box

(b) Briefly discuss two (2) reasons for a possible adverse material yield variance.
• As a result of standard procedures not followed during the production process the actual
quantity of rooibos leaves and dried ginger used were more than the standard.
• Due to the drought, the rooibos leaves and dried ginger may have been of a sub-standard
quality resulting in an adverse material yield variance.
• Inefficiencies in the production processes resulted in more rooibos leaves and dried ginger
used.
• Machine and/or human error when processing resulted in more rooibos leaves and dried ginger
used.
• Unskilled/inefficient workers resulting in the wastage of rooibos leaves and dried ginger used
[Drury 9th edition, page 478 and CIMA]

(c) Advice RT’s management if they should insource the production of the dried rooibos
leaves or should continue purchasing the dried rooibos leaves from external suppliers.
The calculations should be for a three-year period. Ignore time value of money
implications.

① Tonnes of green rooibos

(120 tonnes dried rooibos leaves /(1- 0,04) = 125 tonnes green rooibos) 125 tonnes = 125 000kg

② Dried rooibos leaves purchase price @ June 2018

R21 000 / 600kg = R 35 per kg
R35 per kg x 1 000 = R 35 000 per tonne

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 MAC3761/QB001
Comprehensive approach Purchase Produce
120 tonne 120 tonne
R R
Seedlings - 600 000
Variable manufacturing overheads - 1 000 000
125 000kg ① x R8
Direct labour – Migrant workers - 375 000
Hours required 125 000kg ① / 10kg per hour
= 12 500 hours
12 500 hours x R30 per hour
Direct labour – Farm workers - 775 350
Y1: R240 000
Y2 : (240 000 x 1,075) = R258 000
Y3 : (258 000 x 1,075) = R277 350
Fixed manufacturing costs - 810 000
R270 000 x 3
Government grant - (1 100 000)
Farm equipment - 1 200 000
Distribution costs (local & international) - 0
Purchase price 5 097 400 -
Y1: [R35 000② x (1+0,1) ] x 40 tonne
= R1 540 000
Y2: R1 540 000 x 1,1 = R1 694 000
Y3: R1 694 000 x 1,1 = R1 863 400
Rental income (8 550 000)
Purchase ((1 000 hectares x 95%) x R 250
per hectare)) x 36 months
Produce ((1 000 hectares x 85%) x R 250 (7 650 000)
per hectare) x 36 months
Total (R3 452 600) (R3 989 650)
Conclusion: RT should produce the dried rooibos leaves themselves because the company will
generate a higher net income/ saving of R537 050 (R3 452 600 – R3 989 650) over the 3-year period
under review.

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 MAC3761/QB001
Alternative:

Incremental approach Produce

120 tonnes
R
Seedlings 600 000
Variable manufacturing overheads 1 000 000
125 000kg ① x R8
Direct labour – Migrant workers 375 000
Hours required 125 000kg ① / 10kg per hour = 12 500 hours
12 500 hours x R30 per hour
Direct labour – Farm workers 775 350
Y1: R240 000
Y2 : (240 000 x 1,075) = R258 000
Y3 : (258 000 x 1,075) = R277 350
Distribution costs (local & international) 0
Fixed manufacturing costs 810 000
R270 000 x 3
Government grant (1 100 000)
Farm equipment 1 200 000
Purchase price (5 097 400)
Y1: [R35 000② x (1+0,1) ] x 40 tonne
= R 1 540 000
Y2: R1 540 000 x 1,1 = R1 694 000
Y3: R1 694 000 x 1,1 = R1 863 400
Rental income – lost income 900 000
(100 hectares x R 250 per hectare) x 36 months
Total (R 537 050)
Conclusion: RT should produce the dried rooibos leaves themselves because the company will
generate a higher net income/ saving of R537 050 over the 3-year period under review.

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 MAC3761/QB001
(d) Identify and briefly discuss four (4) qualitative factors RT should consider when making
the decision to insource the production of the dried rooibos leaves.

• Drought/ Weather conditions: The impact of drought/weather conditions on RT’s capability to

produce the required 40 tonnes per year.
• Shortfall in dried rooibos leaves produce: What will the effect be if RT is unable to produce
the required 40 tonnes of dried rooibos leaves per year? Will they need to curtail their current
tea production, and/or will they be able to purchase the shortfall from external producers?
• Relationships with current suppliers. What will the effect be on RT’s relationships with their
existing suppliers? Will they be able to purchase any shortfall dried rooibos leaves from them or
will these suppliers not be willing to sell to RT because of the cancelled contracts?
• Relationship with Ceder Conservation (Pty) Ltd (CC). Will CC be prepared to continue to
lease the remainder of the farm if the hectares available to them are reduced or will CC consider
moving their business to another farm?
• Contract breach – CC lease contract. Are there any legal implications that RT should take into
account if they breach the contract? Are they allowed to one-sidedly change the contract?
• Availability of migrant workers. RT may have challenges securing the services of migrant
workers during harvest time, because they might already be committed to work on other farms.
• New farm workers housing: Is there sufficient housing available for the four new farm
workers? If they do not qualify for the housing benefit, how will it affect their work moral?
• New farm workers becoming shareholders: Will the new farm workers also be eligible to
become shareholders in RT? If not, what will the impact be on their moral? If they are eligible
how will it affect the current farm workers?
• Grant from government: Are there any clauses or requirements that has to be met in order to
qualify for the grant?
• Quality of rooibos leaves produced: Will RT be able to produce the same or better-quality
rooibos leaves than those purchased from their current suppliers? If not, the quality of their
finished tea products may be compromised, and they may lose customers as a result.

[Maximum 8 marks]

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 MAC3761/QB001
(e) Write a report to RT’s owners regarding the long-run (long-term) price setting for the
rooibos-espresso capsules and the rooibos-ginger loose tea. Your report must:
(i) Identify if RT is a price setting or a price-taking organisation in relation to the rooibos-
espresso capsules. Provide a reason for your answer.
(ii) Identify if RT is a price setting or a price-taking organisation in relation to the rooibos-
ginger loose tea. Provide a reason for your answer.
(iii) Provide a brief discussion of the limitations of the cost-plus pricing method.
Present your report in the correct format, using appropriate headings.

REPORT TO THE OWNERS OF RATA TEA (PTY) LTD

TO: RataTea (Pty) Ltd Owners

Date: 27 May 2018
RE: Long-term price setting for the rooibos-espresso capsules and the rooibos-ginger loose tea
From: Student

It gives me great please to report the following to you in response to your question about the long-
term price setting

(i) Price-setting vs a price-taking organisation: Rooibos-espresso capsules

RT is a price-taking organization about the rooibos-espresso capsules.

These capsules are readily available at retailers at an average selling price of R50 and RT has little
influence over the price of these capsules.

There are a number of established capsule producers and the competition between these producers
will ensure that no individual market player can influence the price.

(ii) Price-setting vs a price-taking organisation: Rooibos-ginger loose tea

RT is a price-setting organization about the rooibos-ginger loose tea.

RT is the only manufacturer and the market leader in the production of the rooibos-ginger loose tea.

(iii) Limitations of cost-plus pricing method

“Cost-plus pricing has three major limitations. First, demand is ignored.
Second, the approach requires that some assumption be made about future volume prior to
ascertaining the cost and calculating the cost-plus selling prices. This can lead to an increase in the
derived cost-plus selling price when demand is falling and vice-versa.
Third, there is no guarantee that total sales revenue will be in excess of total costs even when each
product is priced above ‘cost’”

Should you require further clarity, please do not hesitate to contact me

Regards;
Student

[Drury 9th edition, pages 246 - 247]

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 MAC3761/QB001
(f) Calculate the target selling price per package for the rooibos-espresso capsules using
the targeted rate of return on investment approach.
R

Target mark-up (R600 000 x 10%) / 4 000 units 15

Cost per unit given 25
Target price R 40

(g) The financial manager has heard that some loose tea producers are using process
costing. She is refreshing her process costing knowledge and has asked you to explain
the circumstances in which the short-cut method can be used in drafting a quantity
statement.
The short-cut method can be used when:
All the units in the output column of the quantity statement have been subjected to spillage
or have passed the wastage point in this (current) period.

4.22 MUFHIRIFHIRI BEEF (PTY) LTD

(a) Calculate the annualised actual return on investment for the Feedlot Division:

Return on investment Controllable profit

Controllable investment

R1 676 400
R19 330 000

8,67%

 Controllable profit

Details Alternative 1 Alternative 2

Monthly Annual
R’000 R’000
Revenue R3 780 + R2 466 6 246 74 952
Less: controllable costs 6 106,30 73 275,60
Cattle purchase cost 3 150 37 800
External variable selling costs 37,8 453,60
Direct labourers 63 756
Feeding costs 1 350 16 200
Inspection/vaccination costs 01May 31,5 378
Inspection/vaccination costs 31May 54 648
Depreciation-holding pens 420 5 040
Finance cost 0 0
Fixed manufacturing overheads 1 000 12 000
Allocated head office expenses 0 0
Controllable profit 139,70 1 676,40
Controllable profit annualised 1 676,40

 External sales: [(350kg + 50kg) X 270 (450 X 60%)] X R35 p/kg = R3,78m
 Internal sales: R13,7k X 180 (450 X 40%) = R2,466m

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 MAC3761/QB001
 Number of cattle purchased and sold:
Details Maximum Current operating
operating capacity of
capacity 75%
Number of holding pens (given) 5 5
Holding capacity cattle per pen 120 90 (120 X 75%)
Total cattle bought and sold 600 (120 x 5) 450 (90 X 5)

 450 cattle x 350kg x R20 = R3 150K

 R3 780 x 1% (given) = R37,8K
 R140 (given) x 450 = R63K
 given
 (350kg x R0,2) x 450 = R31,50K; [(350kg + 50kg) x R0,3 x 450] = R54K
 (R25 200k/5)/12 = R420K
 Controllable investment

Details Calculations R’000

Holding pens R25,2m – (R5,040m x 3) 10 080
Trade receivables given 2 000
Cash and cash equivalents R12m – R3,150m) 8 850
Controllable assets 20 930
Less: controllable liabilities R1 600k + R0 1 600
Trade payable given 1 600
Long-term loan not controllable 0

Controllable investments R20 930k less R1 600k 19 330

 Refer to controllable profit calculation

(b) Transfer pricing

(i) Calculating the proposed minimum transfer price:

 Calculation of spare capacity and allocation of cattle to transfer

Transfer needed (given) 200

Less: excess/spare capacity (600 less 525) 75
maximum cattle holding/operating capacity 600
less: “assumed” external cattle sales (given) 525
Supplied from sacrificed external sales 125

Details Per unit calculations Per unit Total

R R’000
Cattle purchase cost R3 150k ÷ 450 7 000 3 150
External variable selling External sales only 0 0
Direct labourers R63k ÷ 450 140 63
Feeding costs R1 350k ÷ 450 3 000 1 350
vaccination costs R85,50k ÷ 450 190 85,5
Incremental costs 10 330 4 648,5
Total incremental cost R10 330 x 200 2 066
Plus: lost contribution 2 206,25 441,25
Total transfer costs R2 066K + R441,25K 2 507,25
Minimum transfer price per cattle R12 536,25 R12 536,25

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 MAC3761/QB001
 Refer to controllable profit calculation in question (a) above.
 Refer to calculation  in question (a) above.
 Calculation of lost contribution
Details Per cattle (R) Total transfer(R)
External sales value 14 000 1 750 000
Less: incremental costs (10 330) (1 291 250)
Less: external selling costs (140) (17 500)
Lost contribution 3 530 441 250

 R10 330 X 125(sacrificed external sale cattle) = R1 291 250

Therefore, lost contribution per transferred cattle = R441 250 ÷ 200 = R2 206,25
 R3 780 000 ÷ 270(external sales) = R14 000 x 125 cattle = R1 750 000
 R37 800 ÷ 270 cattle = R140 x 125 cattle = R17 500
 R10 330 (incremental costs) + R2 206,25 = R12 536,25
 R 2 066 000 (R10 330 x 200) + R441 250 = R2 507 250
 Total column alternative cross check: R2 507 250 ÷ 200 cattle = R12 536,25 per cattle

(ii) Comment on Pradesh’s view about his proposed transfer price

Pradesh’s view that the minimum transfer price will guarantee the Feedlot Division a minimum transfer
price of between R14 000 and R14 500 per cattle is not correct. Based on the calculations in b(i) above,
the proposed minimum transfer price for May 2018 that the Feedlot division should expect is +/- R12
536,25 per cattle and not a price between the R14k and R14,5k ranges per cattle. In fact, the current
negotiated transfer price of R13 700 is putting the Feedlot Division in a better financial position than his
proposed transfer price. If Pradesh’s minimum transfer price proposal were to be implemented, the
Feedlot division could potentially lose +/- R1 163,75 (R13 700 less R12 536,25) per cattle transferred
to the Abattoir Division.

(c) Briefly discuss three qualitative factors considered (auction barn cattle buying vs.
private farmer cattle buying.

No. LISTING DISCUSSION

1. Registration with The fact that the auction barns are registered with the regulatory
regulatory authorities authorities (both the Department of Agriculture, Forestry &
Fisheries (DAFF) and the Agricultural Products Agents Council)
would provide customers/potential customers with some sense of
comfort knowing that they are be dealing with an organisation that
is accountable to key regulatory authorities within the South African
agricultural space.
2. Health and safety MfB’s beef is ultimately aimed for human consumption and
consideration therefore health and safety consideration must always be
considered in deciding where the livestock is procured. By virtue of
being registered with the regulatory authorities, the auction barns
are therefore formalized market place, and have an obligation to
adhere to the health and safety regulations as prescribed by the
formal institutions they are affiliated to, in this instance the DAFF
and APAC). Although they can, private cattle farmers have no
obligation to register with any regulatory institution and as such are
not bound to any health and safety regulations.
3. Livestock availability As a formalised market place, the auction barns will most likely
consideration have sufficient and adequate stock at all times, whereas the same
cannot be said about various suppliers located across different
regions.

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No. LISTING DISCUSSION
4. Consideration of The auction barns will present a better opportunity to deal with
unscrupulous suppliers reputable suppliers and therefore minimise the risk of falling victims
to unscrupulous livestock suppliers
5. Fraud consideration The company will also consider the need to minimize if not
eradicate possible fraud stemming from factors such as, but not
limited to:
(i) Buying stolen livestock.
(ii) Buying from fraudulent supplier(s).
(iii) Defrauded into buying lower Class grades fronted as Class B.
6. Livestock quality MfB only buys Class B cattle and their customers expect beef
quality that is synonymous with Class B cattle. By only buying from
the auction barns, the company can minimise the risk of
compromised beef quality. To preserve and maintain their business
reputation in the marketplace, it is to be expected that the auction
barns will exercise strict quality control measures.
7. Safe environment Personal and/or property safety should also be considered. In most
consideration cases, a formalized marketplace tends to priorities the personal
and property safety of the people/customers that frequent their
business establishment. The unfortunate reality is that the same
cannot always be said about private business dealings.
8. After sale consideration The auction barns are likely to offer a formalized after sale services
where MfB will always have an opportunity and/or a platform to
lodge customer complaint should the need arise.
9. Independent verification Unlike buying directly from private cattle farmers taking their word
of the claims made by about their product quality and/or customer service, the auction
supplier(s) barns will act as an independent and knowledgeable verification
agent of all supplier claims.
10. Consideration of wide Although only Class B cattle are bought should the division’s
variety of livestock procurement requirement change in future, MfB will have
immediate access to wide variety of livestock of different quality,
size, age etc. to choose from.
11. Possibility of expanding With various potential supplier(s) and/or customer(s) present at the
business network auction barns, the auction barns present easy and immediate
access to untapped markets for immediate or future
considerations.
12. Inventory management Auction barns will provide MfB with some level of certainty and/or
proper control over inventory management, primarily relating to:
(i) On time delivery of stock.
(ii) Lead-time.
(iii) Continuous and real-time livestock growth monitoring. That is,
maintain a watch-list for cattle movement from lower grades
to Class B grades.
13. Time consideration Consideration of timeous delivery of cattle to avoid stock outs,
production interruptions and minimize idle time.
14. Social and business MfB should consider the reputation of the private sellers, both
reputation of the private within the communities and the business spaces they operate. It
sellers in relation to the will be advisable not to engage with any seller(s) with tainted or
auction barns bad business and social reputation.
15. Logistical consideration ▪ Consideration should be given regarding how the
logistical/transportation arrangements would differ between the
two alternatives
▪ Consideration of the safety of in-transit cattle/inventory for each
of the two procurement alternatives.

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(d) Briefly discuss if the Feedlot Division can feasibly replace the EOQ technique with the
Just- In-Time (JIT) purchasing technique for the purchases of the cattle feed. Limit your
discussion to qualitative factors only.
The introduction of JIT in a feedlot operation is not feasible as cattle feed continuously
throughout the day and night. The required feed therefore needs to be readily available each
day and all the time.
JIT is based on the premise of minimising inventory (feed) holding, this approach will not fit into
the cattle holding and feeding environment where the holding of the feed (investment in
inventory) is critical for the day-to-day survival of the cattle

(e) Comment on whether the Abattoir Division will meet the projected net profit percentage
for the month of May 2018
Details Premium Standard Total
cuts cuts
R R R
Revenue 30 801 600 34 149 600 64 951 200
Gross profit 4 620 240 5 122 440 9 742 680
Cost of sales 26 181 360 29 027 160 55 208 520
Less other costs 254 520 200 000 454 520
further processing cost 90 000 100 000 190 000
Refrigerating costs 164 520 100 000 264 520
Allocated joint costs (balancing figure) 25 926 840 28 827 160 54 754 000
Less: other non-manufacturing costs 1 000 000 1 000 000 2 000 000
Variable 900 000 800 000 1 700 000
Fixed 100 000 200 000 300 000
Net profit before tax 3 620 240 4 122 440 7 742 680
Net profit percentage 11,75% 12,07% 11,92%

Comment: At 11,75% and 12,07%, each of the Abattoir’s joint products, that is the Premium cuts and
the Standard cuts are expected to meet and exceed the projected net profit percentage of 10%

 Given
 4 185 x 160kg x R46 = R30 801 600
 4 185 x 192kg x R42,50 = R34 149 600
 R30 801 600 + R34 149 600 = R64 951 200
 R30 801 600 X 15% = R4 620 240
 R34 149 600 X 15% = R5 122 440
 R9 742 680 ÷ R64 951 200 = 15%
 R64 951 200 less R54 754 000 less R190 000 less R264 520 = R9 742 680
 Calculation of the total joint costs
Purchases & abattoir holding-pen cost 56 000 000
Cattle slaughter processing costs 2 000 000
Total “gross” joint costs 58 000 000
Less: net proceeds from by product 3 246 000
Sales 4 185 x 44kg x R19,75 3 636 765
Less: further processing costs 200 000
Less: cold storage costs 130 400
Less: non-manufacturing costs 60 365
Total “net” joint costs to be allocated R58m – R3,246m 54 754 000

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 R90 000 + R100 000 = R190 000
 R164 520 + R100 000 = R264 520
 R30 801 600 less R4 620 240 = R26 181 360
 R34 149 600 less R5 122 440 = R29 027 160
 R30 801 600 less R90 000 less R164 520 less R4 620 240 = R25 926 840
 R34 149 600 less R100 000 less R100 000 less R5 122 440 = R28 827 160
 R4 620 240 less R1 000 000 (R900k + R100k) = R3 620 240
 R5 122 440 less R1 000 000 (R800k + R200k) = R4 122 440
 Premium: R3 620 240 ÷ R30 801 600 = 11,75%
 Standard: R4 122 440 ÷ R34 149 600 = 12,07%
 Total: R7 742 680 ÷ R64 951 200 = 11,92%
 R3 620 240 + R4 122 440 = R7 742 680

(f) Calculate the proposed target mark-up amount per unit of the hide using the “target rate
of return on invested capital” approach

Target price mark-up amount =

Capital invested x required rate of return

Expected annual demand

R320 000 
1 320 

= R242,42

 R4 000 000 X 8% = R320 000

 Expected demand
Details calculations Values
Productive hours per day given 7
Annual work days given 220
Total annual productive hours 7 hours X 220 days 1 540

Standard process capacity 2kg per 40mins

Process capacity per hour 2kg / 40mins x 60mins 3kg
Annual process capacity in kg 3kg x 1 540 4 620
Hide weight per unit given 3,5 kg
Hides annual demand in units 4 620kg / 3,5kg 1 320

Alternative calculation

1 540 x 60mins ÷ 40mins = 2 310 hours

2 310 hours x 2kg ÷ 3,5kg = 1 320

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4.23 IMVULA (PTY) LTD

(a) Ignoring the possibility limitation of any manufacturing resource(s). Assist Ms Raindeer
with the calculation of the budgeted number of units for each product that Imvula must
sell in order to break even for the 2018 financial year.

Details Glossy (G) Fashion (F) Standard (S)

Budgeted sales 48 000 24 000 72 000
Sales mix 2 1 3

Gross profit R 90,00 R 125,00 R 70,00

Add back: Fixed manufacturing overheads R 20,00 R 30,00 R 10,00

Less: Variable selling cost (R3,60)  (R5,00)  (R2,80) 
Contribution per unit R106,40 R150,00 R77,20
Contribution per sales mix R212,80 R150,00 R231,60

Weighted contribution R594,40

Total fixed costs R6 280 000
Fixed manufacturing overheads R2 400 000
Fixed selling costs R1 000 000
Fixed non-manufacturing costs R2 880 000
Break even sales in batches R6 280 000 ÷ R594,40 = 10 565,28
Rounded batches 10 566
Break even units 21 132 10 566 31 698

 Given
 G: 30min/60min x R40 = R20; F:45min/60min x R40 = R30; S: 15min/60min x R40 = R10
 G: R180 x 2% = R3,60; F:R250 x 2% = R5,00; S: R140 x 2% = R2,80
 G: R106,40 x 2 = R212,80; F: R150,00 x 1 = R150,00; S: R77,20 x 3 = R231,60
 R212,80 + R150,00 + R231,60 = R594,40
 (R20 x 48 000) + (R30 x 24 000) + (R10 x 72 000) = R2 400 000
 Glossy: 10 566 x 2 = 21 132; Fashion: 10 566 x 1 = 10 566; Standard: 10 566 x 3 = 31 698

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(b) Calculate the following standard costing variances for the month of May 2018:

i. Sales quantity variance per product.

Product Actual units Budgeted Diff. Std. gross Variance

in std. mix  units profit

Glossy 4 250 4 000 250 R 90 R 22 500 F

Fashion 2 125 2 000 125 R 125 R 15 625 F
Standard 6 375 6 000 375 R 70 R 26 250 F
Total 12 750 12 000 R64 375 F
 Actual sale units: 3 500 + 2 250 + 7 000 = 12 750
 G: 4/12 x 12 750 = 4 250; F: 2/12 x 12 750 = 2 125; S: 6/12 x 12 750 = 6 375
 G: 48000/12 = 4 000; F: 24000/12 = 2 000; S: 72000/12 = 6 000

ii. Fixed manufacturing overheads volume efficiency variance for product Fashion only.

Product Std. quantity Actual Difference Standard Variance

of input hours hours absorption
for actual rate
production
Fashion 1 350 1 500 (150) R 40 R6 000 A

 1 800 units x (45/60 minutes) = 1 350

(c) In responding to the findings of the market research, list and briefly discuss three (3)
social and environmental qualitative factors that Imvula should consider.

• Pollution: Imvula should consider their CO2 emissions (air pollution) OR their responsible
disposal of waste rubber OR limiting water pollution.
• Conservation: Imvula should consider responsible use of water OR the possibility of using
recycled rubber.
• Health issues: Imvula should consider how to minimise the health risks to employees working
at the plant with rubber due to their exposure to possible toxic materials (fumes, etc).
• Social responsible supplier: Imvula should consider the labour and human right practices of
Pemasok and if it is ethical.
• Impact on the natural forest: A consideration of Pemasok manufacturing process mainly due
to deforestation.
• Laws and regulations: Imvula should consider their compliance with environmental laws.

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(d) Calculate the total actual fixed manufacturing overheads allocated to each product for
the month of May 2018 using activity-based costing (ABC) system.

Allocated FMO Glossy Fashion Standard Total

Logo printing  R2 640 R3 240 R6 120 R12 000
Quality inspections of boots  R13 200 R7 200 R10 200 R30 600
Machine costs  R72 800 R36 400 R72 800 R182 000
Total R88 640 R46 840 R89 120 R224 600

Activity
Total Cost
Glossy Fashion Standard rate
(A) (B)
B/A

No of units
manufactured 4 400 1 800 5 100
 Logo 2 6
printing (both soles) (both soles & 4
inner + outer (both soles &
side) outer side
No. of logo’s 8 800 10 800 20 400
40 000 R 12 000 R 0,30
printed (4 400 x 2) (1 800 x 6) (5 100 x 4)
ABC allocation R2 640 R3 240 R6 120
(Activity rate x (8 800 x (10 800 x (20 400 x
no of logos) R0,30) R0,30) R0,30)

 Quality
inspections 1.50% 2.00% 1.00%
51
66 36
No. of quality (5 100 x 153 R 30 600 R 200
(4 400 x 1,5%) (1 800 x 2%)
inspections 1,00%)
ABC allocation R13 200 R7 200 R10 200
(Activity rate x (66 x R200) (36 x R200) (51 x R200)
no of inspect)
Machine
costs 220 180 255
No. of
20 10 20 R 182
production 50 R 3 640
(4 400/220) (1 800/180) (5 100/255) 000
runs
ABC allocation
(Activity rate x
no of R72 800 R36 400 R72 800
production (20 x R 3 640) (10 x R 3 640) (20 x R 3 640
runs)

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(e) Briefly motivate why Imvula would consider changing the basis of allocating the fixed
manufacturing overheads from the traditional costing system to the activity-based
costing (ABC) system.

“By using a greater number of cost centres and different types of cost drivers that cause activity
resource consumption and assigning activity costs to cost objects on the basis of cost driver
usage, ABC systems can more accurately measure the resources consumed by cost
objects”.
“Traditional cost systems tend to report less accurate costs because they use cost drivers
where no cause-and-effect relationships exist to assign support costs to cost objects.”
Drury 9th edition, chapter 11, pages 260
(f) Calculate the optimal number of units that Imvula can manufacture and sell during the
month of July 2018. For this question only round all your workings to 3 decimal places.

Details Glossy Fashion Standard Total

Budgeted annual 48 000 24 000 72 000 144 000
manufacturing and sales
Budgeted monthly 4 000 2 000 6 000 12 000
manufacturing and sales
Rubber kg per unit 0,60kg 0,70kg 0,35kg

Alternative 1 – Establishing direct material as a potential limiting fact

Monthly rubber required in kg 2 400 1 400 2 100 5 900
Available rubber in kg 4 940
Shortage kg 4 940kg less 5 900kg 960 kg
Therefore the availability of rubber is a limiting factor

Alternative 2 – Establishing cash resources as a potential limiting factor

Required Rands R48 000 R28 000 R42 000 R118 000
Required Dollars $4 080 $2 380 $3 570 $10 030
Available Rands $8 398/R0,085 R98 800
Available Dollars Given $8 398
Shortage (Rands) R98 800 less R118 000 R19 200
Shortage (Dollars) $8 398 less $10 030 $1 632
Therefore, cash availability (R or $) to procure the needed rubber is a limiting
factor

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Details Glossy Fashion Standard
Contribution per unit [given] R108,00 R140,00 R87,50
Contribution per limiting factor R180,00 R200,00 R250,00
CPLF (kg) 
Ranking 3 2 1

Standard manufactured first 6 000

Total rubber used in kg 2 100kg

Available kg for G & F 4 940 less 2 100 2 840kg

Fashion manufactured second 2 000

Total rubber used in kg 1 400

Available kg for G 2 840 – 1 400 1 440
Glossy manufactured 2 400
1 440/0,60kg

Therefore, optimal manufacturing mix is:

1. 6 000 Standards boots;
2. 2 000 Fashion boots; and
3. 2 400 Glossy boots

 G: 4 000 x 0,6 = 2 400; F: 2 000 x 0,7 = 1 400; S: 6 000 x 0,35 = 2 100

 Available kg rubber:

Details Workings Alternative1 Alternative2

Dollars available $ 8 398
Exchange rate R1 = $0,085 $0, 085 R1
Rands available to purchase rubber ($8 398/0,085) R98 800

Dollars needed per kg of rubber R20 x $0,085 $1,70

Rands needed per kg of rubber R20
Kg rubber that can be purchased 4 940kg 4 940kg
($8 398/$1,70 R98 800/R20

 G: R108/0,6 = R180; F: R140/0,7 = R200; S: R87,50/0,35 = R250

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4.24 BRIGHT & SHINE (PTY) LTD

(a) GZD’s budgeted statement of profit and loss for the six months ended 31 January 2018

Item Calculations R
Sales R440 x 82 110 36 128 400
Less: Cost of sales 0 + 34 003 200 – 5 100 480 28 902 720
Opening inventory 0
Plus: Manufacturing cost 34 003 200
Variable manufacturing cost R345,50 x 96 600 33 375 300
Fixed manufacturing cost 96 600 x R6,50 627 900
Less: Closing inventory R352 x 14 490 (96 600 – 82 110) 5 100 480
Gross profit 7 225 680
Less: Selling cost 410 550
Variable selling costs 82 110 x R5 x 4/5 328 440
Fixed selling costs 82 110 x R5 x 1/5 82 110
Less: Finance costs R18 500 000 x 11,25% x 6/12 1 040 625
Less: Operating expenses 2 891 261
Depreciation (R12 950 000 – R10 175 000) x 6/12 1 387 500
Rent expense (R27 000/1.065 x 5) + (R27 000 x 1) 153 761
Other operating expenses R2 700 000 x 6/12 1 350 000
Profit before tax R2 883 244

 Given
 Standard selling price per unit: R352,00 / (100% – 20%) = R440

 Total standard manufacturing cost per unit

Cost item Calculations R per unit
Direct raw material cost – surfactants 15 000/1 000 x R18,50 277,50
Direct raw material cost – sodium 3 000/1 000 x R12,50 37,50
Direct raw material cost – colourant 2 000/1 000 x R6,50 13,00
Direct labour 0,5 x R12,00 6,00
Variable manufacturing overheads 5,00
20-litre open-plastic container 5,00
Plastic container lid 1,50
Total variable manufacturing cost per unit 345,50
Fixed manufacturing costs R1 255 800 ÷ 193 200 6,50
Total manufacturing cost per unit R 352,00

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 Budgeting sales units/volume

Full annual normal manufacturing capacity 210 000

2018 annual manufacturing budget 210 000 x 92% 193 200
2018 annual sales units budget 193 200 x 85% 164 220

▪ First quarter sales unit budget: 164 220 x 20% = 32 844

▪ Second quarter sales units budget: 164 220 x 30% = 49 266
▪ Sales units budget for the 6 months ending 31 January 2018: 32 844 + 49 266 = 82 110

 Budgeted units to be manufactured: 193 200/2 or 193 200 x 6/12 = 96 600

(b) With regard to the budgeted purchases and the storing of the surfactants
(i) Calculate the number of barrels that the surfactants supplier will use to package
Alternative 1 – using milliliters Alternative 2 – using barrels

2xUxC 2xUxC
=√ =√
H+(P x i) H+(P x i)

2 x 24 150 x R5 500
2 x 2 898 000 x R5 500 =√(R300
=√(R2,50 + (R18,50 x 0,085) + (R2 220 x 0,085)

R265 650 000

R31 878 000 000
=√
R488,70
=√ R4,07
= 737,28
≈ 738 barrels (rounded up)
= 88 473,36
≈ 88 474 litres (rounded up)
= 88 474 / 120 litres = 737,28
≈ 738 barrels (rounded up)

 193 200 (see (a) above) x 15 litres = 2 898 000

 2 898 000 / 120 litres = 24 150
 R2,50 x 120 litres = R300
 R18,50 x 120 litres = R2 220

(ii) Calculate the budgeted number of orders to be placed.

Number of orders = Annual demand (manufacturing requirements) / EOQ

Alternative 1 – using milliliters Alternative 2 – using barrels

2 898 000 / 88 474 = 32,76 orders 24 150 / 738 = 32,72 orders
≈ 33 orders (rounded up) ≈ 33 orders (rounded up)

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(c) Briefly discuss three (3) purposes of standard costing.

(i) Providing a prediction of future costs that can be used for decision-making purposes
Standard costs can be derived from either traditional or activity-based costing systems. Because
standard costs represent future target costs based on the elimination of avoidable inefficiencies,
they are preferable to estimates based on adjusted past costs, which may incorporate
inefficiencies. For example, in markets where competitive prices do not exist, products may be
priced on a bid basis. In these situations, standard costs provide more appropriate information
because efficient competitors will seek to eliminate avoidable costs. It is therefore unwise to
assume that inefficiencies are recoverable within the bid price.

(ii) Providing a challenging target that individuals are motivated to achieve

Research evidence suggests that the existence of a defined quantitative goal or target is likely to
motivate higher levels of performance than would be achieved if no such target were set.

(iii) Assisting in setting budgets and evaluating managerial performance

Standard costs are particularly valuable for budgeting because they provide a reliable and
convenient source of data for converting budgeted production into physical and monetary resource
requirements. Budgetary preparation time is considerably reduced if standard costs are available
because the standard costs of operations and products can be readily built up into total costs of
any budgeted volume and production mix.

(iv) Acting as control device by highlighting those activities that do not conform to plan and
thus alerting managers to those situations that may be "out of control" and in need of
corrective action
In a standard costing system, variances are analysed in great detail such as by element of cost,
and price and quantity elements. Useful feedback is therefore provided to help pinpoint the areas
in which variances have arisen.

(v) Simplifying the task of tracing cost to products for profit measurement and inventory
valuation purposes
In addition to preparing annual financial accounting profit statements, most organisation also
prepare monthly internal profit statements. If actual costs are used, a considerable amount of time
is required in tracking costs for monthly costs to be allocated between cost of sales and inventories.
A data-processing system is required, which can track monthly costs in a resource-efficient
manner. Standard costing systems meets this requirement. Inventories and cost of goods sold are
recorded at standard cost and a conversion to actual costs is made by writing off all variances
arising during the period as a period cost.

Note that the variances from standard cost are extracted by comparing actual costs with standard costs
at the responsibility centre level, and not at the product level; therefore, actual costs are not assigned
to individual products.

Source: Drury (2015:440–441)

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(d) For the year ended 31 July 2018, calculate the following variances for the GZD:
(i) Sales volume variance

Product Actual Budgeted Standard gross Variance

quantity quantity profit R
GZ (20-litre hand soap) 165 500 164 220 R88 R112 640 F

 R910 250 / R5,50 = 165 500

 Refer to question (a) calculation  above
 R440 less R352 = R88
 Refer to question (a) calculation  above
 Refer to question (a) calculation  above

Note

The given scenario provides for the following key points: (i) all units manufactured were sold, (ii) the
division had no work in progress, (iii) open-plastic containers were issued according to the
manufacturing requirements, and (iv) not all the purchased direct raw material was issued to
manufacturing. Based on this information, the actual number of units sold can only be established by
the amount of the variable manufacturing overheads incurred since variable cost varies with the
number of units manufactured and, in this instance, also sold.

(ii) Direct raw material purchase price variance (per material type and in total)

Direct raw Actual Standard Diff Actual Variance

material price price quantity R
Surfactants R18,00 R18,50 R0,50 2 628 600 R1 314 300 F
Sodium R13,50 R12,50 –R1,00 471 800 R471 800 A
Colourant R6,90 R6,50 –R0,40 269 600 R107 840 A
Total R734 660 F

 R47 314 800 (given) / R18,00 = 2 628 600 litres

 R6 369 300 (given) / R13,50 = 471 800 litres
 R1 860 240 (given) / R6,90 = 269 600 litres

(iii) Direct raw material yield variance (per material type and in total)

Direct raw Input Actual usage in Diff Standard Variance

material allowed for standard price R
actual yield proportions
Surfactants 2 482 500 2 509 875 –27 375 R18,50 R506 437,50 A
Sodium 496 500 501 975 –5 475 R12,50 R68 437,50 A
Colourant 331 000 334 650 –3 650 R6,50 R23 725,00 A
Total R598 600 A

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 165 500 x 15 litres = 2 482 500  (2 612 000 + 469 500 + 265 000) = 3 346 500
 165 500 x 3 litres = 496 500  3 346 500 x 15/20 = 2 509 875
 165 500 x 2 litres = 331 000  3 346 500 x 3/20 = 501 975
 3 346 500 x 2/20 = 334 650

(iv) Direct labour idle time variance

Item Actual Standard Difference Standard work Variance

productive productive hour rate R
hours hours
Direct labour 86 700 89 760 3 060 R13,64 R41 738,40 A
 102 000 x 85% = 86 700
 102 000 x 88% = 89 760
 R12,00 / 88% = R13,64

Note
Although not specifically asked in this question, you are urged to attempt calculating the following
variances using the same given information:
(i) sales price variance;
(ii) direct raw material mix variance (per material type and in total);
(iii) labour rate variance;
(iv) labour efficiency variance;
(v) variable manufacturing overheads expenditure variance;
(vi) fixed manufacturing overheads expenditure variance;
(vii) fixed manufacturing overheads volume variance;
(viii) plastic container price variance; and
(ix) plastic container-lids price variance.

(e) Calculate the budgeted annual optimum manufacturing mix for the MPD for the year
ending 31 July 2018.

Establishing if mixing time is a limiting factor FST FSP FSR Total

Monthly production and sales units (given) 4 200 4 900 5 600
Annual production and sales units 50 400 58 800 67 200
Mixing time (hours) per unit 0,25 0,25 0,50
Total required mixing time (hours) per annum 12 600 14 700 33 600
Available mixing time (hours) per annum 41 400
Less: Mixing time required for the UoP contract 12 600
Mixing time (hours) left for FSP and FSR 28 800
Less: Required mixing time for FSP and FSR 48 300
Shortage of hours ( 28 800 less 48 300) - 19 500
28 800 < 48 300; therefore, mixing time is a limiting factor (constraint)
 50 400 x 0,25 hours = 12 600 hours
 58 800 x 0,25 hours = 14 700 hours
 67 200 x 0,50 hours = 33 600 hours
 3 450 (given) x 12 months = 41 400 hours

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 14 700 + 33 600 = 48 300 hours

Establishing if finishing time is a limiting factor FST FSP FSR Total

Monthly production and sales units (given) 4 200 4 900 5 600
Annual production and sales units 50 400 58 800 67 200
Finishing time (hours) per unit 0,15 0,35 0,50
Total required finishing time (hours) per annum 7 560 20 580 33 600
Available finishing time (hours) per annum 61 800
Less: Finishing hours needed for the UoP contract 7 560
Finishing time (hours) left for FSP and FSR 54 240
Less: Required finishing time for FSP and FSR 54 180
Surplus hours (54 180 less 54 240) 60
54 240 > 54 180; therefore, finishing time is NOT a limiting factor (constraint)

 50 400 x 0,15 hours = 7 560 hours

 58 800 x 0,35 hours = 20 580 hours
 67 200 x 0,50 hours = 33 600 hours
 5 150 (given) x 12 months = 61 800 hours
 20 580 + 33 600 = 54 180 hours

Calculation of contribution per limiting factor

FST FSP FSR
R R R
Selling price 340 410 484
Less: Variable manufacturing cost 245 297,50 353
Less: Variable selling cost 10 10 10
Contribution per unit R85 R102,50 R121
Limiting factor (mixing time) 0,25 0,25 0,50
Contribution per limiting factor R340 R410 R242
Ranking 1# 2 3

#The division has entered into a fully binding supply agreement with the UoP to supply all its budgeted
annual production units of FST (50 400), and its intention is to honour the agreement fully. Therefore,
FST units will be produced first, regardless of the contribution of the product compared to that of the
other products.

 Contribution per limiting factor

FST: R85,00 / 0,25 = R340
FSP: R102,50 / 0,25 = R410
FSR: R121,50 / 0,50 = R242

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 Calculation of the budgeted selling prices

Details FST FSP FSR Workings

R R R
Direct raw material 180 220 280 A
Direct labour 45 52,50 50 B
Variable manufacturing overheads 20 25 23 C
Total variable manufacturing costs 245,00 297,50 353,00 D = (A+B+C)
Fixed manufacturing overheads 10 10 10 E
Total manufacturing costs 255,00 307,50 363,00 F = (D+E)

Selling prices 340,00 410,00 484,00 G = F/0,75

FST: R255 / (100% – 25%) = R340

FSP: R307,50 / (100% – 25%) = R410
FSR: R363 / (100% – 25%) = R484

 Calculation of the budgeted variable selling cost

Monthly Annually

Total selling cost R367 500 R4 410 000

Less: Fixed selling cost R220 500 R2 646 000
Variable selling cost R147 000 R1 764 000

Variable selling cost per unit R10 p/u R10 p/u

R147 000 / 14 700 = R10 p/u
R1 764 000 / 176 400 = R10 p/u

 Calculation of the fixed manufacturing overheads

Annually
Budgeted fixed manufacturing overheads R1 800 000
Normal annual manufacturing capacity 180 000

Fixed manufacturing absorption rate = R1 800 000 / 180 000 = R10 p/u

Therefore, the budgeted optimal manufacturing mix is as follows:

Available mixing time 41 400

Less: Mixing time used for 50 400 FST units (12 600)
Available for FSP and FSR 28 800
Less: Mixing time used for 58 800 FSP units (14 700)
Remaining for FSR units 14 100

Optimal manufacturing mix

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FST: 50 400 units
FSP: 58 800 units
FSR: 28 200 units (14 100 / 0,5 hour)

(f) Calculate the budgeted margin of safety units for FSP only for the 2018 financial year.
Details FST FSP FSR
Expected demand and sales 50 400 58 800 67 200
Sales mix 6 7 8
Contribution per unit R85 R102,50 R121
Weighted contribution (WC) R510 R717,50 R968
Contribution per batch R2 195,50
Fixed costs R1 800 000 + R2 646 000
Breakeven sales in batches Fixed costs / Contribution per batch
R4 446 000 / R2 195,50 = 2 025,05
Rounded batches 2 026
Breakeven units 12 156 14 182 16 208
Margin of safety units  38 244* 44 618 50 992*

 FST: 50 400 / 8 400 = 6; FSP: 58 800 / 8 400 = 7; FSR: 67 200 / 8 400 = 8

 From question (e) above
 FST: R85(f) x 6 = R510; FSP: R102,50(f) x 7 = R717,50; FSR: R121(f) x 8 = R968
 R510 + R717,50 + R968 = R2 195,50
 Fixed costs: R1 800 000 = fixed manufacturing overheads and R2 646 000 = fixed selling cost
 FST: 2 026 x 6 = 12 156; FSP: 2 026 x 7 = 14 182; FSR: 2 026 x 8 = 16 208
 FSP: 58 800 – 14 182 = 44 618 units

Note
*Take note that although the question did not require “margin of safety” to be calculated for all three
products, calculations cannot not be done per individual product in questions on (i) multi-product CVP;
(ii) breakeven; or (iii) margin of safety, but they must be done simultaneously for the entire company,
that is, for all the products together. Therefore, the calculations for the other products are also provided,
albeit not having been asked.

Furthermore, take note that in this instance, the question asked for a “margin of safety” UNITS, but it
could have asked for a “margin of safety” PERCENTAGE. Ensure that you are aware of these
differences and are able to calculate either one of the two variations.

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4.25 LOOK-LIKE-LEATHER (PTY) LTD

(a) Calculate the budgeted contribution amount per unit of product LB only [7]

Details LB MB*
R R
Sales 3 300 2 450
Less: Variable production costs 2 596,50 1 723,50
Polishing costs 100 80
Direct labour costs 882 798
Direct raw material costs 1 520 760
Variable manufacturing overheads 94,50 85,50
Less: Variable non-production costs 20 20
Selling costs 20 20
Contribution per unit R683,50 R706,50
*Not required, only shown for the benefit of the students to learn and for sake of
completeness.
 Given
 LB: R74 250K/22,5K = R3 300; MB: R36 750K/15K = R2 450
 No opening or closing finished goods, therefore manufacturing budget units = Budgeted sales
units
 LB: 8 550 x 1 000 grams ÷ 380 grams = 22 500
 MB: 2 850 x 1 000 grams ÷ 190 grams = 15 000
 LB: R210 ÷ 60 minutes x 252 minutes = R882
 MB: R210 ÷ 60 minutes x 228 minutes = R798
 LB: R45 600K ÷ 11 400 kg = R4 000 per kg ÷ 1 000 x 380 = R1 520
 MB: R4 000 per kg ÷ 1 000 x 190 = R760
 LB: R90 ÷ 60 minutes x 63 minutes (252 minutes x 25%) = R94,50
 MB: R90 ÷ 60 minutes x 57 minutes (228 minutes x 25%) = R85,50

(b) Calculate variances for the 2020 financial year [10]

(i) Direct labour idle time variance in total
Allowed idle Actual idle Difference Standard Variance
hours hours hours work hour
rate
10 824 16 236 5 412 R233,33 R1 262 782 A
 Given
 108 240 x 10% = 10 824 hours
 108 240 x 15% (100% less 85%) = 16 236 hours
 6,8 hours ÷ 8 hours = 85%
 R210 ÷ 90% (100% less 10%) = R233,33
(ii) Sales mix variance for both products and in total
Product Actual sales Actual sales Difference Standard gross Variance
quantity quantity @ profit per
standard mix unit
LB 16 500 15 840 660 R514,50 R339 570 F
MB 9 900 10 560 -660 R555,50 R366 630 A
Total 26 400 26 400 R27 060 A

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(b) Calculate variances for the 2020 financial year [10]
 Given
 LB: 26 400 x 22,5K ÷ 37,5K (22,5K + 15K) = 15 840
 MB: 26 400 x 15K ÷ 37,5K (22,5K + 15K) = 10 560
 Budgeted sales units (sales mix) as determined in question 2(a), calculation  above
 LB: R683,50 plus R20(selling costs) less R189 (R45 ÷ 60 x 252) = R514,50
 MB: R706,50 plus R20(selling costs) less R171 (R45 ÷ 60 x 228) = R555,50
 Contribution amount as per question 2(a) above
 FMO allocation rate: R6 817,5K ÷ 151 500 hours (94,5K + 57K) = R45 per labour hour
 LB: 22,5K x 252 minutes ÷ 60 minutes = 94 500 budgeted direct labour clock hours
 MB: 15K x 228 minutes ÷ 60 minutes = 57 000 budgeted direct labour clock hours

(iii) Raw leather yield variance for both products and in total
Product Input allowed Actual usage in Difference Standard Variance
for actual standard mix price per
output kg
LB 6 270 5 500 770 R4 000 R3 080 000 F
MB 1 881 2 750 -869 R4 000 R3 476 000 A
Total 8 151 8 250 R396 000 A

 Given
 LB: 16 500 x 0,38kg = 6 270 kg
 MB: 9 900 x 0,19kg = 1 881 kg
 LB: (6 300kg + 1 950kg) x 0,38kg ÷ 0,57kg (0,38kg + 0,19kg) = 5 500
 MB: (6 300kg + 1 950kg) x 0,19kg ÷ 0,57kg (0,38kg + 0,19kg) = 2 750
 Refer to question 2(a) calculation  above

(c) Prepare actual income statement for the 2020 financial year for product MB only [8]

Details Amount
R
Sales 24 750 000
Less: Cost of sales 20 833 050
Opening inventory 0
plus: Raw leather purchases costs 10 500 000
plus: Polishing costs 792 000
plus: Direct labour costs 7 840 800
plus: Variable manufacturing overheads 846 450
plus: Fixed manufacturing overheads 1 603 800
less: Closing inventory (raw leather) 750 000
Gross profit 3 916 950
Plus: Fixed manufacturing overheads over-allocation 3 800
Less: Non-manufacturing variable costs 198 000
Net profit/(loss) before tax R3 722 750
Advice about gross profit:

The budgeted gross profit for product MB is R3,8m and the related actual gross profit is R3,91695m.
Therefore, 3XL has achieved and exceeded product MB’s budgeted gross profit by R116 950.

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(c) Prepare actual income statement for the 2020 financial year for product MB only [8]

 Given
 R43 000K ÷ 8 600kg = R5K per kg x 2 100kg = R10 500 000
 9 900 x R80 = R792 000
 9 900 x 216 minutes ÷ 60 minutes = 35 640 direct labour hours x R220 = R7 840 800
 35 640 x 25% = 8 910 machine hours x R95 = R846 450
 35 640 x R45 = R1 603 800

 Refer to question 2(b)(ii), calculation  above

 150 kg (2 100 less 1 950) x R5 000 = R750 000
 R1 603 800 less R1 600 000 = R3 800
 9 900 x R20 = R198 000

(d) Calculate 3XL’s budgeted optimal manufacturing mix in units for the 2021 financial
[8]
year.

Details Direct Raw

labour hours Leather kg
Required manufacturing resources 70 965 5 605
Available manufacturing resources 59 280 6 000
Surplus/(Shortage) in production resources (11 685) 395

Conclusion: Direct labour hours is a limiting factor while raw leather is not a limiting factor.
Details LB MB
Budgeted contribution per unit R846,20 R772,80
Direct labour time required per unit 4,2 3,8
Contribution per limiting factor (CPLF) R201,48 R203,37
Ranking in terms of CPLF 2 1
Budgeted optimal manufacturing mix units 8 071 7 500

 Given
 (46 200 x 95% = 43 890) + (28 500 x 95% = 27 075) = 70 965
 LB: 11 000 x 252 mins ÷ 60 mins = 46 200; MB: 7 500 x 228 mins ÷ 60 mins = 28 500
 75 x 40% = 30 labourers x 8 hours x 260 days x 95% (net idle time allowance) = 59 280
 4 180 + 1 425 = 5 605kg
 LB: 11 000 x 0,38kg = 4 180; MB: 7 500 x 0,19kg = 1 425
 LB: R4 500 x 15% = R675 plus R193,20 less R22 = R846,20
 MB: R3 100 x 20% = R620 plus R174,80 less R22 = R772,80
 LB: R46 x 4,2 hrs (252 ÷ 60 mins) = R193,20
 MB: R46 x 3,8 hrs (228 ÷ 60 mins) = R174,80
 R3 436 200 ÷ 74 700 (46 200 + 28 500) = R46 per direct labour clock hour
 LB: R846,20 ÷ 4,2 = R201,48
 MB: R772,80 ÷ 3,8 = R203,37
 59 280 less 27 075 = 32 205 hours ÷ 3,99 (4,2 x 95%) = 8 071

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(e)(i) Draft a memorandum to 3XL’s CFO wherein you identify and discuss ethical and
[8]
business concerns about the proposed acquisition of ML.
MEMORANDUM
To: Chief Financial Officer (CFO) – 3XL
From: Management accountant/Student
RE: Discussion of qualitative factors that 3XL would have considered for the acquisition of
ML
Date: 31 July 2020
Dear CFO
In response to your request ethical and business concerns that 3XL would have considered in the
feasibility study to acquire Monopoly Leather, I present the following for your attention:
No. Identification Discussion
1. ML is not a registered ▪ ML is thus not considered a legal entity within South Africa. A
company (Business). consideration must therefore be made about how possible
future litigations might be enforced. For example, if the ML
were to renegade on the acquisition agreement after the
acquisition price has been paid, 3XL might find it difficult, if not
impossible, to lodge a legal and successful claim against ML.
▪ It is also highly possible that ML is not tax compliant and this
will be a risk to consider for HLB in terms of operating legally
and also for interactions with the South African Revenue
Services authorities. Furthermore, it is important to consider
all the applicable VAT implications as ML is a non-registered
vendor.
▪ Consideration must be made about why ML is not registered
and also investigate if the company had ever actively sought
to register and operate legally.
2. ML operates from a ▪ As part of the communities within which they operate, these
hijacked building communities expect the businesses to be good corporate
(Ethical). citizens and also conduct their business responsibly and
ethically. Operating from a high-jacked building is not only
illegal, but it is generally regarded as socially unacceptable
and not in line with good corporate citizenry. As a result, 3XL
should thus consider the social cost of associating themselves
ML.
▪ There is also a risk of social unrest and possible attack by the
community because of the company participating in these
scams/schemes. Any disruption to ML trading activities will
impact heavily on 3XL’s operations.
3. ML has a history of ▪ 3XL should be cognisant that the systematic culture of
renegading from dishonouring business agreements within ML could
business agreements potentially infiltrate into the HLB and subsequently destabilise
(Ethical).
relationships with the current and possible future clients,
suppliers and all other important stakeholders for the business

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(e)(i) Draft a memorandum to 3XL’s CFO wherein you identify and discuss four ethical
[8]
and business concerns about the proposed acquisition of ML.
No. Identification Discussion
4. ML has broken several formal ▪ The manner in which ML conducts itself and its
business agreements and has business appears to display a demeanour that is
recently ferociously renegaded arrogant and non-cooperative. Acquiring or
on another business associating one with an arrogant and uncaring
agreement. As such, ML’s company could potentially result in a customer revolt
demeanour, and business and thus negatively affect the company’s continued
interactions appears to be that existence.
of an arrogant and non-
cooperative company.
5. ML conducts its business on ▪ The handling of significant quantity of cash at business
cash basis only (Business). premises places the company at risk of theft and
robbery. As a result, the safety of the employees at the
business premises may be compromised. The
company may also suffer significant financial loss.
▪ There exists potential loss of customers who might
prefer credit to cash or are forced to transaction on
credit basis during certain periods due to seasonal
liquidity challenges.
▪ The raw material is quite expensive, and customers
carrying large sums of money are also in great danger
of being robbed.
▪ Tanzanian suppliers are likely to request money to be
wired to their bank accounts and this could lead to
delays in depositing cash, with potential hefty bank
charges.
6. ML appears to be thriving at ▪ The fact that ML is storing large cash reserves at
the back of several illegal unknown and heavily guarded bunkers could raise
activities (Ethical). questions about the source(s) of the cash and why the
need to store the cash as such instead of using
formalised financial institutions. It is therefore
incumbent on 3XL to consider the rationale and
necessity of this business practice.
▪ The smuggling of various items into the country is
against the law. 3XL should therefore consider if they
are willing to associate with a company that is known
to continuously contravene the rules, laws and
regulations of the country.
▪ Engaging in illegal activities has adverse going-
concern implications, there is a risk that the company
could be raided and/or put out of business by the law
enforcement agencies

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(e)(i) Draft a memorandum to 3XL’s CFO wherein you identify and discuss four ethical
[8]
and business concerns about the proposed acquisition of ML.
No. Identification Discussion
7. ML has only one ▪ ML is thus exposed to supplier concentration risk and possible
supplier who is in political risk association with a foreign supplier. It is therefore
Tanzania (outside important for 3XL to consider the impact of these aspects and
the country) how the identified risks would be mitigated.
(Business)
8. Ability to generate ▪ ML’s stance of withholding its supply in solidarity with the
cash and the social retrenched workers seems to suggest that, amid all the
solidarity with the negativity, the company still holds the interest and the social
workers by ML is welfare of the workers in the highest regard. However, despite
commendable the good intention of this social gesture, ML could possibly be at
(Business). loggerhead with the Competition Tribunal and Consumer
Protection unit. Intentionally limiting the supply and irrationally
increasing prices could be challenged by the aforementioned
institutions. 3XL should therefore consider the extent to which
these practices are prevalent and their impact on ML’s business
reputation.
▪ Despite the unknown sources of the cash, it is still commendable
that ML can generate significant amount of cash.
▪ In both these instances, perhaps through the association with
ML, 3XL might learn from some of the good attributes, good
qualities and good business acumen that ML possesses.
Kind Regards,
Management Accountant

(e)(ii) Calculate the budgeted minimum transfer price per kilogram of raw leather that the
[8]
Leather Division will be willing to accept

Minimum transfer price = Incremental costs + lost contribution

Units to transfer

= R30 827,5K + R2 110,55K

5 605kg

= R32 938 050 = R5 876,5477 ≈ R5 876,55

5 605kg

 Given
 Determination of possible external market sacrifice
Available (maximum) manufacturing capacity 8 000 kg
Less: other external customer demand 3 500 kg
Available manufacturing capacity for internal sales 4 500 kg
Less: Raw leather needed by the HandBags Division 5 605 kg
Shortage/Sacrifice 1 105kg

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(e)(ii) Calculate the budgeted minimum transfer price per kilogram of raw leather that the
[8]
Leather Division will be willing to accept
 Refer to question 2(d) calculation  above
 5 605kg x R5 500 = R30 827,5K
 Incremental cost per kg
Details Calculations/Commentary Per kg
UL – purchase costs R18,2m ÷ 5 200kg R3 500
UL – importation costs R2,6m ÷ 5 200kg R500
UL – variable processing costs R7,8m ÷ 5 200kg R1 500
Fixed manufacturing overheads Not-incremental R0
Fixed selling and distribution costs Not-incremental R0
Head office allocated costs Not-incremental R0
Other non-manufacturing operating expenses Not-incremental R0
Variable selling and distribution costs Incurred on external sales only R0
Total R5 500
 8 000 kg x 65% = 5 200 kg
 R1 910 x 1 105kg = R2 110,55K
 R7 500 less R5 500 less R90 = R1 910 per kg
 R39m ÷ 5 200kg = R7 500 per kg
 R468K ÷ 5 200kg = R90 per kg

(e)(iii) Advise the management team of the HandBags Division as to whether the team is [9]
forecasted to receive performance bonuses during the 2021 financial year.
Advice: The management team of the HandBags Division is forecasted to receive a performance
bonus of R5 232 000 (see supporting calculations below) during the 2021 financial year.
Supporting calculations:
The forecasted residual income of the HandBags Division (HBD) for the 2021 financial year is
R4 676,8K. Based on the HLB’s performance bonus incentive structure, the forecasted
performance rating of the HBD for the 2021 financial year is therefore, a “B” rating. By reference to
this performance rating, the forecasted performance bonus is therefore R5 232 000 [R500K +
(R72,8m x 6,5%)].

 Given
 Controllable profit
Details Commentary Amount
R’000
Sales 72 800
Less: Controllable costs 63 316,2
Raw leather purchases 33 700
Other variable manufacturing costs 20 100
Fixed manufacturing overheads 3 436,2
Head office allocated costs not controllable 0
Other non-manufacturing operating expenses 4 500
Interest on bank overdraft not controllable 0
Interest on long-term loans 1 580
Controllable profit R9 483,8
Less: Cost of capital charge R4 807
Residual income R4 676,8

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(e)(iii) Advise the management team of the HandBags Division as to whether the team is
[9]
forecasted to receive performance bonuses during the 2021 financial year.

 Weighted average cost of capital

Capital structure Target capital Cost WACC
component structure
Equity 0,6 12,50% 7,50%
Debt 0,4 6,56% 2,62%
Total 1/100 10,12%

 R47,5m x 10,12% = R4 807 000

 Controllable investment
Details Commentary Amount
R’000
Property, plant and equipment 65 000
Trade receivables not controllable 0
Less: Trade payables not controllable 0
Less: Bank overdraft not controllable 0
Less: Vosho Bank: Long-term loan R14m + R3,5m 17 500
Controllable investment R47 500

(e)(iv) Comment on whether the HandBags Division is forecasted to honour Vosho Bank’s
[2]
long-term loan covenant for the 2021 financial year
Return on investment (ROI) =

Controllable profit R9 483,8K = 19,97%

Controllable investment R47 500K

 Refer to question 2(e)(iii) calculation  above

 Refer to question 2(e)(iii) calculation  above
Comment:
Vosho Bank’s only long-term loan covenant is ROI of 13,50% per annum. At a forecasted ROI of
19,97%, the HandBags Division is therefore forecasted to achieve (and exceed) Vosho Bank’s
prescribed long-term loan covenant of 13,50% per annum.

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4.26 AQUA FIRST (PTY) LTD

(a) Identify the costing system used by Aqua for its internal reporting purposes and briefly motivate
your answer by making reference to the relevant information from the scenario.

1. Identification:
Aqua uses the absorption costing system for both its internal reporting purposes and for
assigning costs to its products.
2. Motivation:
▪ By virtue of DivVal’s actual management accounts reflecting “Gross profit” and not “Contribution”
is consistent with the format of an absorption costing system statement.

▪ According to Drury: “absorption costing systems assigns both direct and indirect costs to cost
objects” (Drury, 2015: 49). Furthermore he states: “the term ‘overheads’ is widely used instead of
indirect costs…..Manufacturing overheads include all the costs of manufacturing apart from direct
labour and material costs” (Drury, 2015: 27)

▪ The fact that DivVal’s standard all-inclusive manufacturing costs of the empty glass bottles includes
fixed manufacturing overheads (FMO) (indirect costs) absorbed at R0,45 per unit is in itself
motivation that Aqua uses an absorption costing system.
▪ “With absorption costing method, a share of fixed production overheads are allocated to individual
products and are included in their production costs” (Drury, 2015: 155).

▪ The above statement by Drury is also consistent with Aqua’s operations and therefore further
motivates that Aqua uses an absorption costing system. In this regard, besides allocating direct
costs (glass bottles, prepared water and vitamins) to the bottled mineral water, DivMou also
allocates indirect costs (water quality testing costs, water pump set-up costs and water labelling
costs) to the bottled mineral water using ABC.

▪ By virtue of the fixed manufacturing overheads been allocated to the manufactured products in
each of Aqua’s two divisions, means that Aqua values all their finished inventory items inclusive of
both variable manufacturing costs and fixed manufacturing costs to the division’s respective
products, a phenomenon that is consistent with the absorption costing system.

(b) Calculate DivVal’s total budgeted number of internal sales units to DivMou for the 2018
financial year.

DivVal’s maximum normal manufacturing capacity 1 400 000 bottles

Budgeted operating capacity (1,4 million bottles x 85%) 1 190 000 bottles
Budgeted internal sales units (1,190 million bottles x 65%) 773 500 bottles

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(c) Calculate and recommend a budgeted minimum transfer price per one (1) 500 ml empty bottle
that the DivVal should charge DivMou for the 2018 financial year.
Provide one (1) reason to motivate your recommended minimum transfer price.
Calculation of minimum transfer price:
Details Calculations Per Total @
unit 773 500
units
Raw glass R3,00/1 000g x 600g R1,80 R1 392 300
Bottle cap given R0,20 R154 700
Direct labour cost R6,00/60mins x 4,50 mins R0,45 R348 075
VMO* R12,00/60mins x 4,50 mins R0,90 R696 150
External selling cost Only on external sales R0,00 R0,00
Total incremental costs R3,35 R2 591 225
Plus: Lost contribution R0,00 R0,00
Plus: Internal or (agreed) profit R0,00 R0,00
Recommended minimum transfer price per bottle R3,35 R3,35
(R2 591 225/773 500)
*VMO = variable manufacturing overheads
Reason:
Division Valley has enough manufacturing capacity to supply to both internally and external
customers. (i.e. no lost contribution). The minimum transfer price should therefore be: Total
incremental costs only.

(d) Calculate DivVal’s total budgeted fixed costs that would be used to calculate the division’s
budgeted break-even point for the 2018 financial year.

Details R
FMO R535 500
Fixed selling cost (given) R105 000
Total budgeted fixed cost R640 500
 1 190 000 x R0,45 (given) = R535 500
 Refer to question (b) above

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(e) (i) Calculate DivVal's actual residual income for the 2018 financial year. The Total column is
required

Details External Internal Total

R R R
Sales 1 845 375 2 741 700 4 587 075
Less: Cost of sales (1 476 300) (2 741 700) (4 218 000)
Gross profit 369 075 0 369 075
Less: Selling costs (123 310)
Plus: Interest income 68 500
Less: Other operating expenses (60 000) 
Other operating expenses (350 000)
Allocated head offices expenses 205 000
Interest on bank overdraft 0
Municipal rates 85 000
Controllable profit 254 265
Less: Cost of capital charge (235 750)
Residual income (R254 625 less R235 750) 18 515

 = Given
 = 721 500 x R3,80 (R3,35 per (c) + R0,45 (FMO per (d) above)) = R2 741 700
 = R4 587 075 – R2 741 700 or 388 500 x R4,75 (R3,80 x 125/100) = R1 845 375
 = R1 845 375 x 100/125 or 388 500 x R3,80 () = R1 476 300
 = R2 050 000 x 11,50% = R235 750

(e) (ii) Based on the 2018 actual results, determine and comment if Leahandra Hendricks
(DivVal’s divisional manager) will receive a bonus or not
Return on investment = Controllable profit/Controllable investment
Controllable profit R254 265
Controllable investment R2 050 000
Return on investment (ROI) 12,40%

Comparing: DivVal’s actual ROI for the 2018 financial year is 12,40%, which is less than the
company’s targeted ROI of 12,50% (given) for the same period.

Conclusion: DivVal’s calculate actual ROI is 12,40% which is less than the targeted ROI of 12,50%,
it therefore follows that the DivVal did not meet or exceed the targeted ROI of 12,50%. As a result,
based on DivVal’s actual results for the 2018 financial year, Leahandra Hendricks will not receive a
bonus.

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(f) Prepare DivMou’s production (manufacturing) budget in units for the 2018 financial year.

Details STW FSW Total

Sales 590 625 196 875 787 500
Plus: Closing inventory 45 750 15 250 61 000

Units required 636 375 212 125 848 500

Less: Opening inventory (56 250) (18 750) (75 000)
Units manufactured 580 125 193 375 773 500

 = 393 750 (given) litres x 2 (each 1 litre bottles two (2) 500 ml bottles = 787 500 bottles
STW: 787 500 bottles x 6/8 (sales mix) = 590 625 units
FSW: 787 500 bottles x 2/8 (sales mix) = 196 875 units
 = STW: 75 000 (given) x 6/8 = 56 250 units; FSW: 75 000 (given) x 2/8 = 18 750 units
 = Budgeted operating (manufacturing) capacity = 1 190 000 bottles (see (b) above).
Internal sales (transfer from DivVal to DivMou) = 1 190 000 x 65% (given) = 773 500 bottles
STW: 773 500 bottles x 6/8 = 580 125 units
FSW: 773 500 bottles x 2/8 = 193 375 units
 STW: 56 250 + 580 125 – 590 625 = 45 750; FSW: 18 750 + 193 375 – 196 875 = 15 250

(g) (i) Calculate the budgeted fixed manufacturing overheads per unit that DivMou will allocate to
STW and FSW for the 2018 financial year.

Cost driver rates Calculation of number STW FSW

of activities
Water quality testing 540 000/125 = 4 320 4 320 x R30 = 1 125 x R30 =
Rate = R163 350/5 445 180 000/160 = 1 125 R129 600/540k R33 750/180k
= R30 per test 4 320 + 1 125 = 5 445 R0,24 p/u R0,19 p/u
Water pump set up 30 30 x R3 000 = 45 x R3 000 =
Rate = R225k/75 = 45 R90 000/540k R135 000/180k
R3 000 per s/up 30 + 45 = 75 R0,17 p/u R0,75 p/u
Affixing branding label 15/60 x 540k = 135k 135k x R1,80 = 45k x R1,80 =
Rate = R324 000/180k = 15/60 x 180k = 45k R243 000/540k R81 000/180k
R1,80 per minute 135k + 45k = 180k mins R0,45 p/u R0,45 p/u

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(g) (ii) Prepare the 2018 budgeted statement of profit and loss (income statement) for product
STW only based on the absorption costing system.

Details Calculations STW

R
Sales 555 300 x R6,80 3 776 040
Less: Cost of sales 3 197 605
Opening inventory 56 250 x R5,30 298 125
Plus: Manufacturing costs 540 000 x R5,81 3 137 400
Less: Closing inventory 40 950 x R5,81 237 920
Gross profit 578 435
Less: Selling cost 223 560
Variable selling 555 300 x R0,20 111 060
Fixed selling R150 000 x 75% 112 500
Less: Other operating costs R280 000 x 50% 140 000
Profit for the period R214 875

 Given
 All-inclusive manufacturing costs
Details Per unit Total
Empty bottles transfer R3,80 R2 052 000
Prepared water R0,75 R405 000
Vitamins R0,25 R135 000
Bottle branding label (given) R0,15 R81 000
Fixed manufacturing overheads (R0,24 + R0,17 + R0,45) R0,86 R464 400
All-inclusive manufacturing costs R5,81 R3 137 400

 R3,80 x 540 000 = R2 052 000

 R3,35 [per question (c) + R0,45 (FMO per question (d) above] = R3,80
 R0,75 (given) X 540 000 = R405 000
 R0,25 (given) X 540 000 = R135 000
 (R0,24 + R0,17 + R0,45 (refer to question g(ii) above)) = R0,86
 540 000 x R0,86 = R464 400

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(h) Identify and briefly discuss four (4) qualitative factors from Aqua’s operations that could
possibly have a negative impact on the natural environment and on Aqua’s customers.
1. The harvesting of the natural fresh water from the (Bodibeng) mountain for commercial
purposes.

▪ Water is a natural resource that all living beings rely on for day-to-day survival.
▪ Traditionally water has always been accessible to everybody at no or little cost, however, the
emergence of many water-bottling companies (such as Aqua) mainly for commercial purpose is
threatening the right to this basic need for the majority of the people who might not afford to buy it.
▪ Being cognisant of the fact South Africa is a water-scarce country, Aqua’s harvesting of the water
for commercial purposes can easily be considered by many, including environmentalists as an
exploitation of the natural environment and an encroachment to the right to this basic need.
2. Aqua’s bottle-manufacturing plant is powered by coal.

▪ Coal is not regarded as an environmentally friendly form of generating energy.

▪ To generate the energy needed to operate the bottle-manufacturing plant, Aqua will need to burn
the coal which in turn release plumes of carbon dioxide into the atmosphere around the area
(environment) within which it operates.
▪ It therefore follows that the atmosphere and the air quality surrounding Aqua’s plant will be polluted
and thus negatively affecting the health of not only the staff of Aqua, but also of the
people/community in close proximity to the plant.
▪ The air pollution will also have a negative impact on the natural environment (i.e. plants and
animals) surrounding the plant and will further contribute to extreme global weather patterns (global
warming).
3. Aqua’s landfill site is the largest amongst its competitors.

▪ The fact that Aqua’s landfill site is the largest amongst its competitors suggests that the company
is disposing-off more waste than all its competitors and thus contributing more to damaging the
environment.
▪ Any over utilisation of land for the burying of waste, so produced from the plant, has the propensity
to damage Aqua’s reputation, especially considering that access to and ownership of land is
currently a contentious issue in South Africa.
4. Inadequate bottle-recycling strategy.

▪ Aqua is expected to be fully cognisant of the impact of its glass manufacturing operation on the
environment and thus must develop an adequate bottling-recycling strategy to amongst others:
curb its carbon footprint; lowering greenhouse gas emissions; reducing the need for raw materials;
and reducing landfills.
▪ Aqua’s failure to develop and adopt an adequate bottle-recycling strategy can be misconceived by
many environmentalists as well as its customers as a lack of commitment to reduce its operation’s
negative impact on the environment.
5. One of the ingredients in Aqua’s flavoured sparkling mineral water is flavouring sugars.

▪ Increased intake of sugar has been linked to health problems such as obesity, diabetes and tooth
decay.
▪ Aqua is therefore expected to consider the impact of its flavoured sparkling mineral water, which
contain flavouring sugars, on the health of its customers.
▪ It therefore goes without saying that, beyond profiteering from the sale of its flavoured sparkling
mineral water, Aqua should also raise awareness about the negative impact of sugary drinks on
the health of its customers.

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4.27 ZAMBANI-CHIPS (PTY) LTD

(a) Critically analyse the structure of Zambaa’s management incentive scheme. Limit your
analysis to qualitative factors only.
(i) A management incentive scheme should consist of a pool of performance measurement tools.
Zambaa’s scheme is not suitably designed, as it is based on a single measurement tool only, which
is return on investment (ROI).
(ii) A management incentive scheme should consider both financial and non-financial factors.
Zambaa’s scheme does not consider non-financial factors.
(iii) A management incentive scheme should encourage long-term planning. Return on investment can
encourage executive directors to focus on the short term by not investing in property, plant and
equipment to earn their bonuses, to the detriment of the company in the long term.
(iv) Return on investment is open to manipulation. The executive directors can manipulate the valuation
of the item, Intangible assets – Trademarks, that is included in the calculation of controllable
investment, as there is no active market for these assets.
(v) Return on investment is a relative measure that makes comparison easier. Zambaa can measure
its performance with relative ease and can compare its performance with that of similar-size
companies with ease, using return on investment.

(b) By reference to the 31 March 2018 actual results, determine whether or not the executive
directors of Zambaa are entitled to receive bonuses.

Achieved return on investment (ROI) = Controllable profit / Controllable investments

= R128 860 000 ÷ R434 000 000
= 29,69%
Conclusion:
Zambaa achieved ROI of 29,69%, this translated into an A “performance rating”. The executive directors
of Zambaa are therefore each entitled to receive a bonus of 80% of their annual remuneration of the
2018 financial year.

 Controllable profit calculation

Item Calculations R
Sales Given 345 000 000
Less: Controllable costs 216 140 000
Raw potatoes purchases Given 100 000 000
Direct labour Given 50 000 000
Spices, salt and other ingredients Given 19 500 000
Packaging costs Given 2 500 000
Variable manufacturing overheads Given 5 000 000
Fixed manufacturing overheads Given 20 000 000
Variable distribution costs Given 4 500 000
Director's remuneration* ((R6 000K / 50%) x 1,095) 13 140 000*
Allocated head office expenses Not controllable 0
Finance costs Given 1 500 000
Controllable profit R128 860 000

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*Director’s remuneration

The 2017 performance rating of the executive directors is given as “B”, which attracted a performance
bonus equivalent to 50% of the executive director’s remuneration. Therefore, the 2017 actual executive
director’s remuneration was R12 000 000, that is R6 000 000 / 50%. The 2018 actual executive
director’s remuneration is thus R12 000 000 + 9,50% = R13 140 000.

 Controllable investment calculation

Item Reasons R’000

Controllable investments 434 000
Property, plant and equipment Controlled by Zambaa 500 000
Intangible assets – Brand name registered in Zambaa’s name at CIPC 39 000
Trademarks
Trade receivables Centralised treasury responsibility 0
Less Long-term borrowings Controlled by Zambaa –105 000
Less Trade payables Centralised treasury responsibility 0

(c) From a performance measurement perspective, briefly discuss one reason supporting the
inclusion of Intangible assets – Trademarks in the calculation of the bonuses and also
discuss one reason supporting its exclusion.

(i) The item, Intangible assets – Trademarks, forms part of the non-current assets which Zambaa uses
in the manufacturing process of its potato chips and therefore, it should be included in the calculation
of controllable investments (bonus).

(ii) The item, Intangible assets – Trademarks, should be excluded from the calculation of controllable
investments, as the measurement thereof is highly subjective due to the lack of an active market.
Because of this subjectivity, it is extremely challenging to determine the appropriate value of this
intangible asset.

(d) Based on the actual results and the current cost allocation system, calculate what the
winning bidder’s price per kg of BBQ was for the Steinhopp bid.

The winning bidder’s price

Zambaa’s actual number of packets (units) manufactured in total (125 g each) 20 000 000
Actual packets manufactured in kg ((20 000 000 / (1 000 kg / 125 g)) 2 500 000
Total related manufacturing costs per kg (R159 314 000 / 2 500 000) R63,73
Plus: Profit according to the pricing policy (R63,73 x 6%) R3,82
Total bid price submitted per kg (R63,73 + R3,82) R67,55
The winning bidder's price (R67,55 – R0,12) R67,43

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 Total related manufacturing costs
Item Reason R
Raw potatoes purchases Manufacturing costs 80 000 000
Direct labour Manufacturing costs 40 000 000
Spices, salt and other ingredients Manufacturing costs 16 000 000
Packaging costs Manufacturing costs 2 000 000
Variable manufacturing overheads Manufacturing costs 4 000 000
Fixed manufacturing overheads Manufacturing costs 16 000 000
Variable distribution costs Not manufacturing costs 0
Production director’s remuneration Manufacturing costs 1 314 000
Administrative director's remuneration Not manufacturing costs 0
Allocated head office expenses Not manufacturing costs 0
Finance costs Not manufacturing costs 0
Total manufacturing costs R159 314 000
 R13 140k / 8 directors x 1 director (Production director) = R1 642,5k* x 20mil/25mil = R1 314 000

*Take note that only the production director’s remuneration forms part of the manufacturing costs.

(e) Identity and briefly discus seven (7) qualitative factors that Zambaa would have considered
before submitting the bid to Steinhopp.
No Identifying Factors Discussion
1. Availability of Whether the current maximum manufacturing capacity of 22 million
manufacturing capacity packets is sufficient to meet the required number of packets or if
additional/new capacity would have been required.

2. Impact on the existing The possible impact of the bid on Zambaa’s existing customer’s
customer goodwill loyalty and goodwill to the company should it be required to
sacrifice some packets from its regular market.

3. Possibility of future The possibility of Steinhopp becoming a regular customer, which

business may require capacity expansion.
4. Impact on the existing The possible increase in demand in the regular market, which may
market lead to lost orders/customers.
5. Steinhopp credit profile Zambaa should assess and the Steinhopp’s credit profile and
establish their ability to pay for the supplied packets.
6. Steinhopp’s corporate A proper consideration of these two factors will ensure that Zambaa
reputation and ethical does not associate itself with companies or organisations with
standing compromised business reputation and questionable/doubtful
ethical standing. This is to avoid possible negative publicity and/or
consumer backlash.
7. Steinhopp historical Zambaa should consider contacting some of Steinhopp’s historical
business relations and/or existing customers (mainly those with similar bids) to
establish Steinhopp’s business demeanor, ethics, reliability and
trustworthiness.
8. Possibility of cross-sell Establishing business relations with Steinhopp could present
Zambaa with an opportunity to expand its customer base with
Steinhopp’s clients.

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(f) Assuming that the proposed cost allocation system is adopted, allocate the total indirect
manufacturing overheads to BBQ and WLS for the financial year ended 31 March 2018.

Activity driver BBQ WLS

R’000 R’000
Ordering costs ((5/8) x R5 000K)) and ((3/8) x R5 000K)) 3 125 1 875
Quality ((20 000K/25 000K) x R7 000K)) and ((5 000K/25 000K) x R7 000K)) 5 600 1 400
Peeling and slicing ((2 500/3 125) x R8 000K)) and ((625/3 125) x 6 400 1 600
R8 000K))
Total indirect manufacturing overheads allocated R15 125 R4 875

Cross-check balance

With every ABC question, after you have allocated the given costs/overheads to the products, it is
important to cross check that the allocated amounts still add back to the given total costs/overheads. In
this instance, R15 125k allocated to BBQ plus R4 875k allocated to WLS must cross balance to R20
000k.

 Peeling and slicing calculation

Details BBQ WLS

Total annual manufactured packets in gram 20 000 000 5 000 000
Total annual manufactured in kilogram 2 500 000 625 000
Number of kilograms per run (given) 1 000 1 000
Number of production runs 2 500 625
Total production runs (2 500 + 625) 3 125

 20 000 000 x 125 g/1 000 gram = 2 500 000 kg

 5 000 000 x 125 g/1 000 gram = 625 000 kg
 2 500 000 / 1 000 (given) = 2 500 production runs
 625 000 / 1 000 (given) = 625 production runs

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(g) Calculate the target price of V-L.

Target price = Total cost of manufacture + Target mark-up (amount)

= R8,49 (given) + R8,05

= R16,54 per packet

 Target mark-up amount

= Invested capital x Target rate of return

Annual volume

= (R0 + R13 200 000)  x 9,15%

12 500 x 12

= R1 207 800
150 000

= R8,05

 Invested capital

Billboards marketing campaign – not capital investment 0

Capital invested in a new plant 13 200 000
Total capital invested R13 200 000

 Target rate of return

10% probability (10% x 11,50%) 1,15%

30% probability (30% x 9%) 2,70%
25% probability (25% x 10%) 2,50%
35% probability (35% x 8%) 2,80%
Target rate of return (1,15% + 2,70% + 2,50% + 2,80%) 9,15%

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4.28 S’KHOTHANE (PTY) LTD

(a) (i) Budgeted contribution per unit per sales channels, and briefly advise if any, a
channel that S’khothane consider closing down? [11]

Details Retail channel Online channel

R R
Sales price per unit 15 175 16 175
Less: Variable manufacturing costs per unit 6 070 6 070
Less: Variable selling costs per unit (given) 0 400
Contribution per unit R9 105 R9 705
Advice:
At R9 105, the budgeted contribution per unit from the retail channel is lower that the R9 705 budgeted
contribution per unit from the online channel. Therefore, based on the calculated budgeted
contributions per unit, S’khothane should consider closing down the retail channel.

 Variable manufacturing cost per unit

Cost item Cost per unit
Leather 4 500
Direct labour 300
Shoelaces 70
Specialised glue 75
Rubber sole 100
Innersole 315
Inspection and polish 10
Packaging box 200
VMO* 500
Total R6 070
VMO* = Variable manufacturing overheads
 R5 000(given) / 1 000m x 450 mm x 2 = R4 500
 R10 x 15 hours (12 hours / 0,8) x 2 = R300
 Standard idle time/standard clock hours: 2,2 hours(given) /11 hours (given) = 20%
 R35(given) x 2 = R70
 R37,50(given) x 2 = R75
 R50(given) x 2 = R100
 R450/1 000m x 350 mm x 2 = R315
 R5(given) x 2 = R10
 N40 000(given) x R0,005(given) = R200
 (R135k – R50k)/(220 – 50) = R500
 Retail channel: (R6 070/ 40%) x 60% = R9 105
 Online channel: [(R6 470 + 400)]/40% x 60% = R9 705
 (R6 070 x 100)/40 = R15 175; [(R6 070 + R400(given)] x 100/40 = R16 175

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(a) (ii) Assuming that S’khothane uses the retail store sales channel only, calculate the
budgeted margin of safety percentage for the 2018 financial year [5]

(Budgeted) margin of safety percentage formula =

Budgeted sales less budgeted break-even units

Budgeted sales

= 2 018 – 583
2 018

= 71,1%

 given
 Break-even units
Contribution per unit option Contribution margin ratio option
= Fixed costs/contribution per unit = Fixed costs/contribution margin ratio
= R5 299 500/R9 105 = R5 299 500/60% (given)
= 582,04 = R8 832 500
≈ 583 (rounded up) = R8 832 500/R15 175
= 582,04
≈ 583 (rounded up)

 Fixed costs
Retail cost items Yearly
R
Property rental expenses 600 000
Fixed distribution costs (only incurred for online) 0
Retail space rental expenses 3 480 000
Retail store staff costs 900 000
Manufacturing overheads 319 500
Total annual fixed costs R5 299 500

 Refer to question (a)(i) above

 2 000 m2 x R25 per m2 = R50 000 x 12 = R600 000
 R105 000 + R100 000 + R85 000 = R290 000 x 12 = R3 480 000
 R25 000 X 3 = R75 000 x 12 = R900 000
 R135k – (220 X 500) X 1.065 = R26 625 x 12 = R319 500

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(a) (iii) Briefly discuss 4 (four) qualitative factors that S’khothane would need to consider if
they were to decide to sell via the online sales channel only. [4]

1. Loss of potential new customers via the retail store walk-ins – By closing down the retail
stores, S’khothane will immediately loose the possibility of “new customers” and/or “repeat
customers” pull-in-factor offered by window-shopping and overall human curiosity from the
people passing-by the stores.

2. Online fraud – Online transactions always present an opportunity for online fraud (hacking,
phishing, identity fraud, fraudulent payments, etc.). These could increase the propensity for
possible reputational damage and/or litigation resulting from defraud and aggrieved customers.

3. Information technology (IT) infrastructure and human capital – The company will need to
consider its ability to attract and maintain highly knowledgeable and mostly specialised IT skills
to ensure business continuity and limited downtime. Furthermore, it must ensure that adequate
back-up and recovery plans are maintained.

4. Staff and cash safety at the retail stores – The continued selling via the retail channel present
safety risk to the retail staff considering the luxurious, high-value and the popular nature of the
Krocvellars.

5. The need to minimise and/or eliminate inventory misappropriation – S’khothane has

already suffered the misappropriation of inventory both in the 2017 and the 2018 financial years.
Although it is not clear how the inventory was misappropriated, this risk potentially emanates
from both internally (staff) and externally (external 3rd parties).

6. Increased returns of shoes – Online shopping eliminates the opportunity of in-store fitting by
the customers. Although the expectation is for the customers to always select the right shoe size,
colour etc., there is always a risk of human error. This could happen at various points of the
transaction. Therefore, the risk of shoe returns is increased with the online channel.

7. Loss of customers and/or negative impact on customer loyalty – Some customers prefer
the old-fashioned/conventional human intervention and the interaction with sales person via the
retail store. With going online only, there is a risk of losing these “old-fashioned” customers.

8. In-transit inventory safety – With the online selling, the risk of in-transit stock theft or
misappropriation (between the manufacturing factory and the retail stores) is reduced and/or
eliminated.

9. Consideration of the distribution/delivery of shoes – Due to increased online sales volumes,

the current distributors (VCC) could be overwhelmed. S’khothane will need to consider if VCC is
willing and able (capacity consideration) to continue with the distribution of the shoes to
customers.

10. Social and moral consideration relating to staff retrenchments – As a corporate citizen,
S’khothane has both social and moral obligation to consider the human factor relating to the
possible retrenchments of its retail store staff. The company can also consider the possibility of
retaining, retraining and redeploying these staff members to perform other functions within the
company.

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(a) (iii) Briefly discuss 4 (four) qualitative factors that S’khothane would need to consider if
they were to decide to sell via the online sales channel only. [4]

11. Consider the reaction of the trade union – South African labour market is highly unionised,
especially within industries perceived to be exploitive of labour. The possible retrenchment of the
retail store staff could solicit negative reaction from labour unions with possible business
interruptions and/or break of the social trust and contract.

12. Exposure to the international market – With one of the retail store located at the OR Tambo
International Airport, there always exist an opportunity for S’khothane to inadvertently access an
international market(s) via tourists and visitors buying the shoes. If the retail store channel is
closed, this potentially lucrative market could be lost.

13. Opportunity for predatory marketing by S’khothane’s close competitors – The closing down
of the retail stores could give the company’s close competitors an opportunity to immediately lease
those retail spaces and immediately have access to S’khothane’s long-standing clientele, by
design or by chance.

(b) Variances for the 2018 financial year [9]

i. Direct raw material purchase price variance for specialised glue only.
Alternative Details Actual price Standard/ Actual Variance
Budgeted quantity R
price
1 Specialised glue R0,45 R0,30 506 000 R75 900 A
2 Specialised glue R227 700 R151 800 n/a R75 900 A
3 Specialised glue R56,25 R37,50 4 048 R75 900 A

 R227 700/506 000 = R0,45

 R37,50(given)/125ml(given) = R0,30
 506 000/125mi = 4 048 lots of 125ml
 R227 700/4 048 = R56,25

ii. Direct raw material mix variance for leather and innersole only.
Direct raw Actual usage Actual usage Diff Standard Variance
material in actual in standard price R
proportions proportions
Leather 1 820 1 825 5 R5 000 R25 000 F
Innersole 1 425 1 420 -5 R450 R2 250 A
Total 3 245 3 245 R22 750 F

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(b) Variances for the 2018 financial year [9]

 Given
 2 000 (purchases given) – 180 (closing inventory given) = 1 820
 1 600 (purchases given) – 175 (closing inventory given) = 1 425
 3 245 X 450/800 = 1 825,31 ≈ 1 825
 3 245 X 350/800 = 1 419,69 ≈ 1 420
 1 820 + 1 425 = 3 245

iii. Direct labour idle time variance

Item Actual idle Standard Difference Standard Variance
hours allowed work R
idle hours hour rate
Direct labour 8 250 13 200 -4 950 R12,50 R61 875 F

 Given
 25 workers X 1,50 hours X 220 days = 8 250
 66 000hrs x 20% (see (a)(i) above) = 13 200
 R10 / (100% - 20% ) = R12,50

(c) Discuss four (4) ethical, social and legislative considerations that could possibly
disrupt and/or threaten the continued operations of S’khothane. [4]

1. Child labour – Some of the company’s factory staff are as young as 13 years. This practice is
a direct contravention of the South African Basic Conditions of Employment.

2. S’khothane pays its factory staff R10 per hour, a rate even lower that the current proposed
national minimum wage rate – The South African Parliament tabled the “national minimum
wage bill” proposing a national minimum wage of R20 per hour. With the majority of the South
African labour unions strongly opposing the R20 p/h as a “slave wage”, S’khothane’s R10 p/h
offer is bound to attract negative attention from the labour unions.

3. Women discrimination in the labour force – The company only employs men in its factory.
This can be viewed by many as unfair discrimination and unfair labour practice.

4. Exploitation of the vulnerable community – With the factory situated at a poverty-stricken

environment with unemployment ranging between 60% and 85%. S’khothane could socially be
perceived as being insensitive to the plight of the people it employs. The unreasonably long
working hours and “slavery wages” can be seen as exploitative and/or taking advantage of the
harsh economic hardship and desperate situation experienced by the surrounding community.

5. Possible clashes with the trade unions – At face value, it appears that the location of the
factory site was only for S’khothane to benefit economically. This can lead to continuous clashes
with trade unions for various reasons (some of which have already been discussed above).

6. The use of the leather from an endangered species – The company might find itself at odds
with environmentalist and/or animal sensitive organisations/citizens for using leather from an
endangered crocodile.

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(c) Discuss four (4) ethical, social and legislative considerations that could possibly
disrupt and/or threaten the continued operations of S’khothane. [4]

7. Possible political influence on contracts – The country is continuously debating corruption

allegations at the hands of what many see as “politically-connected people”. Unfortunately, more
often than not, the majority of “tenderpreneurs” tend to be politically connected and this could put
S’khothane under ethical and moral scrutiny. For example, an intervention by the “political heavy-
weights” on the DEaT special order.

8. Suspicious social and ethical standing – At face value, S’khothane’s entire business model
appears to be grounded on political alignment and close proximity to key decision makers within
various layers of the state. This view, whether true or not, can cast serious doubt on the company’s
social and ethical standing, and therefore doubt on their company’s continued existence through
support from the public.
9. Cross border trading legislations – The shoeboxes are currently bought from a foreign supplier
(Dibemba Plc, a shoebox supplier from Nigeria). S’khothane ability to continue selling the shoes
uninterrupted in the short term, is therefore partially dependent on Dibemba’s ability and willing to
meet S’khothane’s shoebox requirements. Furthermore, any cross-border trading is subjected to
various trading legislations and regulations, both from the country of the seller and the country of
the buyer.

(d) Calculate the minimum transfer price.

[6]

Minimum transfer price = Total incremental costs + total lost contribution

units to transfer

= R222 090 + R57 150 = R138,31

2 019 (given)

 Total incremental costs

Cost items Per unit Units to Total
Costs (A) Transfer (B) Ax B
Direct raw material (given) R50 2 019 R100 950
Direct labour (given) R25 2 019 R50 475
Variable manufacturing overheads (given) R35 2 019 R70 665
Total variable manufacturing costs (vmc) R110 R222 090

 Total lost contribution: contribution per unit from external x sacrificed units
= (R150 – R110 (vmc) – R2,50 (external selling costs)] X 1 524 = R57 150
 Calculation of spare capacity
“Gross” available capacity given 2 500
“Net” available capacity 2 500 X 99/100 2 475
Current “gross” operating capacity given 2 000
Current “net” operating capacity 2 000 X 99/100 1 980
Spare capacity 2 475 – 1 980 495
 Calculation of lost/sacrificed units: 2 019(given) less 495 = 1 524

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(e) Special order from the Department of Economic Affairs and Trade (DEaT) [11]
(i) Calculate the special-order price based on S’khothane’s special pricing policy
Cost item Calculations R
Direct manufacturing costs R7 300(given) x 1 400(given) 10 220 000
Variable manufacturing overheads R500 x 1 400(given) 700 000
Fixed manufacturing overheads Irrelevant 0
Online variable selling & distribution cost R400 x 1 400(given) 560 000
Fixed selling & distribution costs Irrelevant 0
Property rental expenses Irrelevant 0
Specialised cotton-like cloth cover R5(given) x 1 400(given) x 2 14 000
National coat of arms R15(given) x 1 400(given) 21 000
Delegate name printing R7,50(given) x 50(given) x 2 750
Lost contribution R8 700(given) x 419 3 645 300
Total special-order costs R15 161 050
Profit R15 161 050 x 45% R6 822 472,50
Special order price R15 161 150 x 1.45 R21 983 522,50

Comparison: At R21,9m, the special-order price is notably lower than the R30m offered by the DEaT.

 From question a(i)

 Lost/sacrificed units
Maximum capacity in units 3 000
External sales 2 019
Spare capacity 3 000 less 2 019 981
Special order units given 1 400
from spare capacity 981
from external sales sacrifice 1 400 less 981 419

(ii) Comment:
At face value, it appears that there might be merits to the allegations because it is strange that the
DEaT offered S’khothane R30 million for goods valued at R21,9 million, an overpayment of over
R8 million. Coincidentally, the special order only came through after S’khothane failed to acquire
PlatBox. Furthermore, it appears that the Centralised Treasury Department was reluctant and/or had
reservations about this special order and was only “convinced” otherwise after a special intervention
by the “political heavy-weights”. Lastly, the fact that the full payment for the special order was
effected immediately and probably without proper supply chain procedures, might also raise
questions. However, having said that, allegations will always remain just that, allegations, until proper,
valid and legally enforceable evidence is presented and acceptable in a court of law.

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4.29 TZANEEN TRAMPOLINES (PTY) LTD

(a) Prepare the budgeted statement of profit or loss (income statement) of TT for the 2018
[15]
financial year.

Statement of profit or loss (income statement) HT DT

(R) (R)

Sales  48 000 000 54 000 000

Less: Cost of Sales 33 950 000 38 730 000
Opening inventory - -
Plus: Variable manufacturing costs*:
(R5 325 x 6 000; R1 985 x 18 000 OR per below 31 950 000 35 730 000
Tubing
(R3 600 x 6 000; R900 x 18 000) 21 600 000 16 200 000
Steel springs
(R550 x 6 000; R400 x 18 000) 3 300 000 7 200 000
Jumping mat fabric
(R200 x 6 000; R150 x 18 000) 1 200 000 2 700 000
Safety pads
(R110 x 6 000; R80 x 18 000) 660 000 1 440 000
Direct labour
(R800 x 6 000; R400 x 18 000) 4 800 000 7 200 000
Variable manufacturing overheads
(R65 x 6 000; R55 x 18 000) 390 000 990 000
Plus: Fixed manufacturing cost: 2 000 000 3 000 000
Less: Closing inventory - -
Gross profit 14 050 000 15 270 000
Less: Non-manufacturing cost 330 000 990 000
Variable selling and administrative costs 300 000 900 000
Fixed selling and administrative costs 30 000 90 000
Less: Other operating costs 700 000 1 436 000
Variable insurance cost 150 000 486 000
Fixed insurance cost 150 000 150 000
Administrative staff costs 400 000 800 000

Budgeted profit R13 020 000 R12 844 000

*Take note: For this question, an excellent examination technique would be to combine all the
variable manufacturing costs into one line instead of reflecting each line separately.

 Sales
HT: 24 000 X ¼ = 6 000 units X R8 000 (given) = R48 000 000
DT: 24 000 X ¾ = 18 000 units X R3 000 (given) = R54 000 000

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(a) Prepare the budgeted statement of profit or loss (income statement) of TT for the 2018
[15]
financial year.
 Variable manufacturing costs
Cost element Calculations
HT DT
HT DT
Tubing R150 x 24 R150 x 24 R3 600 R900
Steel rings R5 x 110 R5 x 80 R550 R400
Jumping mat fabric R50 x 4 R50 x 3 R200 R150
Safety pads R1 x 110 R1 x 80 R110 R80
Direct labour R100 x 8 R100 x 4 R800 R400
Variable manufacturing overheads R10 x 6,5 R10 x 5,5 R65 R55
Total variable manufacturing costs R5 325 R1 985

 Fixed manufacturing overheads

HT: R800/R100 (given) = 8 work hours per unit X 6 000 units = 48 000 work hours
DT: R400/R100 (given) = 4 work hours per unit X 18 000 units = 72 000 work hours
Total work hours = 48 000 + 72 000 = 120 000 work hours
HT: 48 000/120 000 X R5 000 000 (given) = R2 000 000
DT: 72 000/120 000 X R5 000 000 (given) = R3 000 000
 Variable selling and administrative costs
HT: 6 000 X R50 = R300 000
DT: 18 000 X R50 = R900 000
 Fixed selling and administrative costs
HT: R120 000 X 6 000/24 000 = R30 000
DT: R120 000 X 18 000/24 000 = R90 000
 Variable insurance costs
Cost element Calculations
HT DT
HT DT
Probability 1 R30 x 10% R20 x 15% R3,00 R3,00
Probability 2 R15 x 20% R40 x 25% R3,00 R10,00
Probability 3 R40 x 25% R30 x 40% R10,00 R12,00
Probability 4 R20 x 45% R10 x 20% R9,00 R2,00
Expected variable insurance cost per unit R25,00 R27,00
Budgeted sales units 6 000 18 000
Expected total variable insurance cost per product R150 000 R486 000
 HT: R3 + R3 + R10 + R9 = R25,00; DT: R3 + R10 + R12 + R2 = R27,00
 HT: R25 X 6 000 = R150 000; DT: R27 X 18 000 = R486 000
 HT: R25 000 X 12 X ½ = R150 000; DT: R25 000 X 12 X ½ = R150 000
 HT: R1 200 000 X 1/3 = R400 000; DT: R1 200 000 X 2/3 = R800 000

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(b) Calculate the variances for the 2018 financial year. [16]

(i) Sales mix variance for HT, DT and in Total (5)

Product Actual Actual sales Difference Standard Sales margin

sales volume in budgeted in volume gross profit mix variance
volume proportions
units R R
units units

HT 5,000.00 6,250.00 -1 250 2 341,67 2 927 087,50 A

DT 20,000.00 8,750.00 1 250 848,33 1 060 412,50 F

Total 25,000.00 25,000.00 R1 866 675 A

 HT: 25 000 x 6 000/24 000 = 6 250; DT: 25 000 x 18 000/24 000 = 18 750
 Refer to question (a) calculation 
 Standard gross profit HT: R14 050 000/6 000 units = R2 341,67
 Standard gross profit DT: R15 270 000/18 000 units = R848,33
 Refer to question (a), gross profit amount (TT uses absorption costing system)

(ii) Tubing purchase price variance for HT only (2)

Product Actual Standard Actual Purchase

purchase price Difference volume price
per meter purchase price purchased variance
per meter

HT R152,50 R150,00 -R2,50 121 000 R302 500 A

 given
 Actual volume purchased: R18 452 500/R152,5 = 121 000

(iii) Jumping mat fabric usage variance for HT only (2)

Product Actual Standard quantity Difference Standard Usage

quantity allowed of actual price
production m2 variance
m2 R/m 2
m2 R

HT 20 500 20 000 -500 50 R25 000 A

 Actual quantity issued: R1 025 000/50m2 = 20 500m2

Standard quantity allowed for actual production: 4m2 per unit x 5 000 units = 20 000m2
 Given

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(b) Calculate the variances for the 2018 financial year. [16]

(iv) Direct labour rate variance for DT (3)

Product Actual rate per Standard Difference in Actual clock Direct labour
rate rate variance
clock hour rate per hours

clock hour

DT R80 R90 R10 100 000 R1 000 000 F

 Actual rate per clock hour = given

 Standard clock rate per hour = R100 per work hour x 90% = R90 per clock hour
 Actual clock hours = R8 000 000/R80 = 100 000

(v) Direct labour idle time variance for DT (4)

Product Allowed Actual Difference Standard Idle time

variance
idle idle work hour

hours hours rate

DT 10 000 20 000 -10 000 R100 R1 000 000 A

Direct labour idle time variance for DT (Alternative calculation)

Product Allowed Actual Difference Standard Idle time
productive productive variance
hours hours work hour

rate

DT 90 000 80 000 -10 000 R100 R1 000 000 A

 Allowed idle hours: Actual clock hours x allowed idle time %

 R8 000 000/R80 = 100 000 actual clock hours x 10% = 10 000 allowed idle hours.
 Actual idle hours: Actual clock hours x actual idle time %
100 000 actual clock hours x (2 x 10%) = 20 000 actual idle hours.
 given
 100 000 x 90% = 90 000
 100 000 x 80 % = 80 000

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(c) Draft a report to the CFO and explain the following four costing questions: [11]
REPORT TO THE CHIEF FINANCIAL OFFICER
RE: Costing terms and concepts
From: Unisa student
Date: Day-Month-Year
Allow me to explain my understanding of the following cost terms and classifications thereof.

COMMON FIXED COST

Fixed costs can be classified into direct/traceable fixed costs (which relates directly to a certain
product) or common fixed costs, that is, those that are not directly traceable to a product.
Not directly traceable: Common fixed cost does not relate to a certain product and can only be
avoided if none of the products in the product mix are produced.
Shared between products: Common fixed costs can therefore be regarded as fixed costs that are
shared between different products or fixed costs that supports more than one product.

DIFFERENCE BETWEEN A SEMI-VARIABLE

COST AND A SEMI-FIXED COST

Semi-variable cost
This cost is also referred to as mixed costs. Semi-variable
or mixed cost contains both fixed and variable
cost. The mixture of cost includes a fixed amount within
a relevant range of output and an amount that varies
proportionately with output changes.

Semi-fixed cost
This cost is also referred to as stepped-fixed costs.
It has costs that remain fixed within specified
activity levels for a given amount of time but
which eventually increase or decrease by a constant
amount at critical activity levels; also known as
semi-fixed costs.

REASONABILITY OF CLASSIFYING LABOUR COST AS A VARIABLE COST IN SA

Labour cost should only be classified as variable if there is a direct/measurable relationship between
output and cost. It is therefore unlikely that the given indirect cost (labour) can be variable as
employees are sometimes paid while they are not working, for example if a protected strike action
takes place, the employees will still be paid. The current labour legal environment makes it unlikely
that any permanent employees can be classified as variable. As such cost classification has a direct
impact on B/E and margin of safety, it should be reconsidered.

LEARNING CURVE - Learning curve can be applied to direct labour expense line-item
I trust you found my insights helpful for accurate decision-making.

Kind Regards,
Unisa student.

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(d) Calculate the annual budgeted number of units per product type that TT will need to
[8]
manufacture and sell to achieve a monthly target profit of R750 000 during the 2018.
Budgeted break-even sales quantity = Fixed costs + Target profit .
Weighted contribution

= R15 620 000 

R5 414

= 2 885,11
≈ 2 886 batches (ALWAYS ROUND UP)

Number of units for HT: 2 886 x 1 = 2 886 trampolines

Number of units for DT: 2 886 x 3 = 8 658 trampolines

 Fixed costs + target cost

Fixed manufacturing overheads given R5 000 000
Fixed insurance costs R25 000 x 12 months R300 000
Fixed selling costs given R120 000
Fixed administrative staff costs given R1 200 000
Target profit R750 000 x 12 months R9 000 000
Total R15 620 000

 Calculation of weighted contribution according to standard sales mix:

Details Calculations HT DT
Sales given R8 000 R3 000
Less: Variable manufacturing costs see question (a) R5 325 R1 985
Less: Variable selling costs given R50 R50
Less: Variable insurance costs see question (a) R25 R27
Contribution R2 600 R 938
Standard sales mix (SSM) given 1 3
Contribution x SSM R2 600 x 1; R938 x 3 R2 600 R2 814
Weighted contribution R2 600 + R2 814 R5 414

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(e) Briefly explain the characteristics that TT’s CFO would have considered in the decision
to implement the most optimal costing system when comparing the ABC system to the [3]
traditional costing system.
1. Levels of competition: If the competition in the market is intense, then acquiring a sophisticated
ABC system might be necessary. As trampolining is becoming a popular sport, this argument is in
favour of acquiring an ABC system to give TT the “edge”.

2. Non-volume-related indirect costs: If the company has non-volume-related indirect costs that
are a high proportion of total indirect costs – an ABC system might be necessary. In the case of
TT, bending and shaping of the tubes, which accounts for the biggest portion of the fixed
manufacturing overheads, is still volume related (driven by machine hours)

3. Product diversity: TT’s products do not consist of a diverse range of products. They sell two
types of trampolines. The two trampolines however do consume the fixed manufacturing
overheads in different proportions.

4. Specialisation: TT is not a highly specialised company.

5. Cost vs benefit: The cost of acquiring the ABC system should be outweighed by the benefit
acquired from implementing the ABC system. If the accuracy of cost allocations does not lead to
much improved decision making as a result, then TT may decide not to implement the ABC
system.
Source: (Drury, 2015, 9th edition: 272)

(f) Calculate the total budgeted fixed manufacturing overheads per unit for the 2018
financial year allocated to each product type, if TT decides to implement an activity- [10]
based costing (ABC) system.

Overheads item HT DT
Bending and shaping of the 39 000 x R16,09 = 99 000 x R16,09 =
tubes R627 510 R1 592 910

Cutting of the jumping mat fabric 25 662 x R3,08 = 38 493 x R3,08

R79 038,96 = R118 558,44

Quality inspection costs 3 000 x R281,25 = 1 800 x R281,25

R843 750 = R506 250

Machine set-up costs 12 x R25 625 = 36 x R25 625 =

R307 500 R922 500

Total (A) R1 857 798,96 R3 140 218,44

Number of units (B) 6 000 18 000
Cost per unit (A/B) R309,63 R174,46

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(f) Calculate the total budgeted fixed manufacturing overheads per unit for the 2018
financial year allocated to each product type, if TT decides to implement an activity- [10]
based costing (ABC) system.
 Calculation of activity rates:

Cost driver HT DT Total Activity Rate

Machine hours 39 000 99 000 138 000 R16,09
Cutting time hours 25 662 38 493 64 155 R3,08
Number of inspections 3 000 1 800 4 800 R281,50
Number of set-ups 12 36 48 R25 625

 HT: R65(given)/R10(given) = 6,5 hours per unit X 6 000 units = 39 000 machine hours
 DT: R55(given)/R10(given) = 5,5 hours per unit X 18 000 units = 99 000 machine hours
 R2 220 000 / 138 000 (39 000 + 99 000) = R16,09
 HT: 65 000 hours less (0,80% + 0,50%) = 64 155 X 40% = 25 662
 DT: 50 000 hours less (0,80% + 0,50%) = 64 155 X 60% = 38 493
 (R200 000 x 98,70%) / (25 662 + 38 493) = R3,08
 HT: 6 000/2 = 3 000
 DT: 18 000/10 = 1 800
 R1 350 000 / (3 000 + 1 800) = R281,50
 HT: 6 000/500 = 12
 DT: 18 000/500 = 36
 R1 230 000/ (12 + 36) = R25 625

(g) Assume that both the jumping mat fabrics and the direct labour hours were not readily
available and were limited to 60 000 m2 and 80 000 work hours, respectively, for the 2018
[13]
financial year budget.
1. Establishing the sufficiency of the available resources
Details Jumping mat fabrics Direct labour
HT DT Total HT DT Total
Required/needed 24 000 54 000 78 000 48 000 72 000 120 000
Available (given) 60 000 80 000
Shortage 60 000 – 78 000 -18 000 120 000 – 80 000 -40 000
Both the jumping mats fabrics and the direct labour hours are insufficient and thus limiting factors
 HT: 6 000 x 4m2 = 24 000; DT: 18 000 x 3m2 = 54 000
 24 000 + 54 000 = 78 000
 HT: 6 000 x 8 = 48 000; DT: 18 000 x 4 = 72 000
 48 000 + 72 000 = 120 000
Comment: Both the jumping mat fabrics and the direct labours are not sufficiently available to meet
the 2018 financial year-end manufacturing requirement. Both this two resources are limiting factors

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(g) Assume that both the jumping mat fabrics and the direct labour hours were not readily
available and were limited to 60 000 m2 and 80 000 work hours, respectively, for the 2018 [13]
financial year budget.
2. TT should use linear programming to calculate optimum mix (Drury, 2015: 674).
3. Objective function and other relevant equations:

3.1. Objective function:

Maximise 2 600 HT + 938 DT

3.2. Non-negativity constraints:

HT >= 0; DT >= 0;

3.3. Sales demand constraints:

HT <= 6 000; or 0 <= HT <= 6 000
DT <= 18 000; or 0 <= DT <= 18 000

3.4. Direct labour work hours constraint:

8HT + 4DT <= 80 000

3.5. Jumping mat fabric constraint:

4HT + 3DT <= 60 000

 Refer to question (d) calculation 

 Refer to question (d) calculation 

(h) Determine the minimum transfer price per unit that the Springs Division will be willing to
[8]
transfer one spring to the Trampoline Division.
Minimum transfer price of transferring division =
[Total incremental cost (all units to be transferred) + total opportunity costs (from external sales
forfeited)] ÷ total number of units to be transferred.
How many units of sales will be forfeited/loss?

Available capacity in units 3 000

External demand units 1 350

Spare capacity in units (3 000 less 1 350) 1 650

Less: Transfer requirements 2 500

Lost/forfeited units (2 500 less 1 650) 850

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(h) Determine the minimum transfer price per unit that the Springs Division will be willing to
[8]
transfer one spring to the Trampoline Division.

Incremental costs

Direct material R2

Direct labour R1

Variable manufacturing 0,5

External variable selling cost* R0

Variable cost per unit R3,5

Total incremental cost (R3,5 x 2 500 units) R8 750

(* irrelevant – only incurred if sold to external customers)

Total opportunity costs from 850 units sales

forfeited

External selling price R5

Less: Variable cost R3,5

Less: External variable selling 0,3

Opportunity cost per unit R 1,20 R1,2

Total opportunity cost R1,20 x 850 R1 020

Total incremental cost (as per above) R8 750

Total opportunity cost (as per above) R1 020

Total cost to transfer (R8 750 + R1 020) R9 770

Total number of units to be transferred 2 500

Minimum transfer price per unit

(R9 770 / 2 500) R3,91

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(i) List three (3) qualitative factors that TT should have considered before the acquisition of
[3]
Springs Galore CC.
1. The mission, vision and strategy of Springs Galore CC compared to that of the new group.

2. The impact that the brand value of Springs Galore CC will have on the new group.

3. The quality of the springs that Springs Galore CC manufacture.

4. The impact on the business relations with TT’s current springs suppliers.

5. Work morale of the employees since they now have to operate within a divisionalised structure.

6. Possible work culture clashes and the possible inability to integrate the employees from the two
companies into one group.

7. Possible implications of undue pressure and expectation on Ms. Lerato Ndlovu to replicate her
impeccable performance that earned her the “TopNotch Quality Manager” award.

8. Possible reluctance and pushback by the other managers on the “imposition” of Ms. Lerato Ndlovu’s
good leadership qualities.

9. The performance of Springs Galore CC used to be measure using ROI. How will the employees and
managers regard the new performance measurement system?

10. Similar leadership styles result in a strategic fit and an environment which is more conducive for
merging.

(j) Calculate, compare and briefly discuss the actual residual income of the two divisions [13]
Residual income = Controllable profit – (cost of capital of controllable investment)

Residual income Springs Division = R2 080 650,68 – (R4 429 600 x 12% x 1/12)
= R2 080 650,68 – R44 296
= R2 036 354,68

Residual income Trampoline Division = R6 712 141,10 – (R23 512 850 x 10% x 1/12)
= R6 712 141,10 – R195 940,42
= R6 516 200,68

The comparison of the divisions based on TT’s current performance measure would seem unfair and
biased. This is because the figures used to calculate residual income are in absolute terms and not
expressed as percentages. Based on the residual income approach, the Trampoline Division appears
to be quantitatively performing better than the Springs Division. However, the total investment (R4,4m
million in the Springs Division and R23,5m in the Trampoline Division) made in each division cannot be
underplayed and should also be considered when assessing the performance of a manager and/or
division. Hence, it would rather be sensible to also consider and/or implement performance measures
such as return on investment (ROI) which also considers the extent of the investment made in the
division.

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(j) Calculate, compare and briefly discuss the actual residual income of the two divisions [13]
 Controllable profit:
Springs Trampoline
Division Division
R R
Operating profit (given) 2 475 000 7 240 000
Less: Operating expenses 394 349,32 527 858,90
Head office expenses 0 0
Staff costs – administrative staff 0 0
Staff costs – factory staff 206 250 306 000
Rates and taxes – administrative building 0 0
Rates and taxes – factory building 8 250 6 500
Finance costs on bond – administrative building 0 0
Finance costs on bond – factory building 124 849,32 150 158,90
Legal expenses 55 000 65 200
Controllable profit R2 080 650,68 R6 712 141,10

 Springs: R275 000 x 75% = R206 250

 Trampoline: R408 000 x 75% = R306 000
 Springs: R14 700 000 x 10% x 31/365 = R124 849,32
 Trampoline: R17 680 000 x 10% x 31/365 = R150 158,90
 June 2018 factory building interest: (R123 287,67/R15 000 000) x (365/30) = 10% p/a OR
 July 2018 factory building interest (R126 123,29/R14 850 000) x (365/31) = 10% p/a
 June 2018 factory building interest: (R147 945,21/R18 000 000) x (365/30) = 10% p/a OR
 July 2018 factory building interest (R151 517,81/R17 840 000) x (365/31) = 10% p/a

 Controllable investment
Springs Trampoline
Division Division
R R
Total assets (given) 43 180 000 45 500 500
Less: Administrative buildings 3 345 000 0
Controllable assets 39 835 000 45 500 500
Less: controllable liabilities 35 405 400 21 987 650
non-current liabilities (given) 35 175 000 18 500 000
less: Administrative property bonds 3 345 000 0
plus: current liabilities 3 575 400 3 487 650
Controllable investments R4 429 600 R23 512 850

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4.30 UGOGO BAKKER (PTY) LTD

a. Assist Ms Poppy Smith by

i. Calculating whether EB will be able to manufacture the required budgeted number of CC
and CM biscuits for the month of November 2018.
Hours (minutes) available – Hours (minutes ) required = shortage/surplus
1 778① hours – 1 890 hours = 112 hours shortage
106 680 minutes – 113 400 minutes = 6 720 minutes shortage
① Hours (minutes) available Alternative 1 Alternative 2
Total ovens 10 12
Days 22 22
Hours 7 7
Maximum available hours 1 540 1 848
(10 x 22 x 7); (12 x 22 x 7) 92 400 mins 110 880 mins
Plus(Less): broken time (2 x 17 x 7 ); (2 x 7 x 5) 238 (70)
Total available hours 1 778 1 778
106 680 mins 106 680 mins
 22 days less 5 days = 17 days

 Hours (minutes) required CC CM Total hours

Budgeted number of units 3 000 2 800
Baking hours per unit 0,35 0,30
(R4,20/R12 per hour; R3,60/R12 per hour)
Baking minutes per unit 21 18
Total number of hours 1 050 840 1 890
Total number of minutes 63 000 50 400 113 400

ii. Budgeted monthly optimum manufacturing mix for EB for the month of November 2018.
Details CC CM
R R
Sales price 40,00. 35,00.
Prime costs (21,75) (17,90)
Variable manufacturing overheads (4,00) (4,00)
Variable selling costs (2,00) (2,00)
Contribution per unit R 12,25 R 11,10
Limiting factor: Baking hours per unit (from a(i)) 0,35 0,30
Limiting factor: Baking minutes per unit 21 18
Contribution per limiting factor (CPLF) (hours) R 35 R 37
(R12,25/0,35; R11,10/0,30)
Contribution per limiting factor (minutes) R0,58 R0,62
(R12,25/21; R11,10/18)
Ranking based on CPLF 2 1
Optimum manufacturing mix 2 680 2 800

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 Given
 938/0,35 hrs of 56 280/21 mins = 2 680 units
 1 778 hrs(from (a(i) above) – 840 hrs(a(i) above) = 938 hrs
 106 680 mins(from (a(i) above) – 50 400 mins(a(i) above) = 56 280 mins

b. Prepare MB’s actual quantity statement for October 2018.

Alternative 1: using kilograms

Physical units Equivalent units

Direct
Input Output Conversion
Details raw materials
kg kg kg % kg %
200 Opening WIP
1 300 Put into production
Completed from:
Opening work-in-progress 188 0 0 75 40
Current production 912 912 100 912 100
Completed and transferred 1 100 912 987
Normal loss 90  
Abnormal loss 40 40 32 80
Closing WIP 270 270 100 243 90
1 500 1 500 1 222 1 262

 Given
 1,3 tonne x 1 000 kg = 1 300 kg
 200 kg x 94% (100% less 6% normal loss) = 188 kg
 188kg x 40% = 75 kg (rounded to nearest unit of measure (kg))
 2 200 units x (500 g / 1 000 g) = 1 100 kg
 1 100 kg completed and transferred – 188 kg = 912 kg
 (200 kg + 1 300 kg) input x 6% = 90 kg
 Balancing amount: [1 500 kg (200 + 1 300) – 1 100kg – 90kg – 270kg] = 40kg
 40 kg x 80% = 32 kg
 270 kg x 90%= 243 kg

 Take note: The given scenario allowed for the short-cut method to be used. In this instance and any
other similar instances, the short-cut method must be used.

Alternative 2: using units

Take note:

The required quantity statement for this question could also be prepared in terms of units as a unit of
measure, that is, biscuit packets of 500 grams each. Although the Alternative 2 option is not reflected,
the same principles as applied in Alternative 1 are equally applicable to Alternative 2.

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c. Based on your answer in (b) calculate MB’s equivalent cost per unit for October 2018.
Alternative 1: using kilograms

Unit cost statement Total Direct raw Conversion

material costs costs
(kg) R
R R
Opening WIP 10 000 0 0
Current production costs
Direct raw material 25 100 25 100 0
Direct labour & manufacturing overheads 75 300 0 75 300
Normal loss scrap value (900) (900)
Total R 109 500 R 24 200 R 75 300

Equivalent cost per kg R79,47 R19,80 R59,67

 Given
 90kg (from question (b) calculation  above) x R10 = R900
 R24 200/1 222 (from question (b) above) = R19,80
 R75 300/1 262 (from question (b) above) = R59,67
 R19,80 + R59,67 = R79,47

d. Prepare MB’s statement of profit or loss and comprehensive income (income statement)
for the month of October 2018.
Details Amount
Revenue 176 000

Cost of sales (86 952)

Opening work-in-progress (10 000)
Direct raw material (23 404)
Direct labour & manufacturing overheads (73 394)
Less: Closing work-in-progress 19 846

Abnormal loss (2 301)

Gross profit R86 747
Distribution cost (9 600)
Fixed distribution cost (5 000)
Variable distribution cost  (4 600)

Depreciation (2 000)

Net profit R 75 147

 Given
 2 200 units x R80 = R176 000
 R4 000 + R6 000 = R10 000

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 (912kg x R19,80 = R18 058) + (270kg x R19,80 = R5 346) = R23 404
 (987kg x R59,67 = R58 894) + (243kg x R59,67 = R14 500) = R73 394
 (270kg x R19,80 = R5 346) + (243kg x R59,67 = R14 500) = R19 846
 Abnormal loss R
Direct raw material (40kg x R19,80) 792
Direct labour & manufacturing overheads (32kg x R59,67) 1 909
Total cost R2 701
Scrap value (40kg x R10) (400)
Abnormal loss R2 301

 2 200 units/48 units per pallet = 45,8333. Rounded up to 46 x R100 per pallet = R4 600
 (R130 000 – R10 000)/(5 year x 12 months) = R 2 000 per month

e. With the imminent retirement of Ms Ugogo Bakker briefly explain to her two daughters,
five (5) benefits of divisionalising the two bakeries, with each daughter independently
managing one bakery.

1) Divisionalisation can improve the quality of decisions made because the two daughters (divisional
managers) know the savoury and sweet biscuit market (local conditions) and are able to make
business decision and judgments that are more informed.
2) Decisions are made more quickly because information does not have to pass along the chain of
command to and from Ugogo Bakker (top management).
3) The delegation of responsibility to the two daughters and the freedom to make decisions should
motivate the two daughters to execute their responsibilities well.
4) Ms Ugogo Bakker (top management) is freed and allowed to focus on strategic functions and/or
decisions for the bakeries.
5) Divisionilisation provides the two daughters with greater freedom, thus making their activities
more challenging and providing the opportunity to achieve self-fulfilment.
6) It provides valuable training ground for the two daughters by giving them experience of managerial
skills in a less complex environment than that faced by managing the entire UB.
7) Unprofitable activities will be identified quickly by the daughters and will either be eliminated or
turned around.
8) Divisionalisation can create healthy competition between the two sisters to the benefit of the entire
company.

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f. Recommend to UB whether or not the special offer from New Mill should be accepted.
Support your recommendation with the appropriate and relevant calculations.

Comprehensive approach Current supplier New supplier

(Golden Mills) (New Mill)
R R
Purchase price 192 000,00  168 000,00
Ordering cost 9 600,00  28 800,00 
Holding cost 9 535,20 5 365,80
Normal 8 220,00  4 065,00 
Safety stock 1 315,20  1 300,80 
Total R 211 135,20 R 202 165,80
Net saving: R202 165,80 less R211 135,20 = R8 969,40

Incremental approach Movement

Saving in purchase price 192 000,00 - 168 000,00 24 000,00.
Increase in ordering cost 9 600,00 - 28 800,00  (19 200,00)
Saving in holding cost 4 169,40
Saving in Normal 8 220,00 - 4 065,00 4 155,00
Saving in Safety stock 1 315,20 - 1 300,80 14,40
Net saving R 8 969,40

 24 tonnes (given) x 1 000 = 24 000 kg x R8 = R192 000

 24 000 kg x R7 = R168 000
 24 000 kg/ 3 000 kg per order = 8 orders x R1 200 = R 9 600
 24 000 kg/ 1 500 kg per order = 16 orders x R1 800 (R1 200 x 1,50) = R 28 800
 R5 + (R8 x 6%) = R5,48 x (3 000 kg/2) = R8 220
 R5 + (R7 x 6%) = R5,42 x (1 500 kg/2) = R4 065
 R5 + (R8 x 6%) = R5,48 x (24 000 kg/300 days x 3 days) = R1 315,20
 R5 + (R7 x 6%) = R5,42 x (24 000 kg/300 days x 3 days)= R1 300,80

Recommendation:
UB should accept the offer from New Mills as it will result in a saving of R8 969,40 (R211 135,20 –
R 202 165,80)

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4.31 AFRiKAN-ROCK CEMENTS FIRST (PTY) LTD

(a) Briefly comment on Dr. Myburgh’s response regarding her brewing legal woes. [3]
▪ Dr. Myburgh is a registered CA (SA). Therefore, the requirements of the “Code of Professional
Conduct of the South African Institute of Chartered Accountants” (“the Code”) are applicable to
her.
▪ The issues about her brewing legal woes appears to be centered around her integrity and ethical
behaviour.
▪ In accordance with the Code, a professional accountant shall comply with “integrity” as one of the
five fundamental principles. That is, “to be straightforward and honest in all professional and
business relationships”.
▪ With reference to the given information, it would appear that Dr. Myburgh’s integrity and honesty
in dealing with African Roots Cements Plc could be questioned. This is primarily because:
- After 40 years of service at a company, it is expected for one to have amassed a great deal
of knowledge, experience and/or competitive advantage information about the company and
the industry they have served, more so when one was a CEO.
- Protecting a competitive advantage is pivotal to any company, especially from previous
employees who might possess critical and strategic information about the continued existence
of their previous employer.
- With the need to protect their market share, customer base and competitive advantage, it
would therefore seem unlikely that the intention of African Roots Cements Plc was to enter
into a three-months long restraint-of-trade agreement instead of a three-year long agreement.
Without any information suggesting the contrary, it would seem unusual for a company in a
specialised industry to arrange for a three months only restraint-of-trade agreement worth
R30 million.
- The fact that Dr. Myburgh states that R10 million a year is “peanuts”, seems to suggest that
she is aware that the true restraint-of-trade agreement term is three years and not three
months. That is, R10 million x 3 years is equivalent to the R30 million she received for
restraint-of-trade.
- Withholding the truth (keeping quite when she realised that there was a mistake in the
contract) would also amount to dishonesty.
- Furthermore, the name chosen by Dr. Myburgh for her cement company (AfrikanRock
Cements (Pty) Ltd) closely resembles the name of her prior employer. If her intention was
honest, it would seem rational to choose a name that would not cause any confusion in the
market and/or industry.

(b) Prepare ARC’s cement manufacturing/production budget in units for the financial
[8]
year ending 28 February 2019.

HdC MfC LdC FtC Total

Sales  148 800 52 500 142 500 238 300 582 100
Plus: Closing inventory 8 700 0 15 000 13 700 37 400
Available for sale 157 500 52 500 157 500 252 000 619 500
Less: Opening inventory 0 0 0 0 0
Units to manufacture 157 500 52 500 157 500 252 000 619 500

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(b) Prepare ARC’s cement manufacturing/production budget in units for the financial
[8]
year ending 28 February 2019. (continued)
 Given
 HdC:R14 136k/R95 = 148,8k; MfC:R1 050k/R20 = 52,5k; LdC:R9 690k/R68 = 142,5k;
FtC:R23 234 250/R97,50 = 238,3k
 Balancing figures
 No opening inventory was budgeted for.
 HdC: 11 812,5k/75kg = 157,5k; MfC: 262,5k/5kg = 52,5k; LdC: 7 875k/50kg = 157,5k;
FtC: 6 300k/25kg = 252k
 Kilograms needed for manufacturing:
Details Kilograms
Maximum normal capacity (given) 35 000 000
Current operating capacity (35 000 000kg x 75% (given)) 26 250 000
Kilograms needed to manufacture at current capacity
HdC: 26 250 000 kg x 45% (given) 11 812 500
MfC: 26 250 000 kg x 1% (given) 262 500
LdC: 26 250 000 kg x 30% (given) 7 875 000
FtC: 26 250 000 kg x 24% (given) 6 300 000

(c) Calculate the budgeted total contribution amount that ARC must generate for the
[4]
2019 financial year so as to break-even.
Take note: This question stated that “break-even units calculations are not required”. It was
therefore important for students to illustrate an understanding that, AT BREAK-EVEN POINT,
TOTAL FIXED COSTS = TOTAL CONTRIBUTION AMOUNT.

Budgeted annual fixed manufacturing overheads R5 670 000 

Budgeted annual fixed selling & distribution costs R158 880 
Total budgeted annual fixed costs (R5 670k + R158,88k) R5 828 880
Therefore, total contribution amount at break-even is R5 828 880

 Budgeted annual fixed manufacturing overhead:

Products Workings Budgeted allocation to
products
HdC 157 500 x R10 R1 575 000
MfC R0
LdC 157 500 x R10 R1 575 000
FtC 252 000 x R10 R2 520 000
Total R5 670 000

 Manufacturing units as per (b) above

 Given, fixed manufacturing overheads only allocated to joint products
 HdC:R44 640 + MfC:0 + LdC:R42 750 + FtC:R71 490 = R158 880

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(d)(i) Calculate the correct total annual budgeted joint costs to be allocated to the joint
[6]
product(s) during the 2019 financial year.

Details Amount
Budgeted direct raw material purchases 16 485 000
Budgeted crushing and mixing costs 4 515 000
Joint costs before by-product net revenue ( + ) 21 000 000
Less: Net revenue/proceeds from the by-product (MfC) (997 500)
Sales (given) 1 050 000
Less: Packaging costs (PC) 26 250
Less: Variable selling costs (VSC) 26 250
Joint costs to be allocated to joint products (+  + ) R20 002 500

 Total budgeted direct raw material purchases = R7 875k + R8 610k = R16 485 000
 Limestone purchases: (26 250 000 x 0,6) x R0,50 = R7 875 000
 Silica purchases: (26 250 000 x 0,4) x R0,82 = R8 610 000
 Given
 R1 050 000 (By-product sales) less (R0(JC) + R26 250(PC) + R26 250(VSC)) = R997 500
 Current operating capacity in kilograms as per (b) calculation  above

(d)(ii) Allocate the correctly calculated total annual budgeted joint costs in (d)(i) above to
[3]
the joint product(s).

Products Allocation workings Allocated

joint costs
HdC 20 002 500 x 11 812 500/25 987 500 R9 092 045,45
MfC MfC is a by-product and not allocated joint costs R0
LdC 20 002 500 x 7 875 000/25 987 500 R6 061 363,64
FtC 20 002 500 x 6 300 000/25 987 500 R4 849 090,91
Total R20 002 500

 Refer to d(i) above

 157 500 x 75kg = 11 812 500 OR as per question (b) calculation  above
 157 500 x 50kg = 7 875 000 OR as per question (b) calculation  above
 252 000 x 25kg = 6 300 000 OR as per question (b) calculation  above
 Refer to the manufacturing budget as per question (b) above.
 11 812 500 + 7 875 000 + 6 300 000 = 25 987 500

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(e) Draft a report to Dr. Myburgh and briefly explain the other alternative method(s), if
[5]
any, of allocating joint costs to the joint products.

Report: Report on the alternative methods of allocating joint costs to the joint products
From: Student/Senior audit clerk
To: Dr. Christian Myburgh at AfrikanRock Cements (Pty) Ltd (ARC)
Date: 27 March 2019

I have the honour to present the following in response to your dissatisfaction about ARC’s
current method of allocating the company’s joint costs to the joint products (the physical
measures method). Instead of the physical measures method, ARC can consider using any one
(1) of the following three (3) additional alternative methods:

1. Sales value at split-off point method: When this method is used, “joint costs are allocated
joint products in proportion to the estimated sales value of production. A product with higher
sales value will be allocated a higher proportion of the joint costs”. (Drury, 2015:138)

2. Net realisable value (NRV) method: When this method is used, joint costs are allocated to
the joint products in proportion to the NRV of each joint product. The NRV is calculated as:
estimated sales value of the final product less (i) cost to sell the product and, (ii) product’s
further processing costs (if applicable).

3. Gross (constant) profit percentage method: This method “assumes that there is a uniform
relationship between cost and sales value of each individual product” (Drury, 2015:140). When
this method is adopted, the joint costs are allocated to the joint products as follows:

(i) Establish the company’s gross profit and gross profit percentage.

(ii) Determine each product’s gross profit amount by applying the company’s gross profit
percentage.

(iii) Establish each product’s allocated joint cost gross as a balancing figure after eliminating
from the determined gross profit amount per 3(ii) above the product’s: (i) sales value; and
(ii) further processing cost.

I am confident that the above information will help you make an informed decision about the
allocation of ARC’s joint costs to the joint products.

Should you need further clarity on any item we have addressed above, you are more than
welcome to contact us.

Kind regards,
Student/Senior audit clerk
xyzauditfirm@auditfirm.org
012 345 678

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(f) Calculate the following variances for the period-ended 31 August 2018: [17]

(i) Sales prices variances for product HdC and FtC only (per product and in total for both)
Product Actual Standard Difference Actual Sales price
selling selling R sales variance
price price volume R
R R
HdC 98,00 95,00 3,00 73 500 220 500 F
FtC 95,50 97,50 (2,00) 121 000 242 000 A
Total R21 500 A

 R 7 203 000/73 500 = R98,00

 R14 136 000/148 800 (from question (b) above) = R95,00 (or given)
 R11 555 500/121 000 = R95,50
 R23 234 250/238 300 (from question (b) above) = R97,50 (or given)
 given

(ii) Direct labour efficiency variance for product LdC only

Product Standard Actual Difference Standard Labour
direct labour direct labour direct efficiency
time time labour rate variance

LdC 44 062,50 52 875,00 8 812,50 R24,00 R211 500 A

OR in minutes as per below
LdC 2 643 750 3 172 500 528 750 R0,40 R211 500 A

 Given
 88 125 x 30mins / 60mins = 44 062,50hrs
 88 125 x 0,6hours = 52 875,00hrs
 [(R1 890k/157 500 (from question (b) above)]/30mins x 60mins = R24,00 p/h
 44 062,50hrs x 60mins = 2 643 750mins
 52 875hrs x 60mins = 3 172 500mins
 R24/60mins = R0,40 p/minute

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(f) Calculate the following variances for the period-ended 31 August 2018
[17]
(continued):
(iii) Direct raw material purchase price variances (per material type and in total)
Direct Actual Standard Actual Direct raw material
Material purchase purchase quantity purchase price
name price price purchased variances
R R R

Limestone 0,60  0,50 9 517 000 951 700 A

Silica 0,80  0,82 5 833 000 116 660 F
Total 15 350 000 R835 040 A

 R5 710 200/9 517 000 kg = R0,60 p/kg

 R4 666 400/5 833 000 kg = R0,80 p/kg
 given

(iv) Direct raw material mix variances (per material type and in total)
Direct Actual usage Actual usage Standard Direct raw
Material in standard in actual Price material mix
name mix proportion variances
R
R
Limestone 9 210 000 9 517 000 0,50 153 500 A
Silica 6 140 000 5 833 000 0,82 251 740 F
Total 15 350 000 R98 240 F

 15 350 000 x 0,6 = 9 210 000

 15 350 000 x 0,4 = 6 140 000
 given
 9 517 000 + 5 833 000 = 15 350 000

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(g) Prepare the actual statement of profit or loss (income statement) for the period-
[12]
ended 31 August 2018 for product LdC only.

Income statement items Workings/ R

Reference
Sales 4 653 000
Less: Cost of sales 4 864 500
Opening inventory 0
Plus: Manufacturing cost 6 080 625
Joint costs allocated 3 172 500
Direct labour 88 125 x R18 1 586 250
Packaging costs 88 125 x R5 440 625
Applied fixed manufacturing overheads (FMO) 88 125 x R10 881 250
Less: Closing inventory 17 625 x R69 1 216 125
Plus: FMO over-recovery 881 250 – 875 750 5 500
Gross profit/(loss) (206 000)
Less: Selling and distribution costs R21 375 + R84 600 105 975
Fixed 42 750/12 x 6 21 375
Variable 70 500 x R1,20 84 600
Net profit/(loss) before tax (R311 975)

 Given
 0 + R6 080 625 – R1 216 125 = R4 864 500
 R3 172 500 + R1 586 250 + R440 625 + R881 250 = R6 080 625
 R30 x 0,60 hours = R18 p/u
 R787 500/157 500(see question (b) above) = R5 p/u
 Fixed manufacturing overhead absorption rate = given
 Joint cost per unit = R3 172 500/88 125 = R36 p/u
 0 + 88 125 – 70 500 = 17 625 units
 R18 + R5 + R10 + R36 = R69 p/u OR R6 080 625/88 125 = R69 p/u
 R171 000/142 500 (transferred from question (b) above = R1,20 p/u
 17 625 x R69 = R1 216 125

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(h) As part of the organisational structure investigation, you are requested to: [13]

(i) Calculate CMD’s projected residual income for the 2020 financial year
Details R
Profit before taxation (given) 17 442 000
Adjustments:
Consultation fee – controllable: no adjustment 0
Add: Audit fees – not controllable and adjusted 600 000
Add: Allocated head office expenses – not controllable and adjusted 210 0000
Depreciation – related asset controllable: no adjustment 0
Controllable profit R18 252 000
Less: Cost of capital charge (R77 520k x 9,50%) (7 364 400)
Residual income R10 887 600

(ii) Calculate CMD’s projected return on investment for the 2020 financial year
Controllable profit (as per (h)(i) above) R18 252 000
Controllable investment (given) R77 520 000
Return on investment (R18 252k/R77 520k) 23,54%

(iii) List four non-financial measures that can be used to evaluate CMD’s performance in terms of
the quality and efficiency of the cement manufacturing process
1. The actual kilograms (quantity) of cement manufactured compared to the budgeted kilograms
(quantity) to be manufactured.
2. The nature of the feedback from the customers about the quality of the cement.
3. The number and the nature of the complaints lodged with the NHRBC (or other applicable
regulatory bodies) about the quality of the cement.
4. The nature, extent and frequency of planned downtime in the cement manufacturing plant.
5. The extent of unplanned downtime in the cement manufacturing plant.
6. Kilograms, units and/or percentage of cement returned due to poor quality.
7. Kilograms, units and/or percentage of defective cements.
8. The extent and nature of direct labour idle time and direct labour efficiencies/productivity.
9. Vertical comparison to similar other cement manufacturing plants.
10. The morale and the attitude of the cement manufacturing staff.
11. Nature and extent of the feedback from the cement manufacturing staff.
12. Adherence and compliance to regulations and/or standards, for example those of the SABS.
13. Abnormal wastage.
14. Cement rejection rate at inspection points (if applicable).

(iv) Briefly explain benchmarking in the context of CMD’s cement manufacturing process
Within the context of CMD’s cement manufacturing process, benchmarking refers to the investigation
and the identification of the best cement manufacturing practices by comparing CMD’s process with
that of similar but top performing cement manufacturers across the industry (locally, internationally
or both). From CMD’s perspective, the intention of investigating and identifying these best practices
is to replicate them for the purpose of improving their current cement manufacturing process. To a
large extent, it (benchmarking) will involve CMD researching information about the latest trends
(technologically and otherwise) within the cement manufacturing process. Furthermore, it could
involve comparing CMD’s performance in terms of cement manufacturing practice to the best in the
field.

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(i) Assuming that the BMD’s annual requirements of the HdC for the 2020 will be 150
[9]
000 units:

(i) Calculate (if any) the envisaged total contribution that CMD will lose during the 2020 financial
year as a result of transferring 150 000 units of HdC to BMD.
 Determining possible sacrifice of external sales units:
Maximum annual manufacturing capacity of HdC units (given) 210 000
Annual external demand/sales of HdC units (given) 185 000
Expected spare manufacturing capacity in units (210k less 185k) 25 000
Required annual HdC units by BMD (given) 150 000
Supplied from spare capacity 25 000
Supplied from sacrificing external sales units (150k – 25k) 125 000

Take note: For the CMD to fully supply the required 150 000 units to the BMD, CMD will have to
sacrifice the selling of 125 000 units to their current external customers. As a result, CMD will thus
lose contribution relating to these sacrificed units.

 Calculating total envisaged lost contribution:

Details R R
Per unit Total
Sales (A) 102,60 12 825 000
Less: Total variable costs (B) (67,50) (8 437 500)
Direct labour cost 22,50 2 812 500
Other variable manufacturing costs 43,50 5 437 500
Variable selling & distribution cost 1,50 187 500
Lost contribution (A) less (B) R35,10 R4 387 500

Total envisaged lost contribution is therefore: 125 000 x R35,10 = R4 387 500

 R95 (given) x 1,08 = R102,60

 R22,50 (given) + R43,50 (given) + R1,50 (given) = R67,50

(ii) Calculate the minimum transfer price that CMD will be willing to accept for the transfer of each
unit of HdC required by BMD during the 2020 financial year.
The given scenario results in sacrificed external sales units, therefore, the minimum transfer price
is calculated as follows:

[Total incremental cost (all units to be transferred) + total opportunity costs (from external sales
forfeited)] ÷ total number of units to be transferred.
Incremental costs R

Direct labour costs per unit 22,50

Other variable manufacturing costs per unit 43,50
Variable selling & distribution costs per unit* 0
Variable costs per unit 66,00
Total incremental cost (R66,00 x 150 000 units) R9 900 000

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(i) Assuming that the BMD’s annual requirements of the HdC for the 2020 will be 150
[9]
000 units (continued).

Details Alternative 1 Alternative 2

Per unit (R) Total (R)
Other variable manufacturing costs 43,50 6 525 000
Direct labour costs 22,50 3 375 000
Variable selling & distribution costs* 0 0
Total incremental costs 66,00 9 900 000
Lost contribution (R4 387 500/150 000) 29,25 4 387 500
Total incremental costs + lost contribution R95,25 14 287 500
Minimum transfer price R95,25 R95,25
 Given
 R4 387 500 ÷ 150 000 = R29,25
 R43,50 x 150 000 = R6 525 000
 R22,50 x 150 000 = R3 375 000
 R14 287 500 ÷ 150 000 = R95,25
 R43,50 +R22,50 + R0 + R29,25 = R95,25
* Variable selling & distribution costs are only incurred on external sales (given information)

(j) (i) Advise whether BMD will be able to fully meet its 2020 financial year annual [10]
demand.
Details Hours Minutes
Available maximum brick-making time 122 325 7 339 500
Less: Total brick-making time needed 141 250 8 475 000
MB (750 000 x 6 minutes/60 minutes) 75 000 4 500 000
FB (1 125 000 x 3 minutes/60 minutes) 56 250 3 375 000
PB (400 000 x 1,5 minutes/60minutes) 10 000 600 000
Shortage (122 325 – 141 250) (18 925) (1 135 500)
 Available production days calculations
Details Days
Total days in a financial year for all brick-makers 27 375
Less: Compulsory leave days 1 500
Less: Discretionary leave days 600
Less: Weekend days – not operational during weekends 7 800
Total productive days 17 475

 365 days x 75 brick-makers = 27 375 days

 20 days x 75 brick-makers = 1 500 days
 (15 days x 40% x 75 x ⅓ = 150) + (15 days x 60% x 75 x ⅔ = 450) = 600 days
 52 weekends x 2 days per weekend x 75 brick-makers = 7 800 days
 17 475 x 7 hours (given) = 122 325 hours x 60mins = 7 339 500 minutes

Advice:
Based on the above calculations, a maximum of 122 325 brick-making hours are available for the
2020 financial year against the required 141 250 hours. BMD will, therefore, not be able to fully
meet the 2020 financial year demand for all the three (3) types of bricks.

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(j) (ii) Calculate the optimum mix of bricks to maximize BMD’s projected contribution for [10]
the 2020 financial year.

MB FB PB
Sales R6,50 R10,50 R5,00
Less: Total variable costs per unit (R4,40) (R5,85) (R3,05)
Direct raw material costs R2,05 R4,25 R2,10
Brick-making labour costs R2,00 R1,00 R0,50
Variable manufacturing overheads R0,25 R0,50 R0,35
Variable selling costs R0,10 R0,10 R0,10
Contribution per unit R2,10 R4,65 R1,95
Brick-making time in minutes
6 3 1,5
Brick-making time in hours 6/60 = 0,1 3/60 = 0,05 1,5/60 =0,025
CPLF* in minutes R0,35 R1,55 R1,30
OR CPLF* in hours R21,00 R93,00 R78,00
Ranking in terms of CPLF* 3 1 2
All FB units manufactured first 1 125 000
Brick-making time used for FB 56 250
Available brick-making time after FB 66 075
All PB units manufactured 2nd 400 000
Brick-making time used for PB 10 000
Available brick-making time after FB and 56 075
PB
MB units manufactured 3rd 560 750
CPLF* = Contribution per limiting factor

BMD optimum manufacturing mix of bricks is therefore 1 125 000 FBs, 400 000 PBs and 560 750
MBs.

 MB:R20/60 x 6 = R2,00; FB:R20/60 x 3 = R1,00; PB:R20/60 x 1,5 = R0,50

 Minutes: MB:R2,10/6 = R0,35; FB:R4,65/3 = R1,55; PB:R1,95/1,5 = R1,30
 Hours: MB:R2,10/0,1 = R21,00; FB:R4,65/0,05 = R93,00; PB:R1,95/0,025 = R78,00
 Given
 1 125 000 (given) x 3mins/60mins = 56 250hrs
 122 325hrs (see (j)(i) above) – 56 250hrs = 66 075hrs
 400 000 (given) x 1,5mins/60mins = 10 000hrs
 66 075hrs – 10 000 = 56 075hrs
 56 075/6mins x 60mins = 560 750 units

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4.32 MATAMATIE (PTY) LTD

(a) (i) Determine the budgeted minimum transfer price at which FD would have been
willing to transfer one (1) tonne of raw tomatoes to PD for the harvest period ending [8]
30 September 2019

Minimum transfer price = Incremental costs + lost contribution

Units to transfer
= R39 970 000 + R2 590 000
7 000
= R42 560 000
7 000
= R6 080
 Given
 Determination of sacrificed units
Details Tons
Total budgeted harvested tons 16 000
Less: External demand 10 000
Available for internal transfer before any sacrifice 6 000
Less: Required for internal transfer 7 000
To sacrifice from supply to Stearz 1 000

 Determination of external contribution

Details Amount
Stearz selling price per tonne 8 500
Less: Incremental costs per tonne 5 710
Less: Variable external selling costs per tonne 200
External (Stearz) contribution per tonne R2 590
(Stearz) Lost contribution in total R2 590 000

 Determination of incremental costs

Details In Total
Seed and irrigation water costs 10 500 000
Plus: Direct labour costs 14 000 000
Plus: Pesticides costs 7 350 000
Plus: Variable production overheads 8 120 000
Plus: Variable external selling costs 0*
Plus: Fixed production overheads 0#
Incremental costs R39 970 000
* Not incurred on internal sales
# Not incremental in nature
 9 000 tn contracted (AFBG) plus 1 000 tn non-contracted customer (Stearz) = 10 000 tn
 R2 590 x 1 000 tn = R2 590 000
 R1 500 x 7 000 tn = R10 500 000
 R2 000 x 7 000 tn = R14 000 000
 R1 050 x 7 000 tn = R7 350 000
 R1 160 x 7 000 tn = R8 120 000
 Internally required tonnes = 7 000

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(a) (ii) From PD’s performance measurement perspective, comment on the fairness of the
current negotiated transfer price (TP) in comparison to the budgeted minimum [3]
transfer price as per (a)(i) above
Context: MtM’s two operating divisions are managed by two independent management teams, and
the related performance management activities are also conducted independent of each other.
1. The negotiated transfer price (R7 500) is higher than the calculated minimum transfer price
(R6 080). PD may have a view that they are being overcharged.
2. The negotiated TP does not seem to take into consideration the internal savings of variable
external selling costs.
3. The negotiated transfer price is also higher than the price paid by one of FD’s external customer
(AFBG), that is about R1 420 (R7 500 less R6 080) more per tonne.

Comment: Taking into account the above discussion points

▪ The current negotiated R7 500 transfer price appears to be unfair from PD’s perspective OR
▪ The negotiated transfer price negatively affects PD’s performance measurement.

(b) Identify and briefly discuss three (3) social, ethical and environmental concerns [6]

No. Listing Discussion

1. Excessive use of ▪ Water is regarded as a scarce resource, especially water that
drinking water for has already been earmarked for human consumption (drinking)
irrigation. for survival.
▪ To some extent, all farming operations require some level of
irrigation. However, any responsible farmer/consumer has a
social obligation to use drinking water sparingly and maintain
some reasonable level of balance between irrigating and saving
water.
▪ Should the society become aware of MtM’s stand-point and
views on drinking water, they could possibly boycott the
company.
▪ MtM’s unnecessary/over-the-top use of drinking water for
irrigation purposes may lead to penalties by the Water Affairs
Department and possible subsequent cancellation of its water
license.
▪ Without information to suggest the contrary, it appears that MtM
does not readily have any alternative source of irrigation water,
should its water licence be revoked, its farming operations might
grind to an untimely halt.
▪ The current drought conditions, which Ms Sereki referred to
further aggravates the social impact of excessive use of drinking
water.

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(b) Identify and briefly discuss four (3) social, ethical and environmental concerns [6]

No. Listing Discussion

2. Reluctance to use ▪ The reluctance to utilise environmentally friendly pesticides
environmentally friendly could lead to MtM being viewed as an organisation that
pesticides. disregards good corporate governance and cares little about
the environment and its sustainability.
▪ This matter could potentially lead to consumer revolt and
boycott by the environmental conscious section of the
society.
▪ Environmental lobby groups may lodge complaints against
the company which can damage the image of the company.
This could possibly have a negative effect from client
retention and/or attraction or lead to possible sanctions for
contravention of the environmental regulations.
3. Refusal to, as per lease ▪ Mt’s has uncaring attitude towards their role to minimise soil
agreement, plant erosion. Soil erosion can lead to the decrease in the soil
vegetation to manage quality of the farm, create issues with environmental
soil erosion. sustainability of the farm, affect the farms ability to continue
farming and/or decrease the yield obtained from the farm.
▪ Not managing the prevention of soil erosion can lead to the
problem becoming so severe that the land can no longer be
cultivated and result in the abandoning of the land. This
might create huge problems for future generations.
4. Senior staff member ▪ The farm manager’s persistent conflict with the DLR officials
(farm manager) fighting and the exchanged uppercuts and left-hooks could
with the government negatively affect MtM’s reputation in the public.
officials. Inability to ▪ Reputational damage could possibly lead to consumer
resolve conflict in a civil disassociation with a company that believes in violence to
manner address issues and disagreements. This has the propensity
to affect MtM’s going concern assumption.
▪ The farm manager’s method of handling conflict with
government officials is an indication of how he usually
manages conflict with violence. This aggressive behaviour
could create a stressful work environment for the farm
workers. It could additionally create a negative social
environment with the communities surrounding the farm as
well as his neighbours.
5. Uncaring attitude and ▪ The farm manager depicts an unethical and irresponsible
demeanour by the farm attitude and may make the public take a view that the entire
manager towards other senior staff (management) at MtM share the same views as
humans and animals him.
who need drinking water
▪ This could potentially lead to customer rebellion and
and the environment for
disassociation with MtM.
survival

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(c) Optimum available raw tomato allocation in kilograms per product type. [9]
 Given
 Establishing if the available raw tomatoes can meet the demand
Details Sauce Juice Total kg
Total demand in units 7 000 2 000
Required tomatoes per litre 2kg 1,6kg
Required tomatoes for demand 10 500kg 2 400kg 12 900
Available maximum tomatoes 10,8 tonnes x 1 000kg 10 800
Shortage (10 800 – 12 900) (2 100)
Tomatoes are therefore a limiting factor
 Calculating standard contribution per limiting factor (raw tomatoes)
Details Sauce Juice
Per unit Per unit
Standard selling price R35,00 R33,00
Less: Total variable costs R26,60 R24,30
Raw tomatoes R12,00 R9,60
Packaging R3,60 R3,50
Direct labour R1,80 R1,80
Variable production overheads R9,00 R9,00
Variable distribution costs R0,20 R0,40
Contribution per unit R8,40 R8,70

Details Sauce Juice

Raw tomatoes usage per unit 1,5kg 1,2kg
Contribution per limiting factor (CPLF) R5,60 R7,25
Ranking ito CPLF only 2 1
Optimum allocation of raw tomatoes 8 400 kg 2 400 kg
 ((7 000 x 750ml)/ 1 000 ml) x 2kg)) (all given) = 10 500 kg
 ((2 000 x 750ml)/ 1 000 ml) x 1,6kg)) (all given) = 2 400kg
 ((R8 x 2kg)/ (1 000 ml x 750ml)) (all given) = R12,00
 ((R8 x 1,6kg)/ (1 000 ml x 750ml)) (all given) = R9,60
 ((750ml/ 1 000 litres) x 2kg)) (all given) = 1,5kg
 ((750ml/ 1 000 litres) x 1,6kg)) (all given) = 1,2kg
 Sauce: R8,40÷1,5kg = R5,60; Juice: R8,70÷1,2kgs = R7,25
 10 800 kg less 2 400 kg = 8 400 kg

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(d) Determine the actual equivalent cost per unit (in Rand per litre). [8]
 Equivalent cost per unit
Details Amount
DRM equivalent cost per unit R13,00
Plus: Conversion equivalent cost per unit R12,00
Equivalent cost per unit R25,00
 Given
 R62 050 – R300 = R61 750
 R1,00 x 300 = R300
 R61 750/ 4 750 material equivalent units = R13,00
 R59 820/ 4 985 conversion equivalent units = R12,00
 The Actual Quantity Statement for the month ended 30 September 2019
Physical units Equivalent units
Direct
Input Output Conversion
Details raw material
(litres) (litres) litres % Litres %
1 000 Opening WIP
5 000 Put into production
Completed from:
Opening work-in-progress 950 0 0 285 30
Current production 4 300 4 300 100 4 300 100
Completed and transferred 5 250 4 300 4 585
Normal loss 300 0 100 0 80
Abnormal loss 50 50 100 40 80
Closing WIP 400 400 100 360 90
6 000 6 000 4 750 4 985
 Given
 1 000 x 95% (net of normal loss of 5%) = 950
 950 x 30% (100% less 70%) = 285
 5 250 less 950 = 4 300
 (1 000 + 5 000) = 6 000 x 5% = 300
 Short-cut method must be applied in this instance.
 6 000 less (5 250 + 300 + 400) = 50
 50 x 80% = 40
 400 x 90% = 360

(e) (i) Calculate the actual number of packaged Sauce units that were stolen. [1]
Alternative 1 Alternative 2
R23 850/R18 = 1 325  Given
 Given  Completed and transferred units: ((5 250/ 750ml)
 (R14 + R10)/1 000ml x 750ml = R18 x 1 000 litres)) = 7 000
 Sales units: (R17 250/ R34,50) = 500
 Closing inventory should be: (7 000 – 500)
= 6 500
 Stolen Sauces: 5 175 – 6 500 = 1 325

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(e) (ii) Prepare PD’s actual statement of profit or loss and other comprehensive income [8]

Details R
Sales 17 250
Less: Cost of Sales 30 900
Opening work-in-progress (WIP) 18 000
Direct raw material costs 65 800
Conversion costs 49 450
Closing inventory (WIP) (9 200)
Closing inventory – Finished goods (93 150)
Less: Abnormal loss/(income) 1 050
Gross profit(loss) (14 700)
Less: Non-manufacturing costs 29 200
Inventory write-off (stolen sauces) 23 850
Variable distribution costs 100
Fixed distribution costs 5 250
Net profit (loss) before tax (R43 900)
 Given
 R14 x 4 700 (4 300 + 400) – As per quantity statement (APQS)) = R65 800
 R10 x 4 945 (4 585 + 360) – APQS) = R49 450
 ((R14 x 400) (APQS) = R5 600) + (R10 x 360) (APQS) = R3 600) = R9 200
 Given OR R18 x 1 325 from part e(i) = R23 850
 R18 x 5 175 = R93 150
 (R14 + R10) x 750/1 000 = R18 per packaged sauce unit
 R1 100 - R50 (R1 x 50) (APQS) = R1 050
 ((R14 x 50) (APQS) = R700) + (R10 x 40) (APQS) = R400) = R1 100

(e) (iii) List two (2) possible reasons that could have contributed to the difference between
the actual net profit before tax calculated in e(ii) and the Sauce’s budgeted net profit [2]
before tax.
The actual net loss is R43 900 and the budgeted net profit is R108 900.
1. The actual selling price per unit was R0,50 less than the related standard. (R34,50 vs. R35,00).
2. Although 7 000 (5 250 x 1 000/750) Sauces were actually completed and transferred (produced)
during September 2019, only 500 of these were actually sold. Therefore, a significant amount of
production costs were not recovered through sales as it was initially envisaged.
3. 1 325 Sauces were stolen from the storeroom and this resulted in R23 850 inventory write off.
4. At the end of the month, the company is still carrying R93 150 finished goods inventory that it had
budgeted to sell but did not.
5. The company incurred abnormal loss.

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(f) Based on the 2020 budgeted information, comment on whether or not it is expected
[5]
that PD’s management team will earn a performance related bonus.

Details Values
Controllable profit (CP) R2 060 000
Controllable investment (CI) R11 600 000
Return on investment (R2 060 000/R11 600 000) 17,76%

Conclusion: The budgeted ROI of 17,76% is less than the 18,50% target ROI condition for
performance related bonus. Therefore, PD’s management team is not expected to earn a
performance related bonus in the 2020 financial year.
 Given
 Budgeted controllable profit
Details R
Budgeted profit before taxation 1 500 000
Adjustments:
Administrative salaries – controllable: no adjustment 0
Add: Finance costs – not controllable and adjusted 360 000
Add: Allocated HO expenses – not controllable and adjusted 200 000
Budgeted controllable profit (CP) R2 060 000

 R3million x 12% = R360 000

 Budgeted controllable investment

Details R
Non-current assets – controllable 11 500 000
Add: Current assets – controllable 2 100 000
Non-current liabilities – not controllable 0
Less: Current liabilities – controllable 2 000 000
Budgeted controllable investment (CI) R11 600 000

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4.33 SAMSONS FAMILY TRUST

(a) Explain “responsibility centre” and recommend and motivate for the most
[4]
appropriate “responsibility centre” for the Samsons Head Office.
(i) “A responsibility centre may be defined as a unit of a firm where an individual manager is held
responsible for the unit’s performance” (Drury, 2015: 411).

(ii) According to Drury (2015: 411), there are four types of responsibility centres: (i) cost or expense
centre; (ii) revenue centre; (iii) profit centre; and (iv) investment centre.

Recommendation: The most appropriate responsibility centre type for Samson’s head office is the
“investment centre/ capital investment centre”.
Motivation: In line with the definition of an investment centre (centres whose managers are
responsible for both sales revenue and costs, in addition, have responsibility and authority to make
capital investment decisions), Samson’s Head Office:
- Is responsible for the revenue (management fees) it generates. In this regard, it unilaterally set
the management fees with no negotiation with the operating companies.
- Has full responsibility over all its costs, this is by virtue of its full responsibility over all its
operational decisions. Furthermore, all the allocated operating costs are at the HO’s discretion.
- Also has authority to make decisions about the group’s entire capital investment (non-current
assets) decisions. It is the head office’s that decided on the group’s depreciation policy of 20%
per annum on buildings while Land in not depreciated.

(a) (iii) Calculate SHO’s budgeted return on investment (ROI) for the 2019 financial year. [15]

Formula = Controllable profit = R1 810 000  = 10,16%

Controllable investment R17 820 000

 Controllable profit:
Controllable income – revenue: management fees 13 140 000
Interest income on intra-group loan accounts 0
Less: Controllable costs: 11 330 000
Staff costs – administrative managers 4 500 000
Staff costs – Hummer & Murdge 1 180 000
Allocated head office costs (cleaning expenses) 1 260 000
Depreciation – Factory buildings 3 600 000
Depreciation – Administrative block 240 000
Interest on long-term borrowings 550 000
Controllable profit R1 810 000
 Given
 R365 000 x 12 x 3 = R13 140 000
 R1 500 000 x 3 = R4 500 000
 Operating factory properties: R6 000 000 x 20% x 3 = R3 600 000
 Head office buildings (administrative block): (R2 000 000 x 60%) x 20% = R240 000

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(a) (iii) Calculate SHO’s budgeted return on investment (ROI) for the 2019 financial year. [15]
 Controllable investment:

Controllable assets: R26 320 000

Properties – capital investment 21 320 000
Vineyard – capital investment 5 000 000
Current assets (intra-group loan accounts) 0
Less: Controllable liabilities: R8 500 000
Long-term borrowings 8 500 000
Current liabilities (intra-group loan accounts) 0
Controllable investments R17 820 000

 (R23 400K – R3 600K = R19 800K) + (R1 760K – R240K = R1 520K) = R21 320K

(a) (iv) Comment on whether SHO is budgeted to achieve the group’s target annual rate
[2]
of return for the 2019 financial year.

The group’s target annual rate of return is 10,50% (9,75% + 0,75%). At a budgeted annual ROI
of 10,16%, the head office is not expected to achieve the 10,50% target.

(b) (i) Prepare the budgeted statement of profit or loss and other comprehensive income
[14]
(income statement) for the 2019 financial year.

Details R
Sales 2 092 000
Less: Cost of sales 2 505 250
Plus: Vineyard production costs 2 250 000
Plus: Packaging costs 14 250
Plus: Direct labour costs 91 000
Plus: Fixed production overheads 150 000
Gross profit/(loss) (413 250)
Less: Non-manufacturing costs 5 005 750
Vineyard security costs 105 750
Interest expense on the intra-group loan accounts 100 000
Management fees 4 380 000
Allocated head office expenses 420 000
Profit(loss) before tax (R5 419 000)

 Given
 40 000 + 1 710 000 + 342 000 = R2 092 000

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(b) (i) Prepare the budgeted statement of profit or loss [14]
 Sales units
Details Calculations Kg Selling price Sales
per kg
Budgeted harvest 200 000
Less: Unusable sales 200 000 x 5% 10 000 R4 R40 000
Usable harvest sold to: 190 000
Mr. Barns Winery 190 000 kg x 60% 114 000 R15 R1 710 000
SF (internal sales) 190 000 kg x 25% 47 500 R0 R0
ShopMart 190 000 kg x 15% 28 500 R12 R342 000
Total budgeted sales R2 092 000

 R15 x 80% (100% less 20% discount) = R12

 (R500 + R250 + R375) x 2 000 (200 000kg ÷ 100kg) = R2 250 000
 (114 000kg + 28 500kg) ÷ 100kg x R10 = R14 250
 (200 000 ÷ 5kg) x (3mins ÷ 60mins) = 2 000hrs x R45,50 = R91 000
 R365 000 x 12 = R4 380 000
 R1 260 000 ÷ 3 divisions = R420 000

(b) (ii) Briefly comment on the correctness of Bard’s view [3]

1. SV’s budgeted income statement for the 2019 financial year reflects a projected loss of R5,419
million.
2. There appears to be some merit in Bard’s view about the impact of the intra-group items on SV’s
profitability, or lack thereof:
(i) The internal sales of grapes by SV to SF is currently at R0 value. SV currently supplies 47 500
kilograms of its grapes to SF at R0 value while the related highest price to external customer
(MbW) is R15 per k/g. Therefore, had it not been for the 47 500 internal sales to SF at R0
value, SV could potentially earn an additional R712 500 (47 500 x R15) from external sales,
hence increasing its sales by approximately R712 500 [also accept R750K (200K x 25% x
R15)]. This matter is further exacerbated by the fact that, SV is still absorbing all the vineyard
costs relating to the production of these 47 500 kg grapes while no corresponding income is
derived.
(ii) SV currently pays R4,38 million in management fees to the head office. This appears to be
overly excessive considering that SV is currently generating about R2,092 million in revenue.
Even in the instance where the internal sales to SF could be included in SV’s revenue at an
external selling price, at R2,804 million (R2 092 000 + R712 500) the adjusted revenue in SV’s
books will still not be sufficient to cover the management fees.
(iii) On the other hand, SV’s loss would have increased if SV’s administrative manager’s salary of
R1 500 000 was being paid and accounted for by SV and not by the head office as is currently
the case.
(iv) The head office allocated cleaning costs of R420 000 appears to be unreasonable considering
that the operating companies (SV included) are still expected to pay management fees.

(v) Lastly, SV’s profitability is further put under pressure by the R100 000 interest expense on the
intra-company loan accounts.

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(b) (iii) Calculate the total direct labour idle time variance for the 2019 financial year. [3]

Standard Actual idle Difference Standard Variance

Allowed idle hours in work hour
hours hours rate
210 252 -42 R52 R2 184 A

 Given
 1 680 x 12,5% = 210
 180 000 ÷ 5kg = 36 000 x 2,8mins ÷ 60mins = 1 680 hrs.
 7,5mins ÷ 60mins = 12,5%
 1 680 x 15% = 252
 R45,50 ÷ 87,50% (100% - 12,5%) = R52,00

(b) (iv) Calculate the fixed production overheads over-/under absorption amount for the
[4]
2019 financial year.

Details Amount
Absorbed fixed production overheads R135 000
Actual fixed production overheads R130 000
Fixed production overheads over absorbed R5 000

 Given
 180 000kg x R0,75 = R135 000
 R150 000 ÷ 200 000kg  = R0,75

(c) (i) Calculate the optimum kilograms mix of grapes that will maximise SF’s budgeted
[13]
contribution for the 2019 financial year.

Details Crates White Red

grapes grapes
Annual demand in kilograms 45 000kg 30 000kg
Kilogram per 1 crate 10kg 10kg
Required crates 7 500 4 500 3 000
Available crates 6 864
Based on probabilities 7 150
Less: Damaged not used 286
Shortage (6 864 – 7 500) -636
Therefore, crates are a limiting factor.

 Given
 WG: 45 000kg ÷ 10kg = 4 500 crates
 RG: 30 000kg ÷ 10kg = 3 000 crates
 (7 500 x 65% = 4 875) + (6 500 x 35% = 2 275) = 7 150
 7 150 x 3/75 = 286
 7 150 – 286 = 6 864

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(c) (i) Calculate the optimum kilograms mix of grapes that will maximise SF’s budgeted
[13]
contribution for the 2019 financial year.

Details White Red

grapes grapes
Selling price per crate R200,00 R250,00
Less: Total variable costs R16,50 R136,50
Purchase (transfer price) R0 R120
Variable refrigeration costs R1,50 R1,50
Crate costs R15,00 R15,00
Contribution R183,50 R113,50
Contribution per limiting factor (CPLF) R183,50 R113,50
Ranking ito of CPLF 1 2
Optimum crates mix 4 500 2 364
Optimum grapes kilogram mix 45 000 23 640
 White: R20 x 10kg = R200; Red: R25 x 10kg = R250
 White: Internal transfer are at R0 (nil) value.
 Red: R12 x 10kg = R120
 R0,15 x 10kg = R1,50
 White: R183,50 ÷ 1= R183,50; Red: R113,50 ÷ 1= R113,50
 6 864 – 4 500 = 2 364
 White: 4 500 x 10kg = 45 000kg; Red: 2 364 x 10kg = 23 640kg

(c) (ii) List three (3) environmental concerns that could have prompted the
[3]
environmental groups’ continuous disagreements with CratesMatter Ltd.
1. The manufacturing of plastic requires the usage of chemicals and other toxic materials which are
potentially harmful to the environment.
2. The potential CO2 emissions from the manufacturing site due to the usage of coal and non-
renewable energy.
3. The disposal of the damaged plastic which could harm the environment through but not limited
to, continuous usage of the landfill sites as plastic is not easily degradable.
4. The disposal of used and damaged plastic which could possibly result in water pollution and thus
endanger the ecosystem, and in particular the oceans, seas and rivers.
5. Not using energy efficient and/or renewable energy manufacturing processes.
6. Non-compliance with various regulations (Health & Safety, Renewable energies etc)

(c) (iii) Use the ABC technique to calculate the budgeted fixed overheads to be allocated
[6]
to each grape type for the 2019 financial year.

Details White grapes Red grapes

Crate packing overheads 22 500 15 000
Inspection overheads 5 625 9 375
Total R28 125 R24 375

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(c) (iii) Use the ABC technique to calculate the budgeted fixed overheads to be allocated
[6]
to each grape type for the 2019 financial year.

 Given
 Refer to question (c)(i) calculation  above
 4 500 + 3 000 = 7 500
 WG: R37 500 ÷ 7 500 = R5,00 x 4 500 = R22 500
 RG: R37 500 ÷ 7 500 = R5,00 x 3 000 = R15 000
 WG: 4 500 ÷ 25 = 180; RG: 3 000 ÷ 10 = 300
 180 + 300 = 480
 R15 000 ÷ 480 = R31,25 x 180 = R5 625
 R15 000 ÷ 480 = R31,25 x 300 = R9 375
 R52 500 less R37 500 = R15 000
 (45 000 x R0,70) + (30 000 x R0,70) = R52 500
 WG: R22 500 + R5 625 = R28 125; RG: R15 000 + R9 375 = R24 375

(d) Calculate the budgeted break-even point in units per product type for the 2020
[12]
financial year.

Details Workings SSW DRW

R R
Total variable costs 34,50 28,50
Grape costs 0 0
Primary fermentation costs 15,00 15,00
Variable production overheads 9,00 9,00
Glass bottle 4,50 4,50
Secondary fermentation costs 6,00 0
Contribution per unit 23,00 19,00

Contribution x Sales mix R23,00 R76,00

Weighted contribution R99,00

Total fixed costs R6 200 000

Break-even batches 62 626,26
Break-even batches rounded up 62 627

Break-even point units 62 627 250 508

 Given
 R20 ÷ 1 000ml x 750ml = R15,00
 R12 ÷ 1 000ml x 750ml = R9,00
 R8 ÷ 1 000ml x 750ml = R6,00
 SSW: R0 + R15 + R9 + R4,50 + R6 = R34,50; DRW: R0 + R15 + R9 + R4,50 + R0 = R28,50
 SSW: 34,50 ÷ 60% x 40% = R23,00; DRW: 28,50 ÷ 60% x 40% = R19,00
 SSW: 64 000 ÷ 64 000 = 1; DRW: 256 000 ÷ 64 000 = 4
 SSW: R23,00 x 1 = R23,00; DRW: R19,00 x 4 = R76,00

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(d) Calculate the budgeted break-even point in units per product type for the 2020
[12]
financial year.

 R23,00 + R76,00 = R99,00

 64 000 + 256 000 = 320 000 x 750ml ÷ 1 000ml = 240 000 litres x R5,00 = R1 200 000
 R1 200 000 + R5 000 000 = R6 200 000
 Multi-product break-even =: R6 200 000 ÷ R99 = 62 626,26 ≈ 62 627
 SSW: 62 627 x 1 = 62 627; DRW: 62 627 x 4 = 250 508

(e) (i) Identify and advise Bard as to which is the most appropriate transfer pricing
method to determine the minimum transfer price for the internal transfer of SV’s [3]
grapes to SL.

Identification: The “marginal/variable/incremental costs plus opportunity cost transfer price”

appears to be the most appropriate minimum transfer price type for SL. This view is informed by the
following:
Advice:
1. Currently SV has three customers for its grapes harvest. Two external customers (Mr Banrs
Winery (MbW) and the ShopMart), and one internal customer in SF. While SV is able to make
profit from selling to its external customers, internal sales to SF are at R0 selling price.
2. With the launch of wine selling in SL, whilst still operating at its full capacity, SV will further be
required to supply grapes to SL at R0 selling price (the current transfer price) and subsequently
forego a significant amount of contribution from selling to MbW (external customer) (lost
contribution OR opportunity costs).
3. Furthermore, the scenario is explicit that all of SF’s white grape requirements will be supplied
through sacrificing grape sales to MbW (external customer).
4. Variable costs relating to the grapes to be transferred are incremental/marginal and will must
therefore be added to the transfer price as they will be incurred irrespective of who the customer
is.
5. Bringing all these facts together, one can conclude that, as SV has no spare capacity to supply
to SL, any internal transfer of grapes will result in lost (external) contribution. Therefore, applying
the “variable costs plus lost contribution” principles will result in a transfer price equivalent to the
current MbW sales price, and thus compensating SV for its externally lost contribution.

(e) (ii) Calculate the budgeted minimum transfer price per kilogram of grapes that SV
will be willing to accept for the expected transfer of grapes required by SL during [10]
the 2020 financial year.
 Given
 Determining sacrificed units
Details Grapes
Kilograms
Available grapes (in kg) from supply to MbW 120 000
Needed by SL (all sacrificed from the supply to MbW) 108 000
Semi-sweet white wine (SSW) 21 600
Dry white wine (DRY) 86 400

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(e) (ii) Calculate the budgeted minimum transfer price per kilogram of grapes that SV
will be willing to accept for the expected transfer of grapes required by SL during [10]
the 2020 financial year.
 21 600 + 86 400 = 108 000
 64 000 x 750 ml ÷ 1 000 ml = 48 000 litres x 450 grams ÷ 1 000 grams = 21 600 kg
 256 000 x 750 ml ÷ 1 000 ml = 192 000 litres x 450 grams ÷ 1 000 grams = 86 400 kg

Minimum transfer price of transferring division =

Total incremental costs per unit + total opportunity costs (external sales forfeited) per unit
= R13,00 + R2,85
= R15,85

 Total incremental costs

Details Per unit
Vineyard, irrigation and pest control costs R12,50
Direct labour R0,50
External packaging costs (not incurred on internal sales) R0
Fixed production overheads (not incremental) R0
Total variable cost per kilogram R13,00

 Total opportunity costs from sacrificing 108 000 kg

Details Per unit
Selling price to MbW 16,00
Less: Variable costs 13,00
Less: External packaging costs 0,15
External (MbW) contribution per kilogram R2,85

(e) (iii) Calculate the budgeted number of orders to be placed with regards to the glass
[6]
bottle requirements during the 2020 financial year.

2xUxC
EOQ =√
H+(P x i)

2 X 320 000 X R104

=√
(R1 + (R4,50 X 10,50% )

= 6 723,2460
≈ 6 724 glass bottles (rounded up)

Number of orders = Total annual demand ÷ EOQ

= 320 000 ÷ 6 724

= 47,5907
≈ 48 (rounded up)

 Given

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4.34 SCRUMPTIONS SOUTH AFRICAN SOUP (PTY) LTD

(a) With regard to product BilS only for the 2019 financial year:

i. Manufacturing budget
Details Calculation No of Units

Sales 500 000 x 2 ÷ (2+3) 200 000

Plus: Closing inventory Given 7 000
Less: Opening inventory Given 3 000
Unspoiled required units 204 000
Plus: Spoiled units (0,04 ÷ (1-0,04)) x 204 000 8 500
OR
212 500 x 0,04
Units to be manufactured 204 000 ÷ (1-0,04) 212 500

ii. Purchases budget for the ingredient Biltong

Details Grams Kilograms

Material usage budget (g/ kg) 25 500K R3 825K 25 500 R3 825K
Plus: Planned closing inventory 50K R7,5K 50 R7,5K
Less: Planned opening inventory 100K R15K 100 R15K
Total g / kg to be purchased 25 450K 25 450
Price per g / kg R0,15 R150
Total purchases budget R3 817,5K R3 817,5K R3 817,5K R3 817,5K

 Given
 212,5K x 120 g = 25 500K ÷ 1 000 = 25 500
 From a(i) above: Units to be manufactured
 25 500K + 50K – 100K = 25 450K; 25,5K + 50 – 100 = 25 450
 R18/120g = R0,15 x 1 000 = R150
 25 450K x R0,15 = R3 817,5K; 25 450 x R150 = R3 817,5K

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(b) Calculate the budgeted break-even point in units per product for the 2019 FY
Contribution BilS SamS
Sales R70  R45
Less: Variable costs R37 R20
Soup ingredients R27,90 R6,70
• Biltong R18,00
• Spiced cream base R5,10
• Cheese R4,80
• Beef stock R4,90
• Samp and bean mixture R1,50
• Vegetables R0,30
Less: Container (EfC) R0,10 R0,10
Less: Variable manufacturing overheads R9,00 R13,20
Contribution per unit R33,00 R25,00
Weighted contribution R141 R66 R75
Fixed costs
Fixed manufacturing overheads R3 168 000
Marketing – Best Buds R632 000
Administrative costs R1 400 000
Total fixed costs R5 200 000
Break-even batches 36 879,4326
Batches rounded-up 36 880
Break-even units 73 760 110 640

 Given
 BilS: R6/60min x 90 min = R9; SamS: R6/60min x 132 min = R13,20
 (R33 x 2 = R66) + (R25 x 3 = R75) = R141
 R990 000 + R2 178 000= R3 168 000
 220 000 units x (R3/60 min x 90 min) = R990 000
 330 000 units x (R3/60 min x 132 min) = R2 178 000
 Fixed costs ÷ weighted contribution: R5 200 000 ÷ R141 = 36 879,43262 ≈ 36 880
 BilS: 36 880 x 2 = 73 760; SamS: 36 880 x 3 = 110 640

(c) From a profit perspective, state which one of these two companies is more vulnerable to an
economic downturn and provide a reason for your answer.
▪ Operating leverage is used to measure the sensitivity of profits to changes in sales.
▪ The greater the degree of operating leverage, the more that changes in sales activity will
affect profit.
▪ Higher degrees of operating leverage can provide significantly greater profits when sales are
increasing, but higher percentage decrease will also occur when sales are declining.
▪ Higher operating leverage also results in greater volatility in profits.
Source: Drury, 2015:184-185

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Stating: At an operating leverage of 5 as compared to 2 for DF, SSAS is therefore more vulnerable to
an economic downturn.

Reason:

1. SSAS has a higher operating leverage.

2. SSAS would thus need to sell more units to break-even as compared to DF.
3. SSAS has a greater sensitivity of profit to change in sales.

4. SSAS has a greater risk of drop/decrease in profit due to change in sales.

5. SSAS has a higher ratio of fixed costs:variable costs.

6. At this operating leverage level, it means, during an economic downturn, SSAS’s profit can/may
change (decline) by 5 times the change (decline) in SSAS’s sales as opposed to DF’s profits
changing (declining) by 2 the change (decline) in their (DF’s) sales.

7. If sales of both companies (SSAS and DF) were to decline by the same percentage due to an
economic down turn (say 10% for example), at an operating leverage of 5, SSAS’s profit will decline
by 50% (a higher percentage) as compared to DF’s 20% decline in profits.

(d) Calculate the following standard costing variances for the month of May 2019:

(i) Direct material yield variance for the Samp and bean mixture ingredients only
= [Input allowed for actual output less Actual quantity in standard mix proportions] X Standard price
Ingredients Input allowed Actual quantity Units Standard Yield
for actual in standard mix difference price per variance
output proportions kg
Kg R
Kg Kg

Beef stock# 8 400 8 575 -175 R14 R2 450 A

Samp and Bean mix 3 600 3 675 -75 R10 R750 A
Vegetables# 2 400 2 450 -50 R3 R150 A
14 400 kg 14 700 kg R3 350 A

# Not required, only provided for completeness

 Given
 Kg: 24 000 units x 150g/1 000g = 3 600 kg; Gram: 24 000 units x 150g = 3 600 000 g
 14 700 kg x 150g/600g = 3 675 kg x 1 000 = 3 675 000 g
 8 800kg + 3 700kg + 2 200kg = 14 700 kg
 350g + 150g + 100g = 600g
 R1,50/150 g = R0,010 p/g x 1 000 g = R10 p/kg

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(ii) Fixed manufacturing overheads (FMO) volume efficiency variance for BilS
= [Standard quantity of input hours for actual production less Actual input hours) x Standard fixed
overheads rate]

Product Standard Actual Difference Standard Variance

quantity of input input in FMO rate
hours for actual hours hours per hour
production
BilS 21 000 20 000 1 000 R3 3 000 F

 Given
 Hours: 14 000 units x 1,5 hours = 21K hrs

(e) Briefly discuss two (2) reasons for a possible favourable direct material yield variance for
the SamS soup ingredients:

• Better quality soup ingredients were used in the manufacturing process OR less
material/ingredients wastage.
• Increased efficiencies in the production processes resulted in (less soup ingredients used) OR
(more output/soup from ingredients used).
• Less than budgeted machine errors occurred when processing resulted in less ingredients
used.
• The amount of time included in the standard was erroneous and should have been shorter.
• Efficiencies in the cooking process – Actual usage was less than planned, possibly due to less
evaporation.
• Standard procedures were not followed – The set direct material manufacturing standards
regarding the yield were not adhered to.
• Ingredients substitution – based on different relative prices took place leading to an adverse
mix and favourable yield variance.

(f) (i) From a quantitative perspective only, advise the COO of SSAS as to whether or not to
replace the cold room’s current condensing units with new condensing units.
Comprehensive approach Current unit (R) New unit (R)
Original cost 102 000 
Depreciation 0 0
Installation fee 18 500
Fixed maintenance fee 26 000 24 000
Electricity costs 115 200 96 000
Current book value 0
Resale value 22 000
Spoiled units 645 000 580 500
Total R808 200 R821 000

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Incremental approach (Alternative) Replace unit (R)
Original cost 102 000
Depreciation 0
Installation fee 18 500
Fixed maintenance fee (2 000)
Electricity costs (19 200)
Current book value 0
Resale value (22 000)
Spoiled units (64 500)
Total R12 800

 Given
 €6 000 x R17 = R102 000
 Current: R2 400 x 12 months x 4 years = R115 200; New: R2 000 x 12 months x 4 years = R96
000
 Current: R6 500 x 4 years = R26 000; New: R 6 000 x 4 years = R24 000
 R645 000 x 90% = R580 500
 R115 200 – R96 000 = R19 200
 R26 000 – R24 000 = R2 000
 R645 000 x 10% or R645 000 – R580 500 = R64 500
Advice: From a quantitative analysis only, SSAS should not replace the current units as it will result in
an increase in costs of R12 800 (R808 200 – R821 000) over the four years under review.

(f) (ii) Briefly discuss four (4) qualitative factors that SSAS should consider during the
replacement of condensing units’ decision.

• SInc is a newly established company – Will SInc still exist in the next four years and will they
be able to honour the warranty.
• Reliability of SInc – SSAS will need to consider what approach it will adopted to assess the
reliability of SInc considering that as a new supplier, SInc would not have built a track record
(business trust, supplier of quality products, after sale service, reputable company etc.) yet.
• Quality of SInc’s units – As a new company, SInc is not yet established as the supplier of choice,
therefore in this initial stages questions might still be asked about the quality of its units.
• SInc’s units’ compatibility to the South African environment – SSAS must enquire if and
establish if SInc’s units are appropriate and compatible to the South African environment. For
example, with regards to power voltage requirements and climate conditions.
• Are the loss reduction claims realistic and reliable – Is there any evidence that SInc’s claim
of a 10% reduction in losses is true?
• Recourse against non-performance – What will SSAS’s recourse against SInc be if the 10%
reduction in losses is not met?
• Legal jurisdiction – Under which country’s legal jurisdiction will the purchase agreement fall and
what will the implications of the possible different legal jurisdictions be on SSAS.

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• Service turnaround time – Because there are only a limited number of approved service
providers in South Africa, what will the turn-around time be if SSAS needs assistance with or
maintenance of the new units?
• Down-time possibilities, extent and impact on the operations – Possible production down-
time while waiting for the service providers if they are not available immediately (for unplanned
down-time/condensing units break-down).
• Possible job losses – Is there a possibility of job losses because the current machines no longer
need to be maintained by the in-house maintenance team?
• Transportation and delivery matters – It is important to consider whether delivery will be timely,
safely and/or at the agreed place and its impact of SSAS ability to continue supplying its
customers.
• Keeping old units as back-up – Should the old units be sold or be kept as a back-up. Should
they be kept, does SSAS have adequate space to keep both old and the new units?
• Environmental impact – the less energy efficient current units may lead to non-compliance with
environmental regulations or could lead to more pollution of the environment.
• Health concerns and risks – In light of the recent food bacteria contamination challenges (for
example Listeria) it will be more socially responsible to replace the units as there will be less spoilt
units that could accidentally end up on the retailers’ shelves.
• Training – A consideration of whether or not staff will require training to operate the new units.

• Availability of spare parts in the future – The availability of spare parts for future service,
maintenance and/or replacement is of importance to consider with regard to where these parts
will be sourced (local vs. imported). This, considering the possible waiting period and the impact
therefore on continued operations. Furthermore, the current units were bought as refurbished and
with a remaining useful life of 4 years there remains a possibility that the technology in these old
units will soon become obsolete leading to a possibility of unavailable spare parts in the future.
• Likelihood of transferring maintenance and service skills to the in-house maintenance
team – The current condensing units are exclusively serviced by SSAS’s in-house maintenance
team while that of the new units will be performed by an external service provider. To an extent
that SSAS will eventually wish to keep the maintenance skills and capabilities in-house, it is
important to consider the feasibility and the likelihood of transferring the maintence know-how and
skills to SSAS’s in-house maintenance team.
(g) As part of launching ChaS, assist the COO with addressing the following questions:
i. Determine the unit selling price that maximises the expected total profit:

Annual Selling price Cost per Expected

demand in per unit unit total profit
units R R R
46,000 60 46 644,000
48,000 58 44 672,000
50,000 56 40 800,000
52,000 54 39 780,000

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 Given
 46 000 x (R60 - R46) = R644K  48 000 x (R58 – R44) = R672K
 50 000 x (R56 – R40) = R800K  52 000 x (R54 – R39) = R780K

ChaS’s expected total profit will be maximised at a selling price of R56

ii. Briefly explain what is meant by an elastic demand.

▪ If the percentage change in demand is more than the percentage change in the price, the demand
for the product is deemed elastic. OR
▪ When demand changes a great deal after a small change in price, the demand for the product is
deemed elastic.

1. Therefore, from SSAS’s perspective, a small change in the selling price of ChaS will influence the
demand of ChaS’ at a higher proportion. OR

2. The percentage change in the demand of ChaS is more than the percentage change in ChaS’s
selling price.

iii. Briefly explain the difference between the below two pricing policies.

A price-skimming policy is an attempt to exploit those sections of the market that are relatively
insensitive to price changes. High initial prices may be charged to take advantage of the novelty
appeal of a new product when demand is not very sensitive to price changes,

[Drury 9th edition, page 242]

Whereas, a penetration pricing policy is based on the concept of charging low prices initially with
the intention of gaining rapid acceptance of the product”

[Drury 9th edition, page 243]

iv. State which one of the two pricing policies methods as per g(iii) above is more suitable to
an elastic demand environment and provide a reason for your answer

State: Penetration pricing policy is more suitable because:

Reason:

1. ChaS’s damand is deemed to be elastic and in this environment, consumers are price conscious.

OR

2. A price-skimming policy is used where the consumers are not very sensitive to price changes.

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5 REFERENCES

Drury, C. 2015. Management and cost accounting. 9th edition. United Kingdom: CENGAGE Learning.

Williams, J, Cairney, C, Chivaka, R, Joubert, D, Pienaar, A, Pullen, E, Roos, S & Streng, J. 2020.
Principles of management accounting: A South African perspective. 3rd edition. Cape Town: Oxford
University Press Southern Africa.

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