Calculators: Yes

Requirements for this paper: Other resources:

None
Answer scripts: X Multi-choice cards:
Attendance slips (Fill-in Multi-choice cards
paper): (A4):
Scrap paper: Graph paper:

Type of Assessment: SECOND OPPORTUNITY Qualification: BCom

Module code: MDAC 271 Duration: 185 MINUTES

Module description: INTRODUCTION TO MANAGEMENT Max: 100
ACCOUNTING
Examiner(s): Z VUTHELA Date: 17 December
B MONCHO 2021
J BARNARD
Internal L BOTHA Time: 14:00
Moderator(s):

Submission of answer scripts: ORDINARY

INSTRUCTIONS TO CANDIDATES:

1. You are reminded that answers may NOT be written in pencil or erasable pen.
2. The marks shown against the requirement(s) for each question should be taken as an
indication of the expected length and the required depth of the answer.
3. Answer the questions using:
 Appropriate arrangement and presentation;
 Clarity of explanation;
 Logical argument; and
 Clear and concise language.
4. Non-programmable calculators are allowed.
5. All books must be handed in.
6. Clearly show all calculations.
7. Round to two decimal places unless stated otherwise.
8. You are not allowed to consult another student or any other resources, i.e. closed book
assessment
CONTENT MARKS
MINUTES
Question 1 – Direct materials, Direct Labour and Overheads 15# 27 minutes
Question 2 – CVP analysis and Variable costing systems 25# 45 minutes
Question 3 – Standard costing 20# 36 minutes
Question 4 – Joint cost and Relevant costing 40# 72 minutes
Additional writing time allowed because of use of invigilator app 5 minutes
Admin Scan and upload answer on Invigilator app and Efundi 15 minutes
#Include ½ marks

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MDAC271: Paper No.1 | 2nd Opportunity 2021 | Full-time
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QUESTION 1 (15 marks)

Black Coffee (Pty) Ltd (hereinafter “Black Coffee”) was established in April 2013 as a sock
brand built around three key principles: i) premium quality; ii) local manufacturing; and iii) a
design that tells authentic African stories. A few years ago, Black Coffee entered into a
partnership with Mrs Price Clothing Store on a retailer’s development programme that aims
to provide support to young entrepreneurs as they expand their commercial footprint in the
highly competitive retail landscape. Black Coffee socks are now available at 20 selected
stores nationwide as well as online via the retailer’s e-commerce platform.

Their budgeted information for October 2021 was as follows:

Selling price per pair R250

Sales volume (pairs) 9 000
Production volume (pairs) 9 000
Direct material (54 000 metres) R540 000
Direct labour (13 500 hours) R94 500
Manufacturing overhead costs:
Indirect material R20 000
Indirect labour R31 600
Electricity R15 000
General expenses R8 000
Rent R42 000
Other operating costs:
Marketing and selling:
Variable (5% commission on each pair sold) ?
Fixed cost per pair sold 21
Fixed administration expense per pair sold R39

Actual costs and expenses incurred during October 2021 were as follows:

R
Raw materials purchases – cash
Material purchases (52 686 metres @ R9,00 per m) 474 174

Material
Direct materials issued to production (90% of all raw materials
available for use) ?

Labour
Direct labour - cash (450 extra hours worked compared to
budgeted) ?

Manufacturing overhead costs:

Indirect material used 18 900
Indirect labour 30 600
Electricity 16 200
General expenses 6 750
Rent 45 450
Other operating expenses - cash:

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 Marketing and selling expenses 334 125
Fixed administration expenses 71 100

Additional information for October 2021:

Opening inventory 1 October 2021:

Raw materials at actual cost R38 700
Work in progress R14 202
Finished goods (900 units) R28 404

Actual sales volume 8 910

Actual production volume (completed units) 9 090
Actual selling price R300
Actual sales commission 5.5%

 The closing balances for work in progress and finished goods amounted to R35 000
and R84 000 respectively, on 31 October 2021.
 All inventory items are valued using the first-in-first-out (FIFO) method, according to
absorption costing principles.
 The actual direct labour rate was equal to the budgeted rate.
 Manufacturing overheads are absorbed on the basis of budgeted direct labour hours.

Marks
REQUIRED Sub– Total
total
(a) Prepare the following ledger accounts only for the month of October
2021:
 Raw materials control 3
 Wages control 2
 Manufacturing overhead control 5
 Work in progress control 15
3
 Finished goods control
2
Show all calculations clearly.
TOTAL MARKS 15

QUESTION 2 (25 Marks)

Biko’s (Pty) Ltd (hereafter Biko’s) is a business that sells prepacked lasagnas to retailers.
Biko’s was started by a South African couple, Bogosi and Nono, who spent most of their
upbringing in Italy. After struggling for a couple of years in this very competitive food market,
Bogosi decided to use his Italian friend’s lasagna recipe and convert it into a microwave
meal, which can be sold to larger retail outlets such as Pick ‘n Pay, Checkers and Spar.
Biko’s started off with the Namagna, a minced lasagna, and recently added the Vegita, a
vegetarian lasagna, as market research showed that young professionals with families are
looking for a healthy meal option that is easy to prepare.
Production takes place at a relatively small but fairly automated plant. The production
process starts with the mixing of ingredients and the kneading of the dough. The two
lasagnas are then split into two processes, the meat and the vegetable process. Bogosi
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studied mechanical engineering, so he was able to convert the process into a fairly
automated one. Fixed production overheads are high, but Bogosi is confident that should
capacity increase, Biko’s will be able to cover the overheads.
Extracts from the budget for the year ended 31 October 2021 and the actual results per the
management accounts for the year are set out below:
Note
s Budget Actual
R R
Revenue 1 3 195 000 3 520 000
Less: Cost of Sales -2 140 553 -2 194 653
Opening inventory 2 148 500 148 500
Production cost 3 2 114 600 2 153 100
Closing inventory 4 122 547 106 947
Gross profit 1 054 447 1 325 347
Selling and distribution cost 5 875 000 877 500
Net profit before tax 179 447 447 847

Notes:
1. Budgeted selling prices was R80 for Namagna and R70 for Vegita, but Bogosi
believed that he could keep up with the budgeted sales volume (32 500 for Namagna
and 8 500 for Vegita) even if he increased the selling price of the Namagna by R10,
which was proved correct by the actual outcome.

2. Opening inventory on 1 November 2020 consisted of 4 000 units of Namagna and

1 500 units of Vegita at an actual cost of R108 000 and R40 500 respectively. The
pre-determined fixed manufacturing overhead rate per lasagna was R16 for the 2020
financial year. No material inventories of raw materials were held on this date.

3. Bogosi budgeted for 30 000 Namagnas and 7 500 Vegitas to be manufactured during
the year. Actual production showed 29 500 Namagnas and 8 000 Vegitas were
manufactured.

4. Biko’s uses the weighted average method of inventory valuation and the closing
inventory values on 31 October 2021 are considered to be correct.

5. The budgeted selling and distribution costs were made up of a variable cost of R8.50
per unit and a fixed annual cost of R526 500.
Additional information:

 Except for the mince and vegetable portions which are the main ingredients of the
respective lasagna types, the remaining ingredients are standardised for both
products and are bought ready made from a local supplier. The budgeted cost per
kilogram of a pack of standardised indirect ingredients is R28. One Namagna
requires 220g and one Vegita 200g of the pack. Total actual cost of the pack for the
year was R230 000 (R190 000 for Namagna) after Bogosi was able to negotiate a
price of R27 per kg.
 The actual mince cost for the Namagna lasagna was R566 400. Bogosi was very
concerned because although the mince price remained at the budgeted R40 per
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 kilogram, the actual mince cost was R21 600 more than the total budgeted cost of
mince for budgeted production of 30 000 Namagnas.
 Vegetable portions used to fill Vegita are budgeted at R4 per unit. The actual cost
was R30 400.
 As the manufacturing process is fairly automated, only six (6) unskilled workers are
required. As they are willing to work for the minimum stipulated wage, Bogosi
decided to keep them at the minimum rate of R32 per hour. While preparing the
budget, Bogosi reviewed the timesheets from the last two years and discovered that
it takes an average 15 of minutes for a Namagna and 20 minutes for a Vegita to be
prepared for processing and packaging. Biko’s were part of the striking members in a
nationwide strike. The outcome forced Bogosi to increase their hourly rate by R5.
 The Namagna and Vegita workers clocked 7 500 and 2 400 hours, respectively.
 Budgeted variable manufacturing overheads were calculated at R10 per lasagna with
actual variable manufacturing overheads of R9.60 per lasagna.
 The lasagna is wrapped in a disposable labelled plastic holder, which was budgeted
for at 48c per holder. Due to increasing pressure from the public to go “green”, the
supplier offered a discount of 8 cents should Biko’s continue with the order and pay
cash, which Bogosi accepted.
 Fixed manufacturing overheads of R600 000 were budgeted. Currently, these
overheads are allocated based on budgeted production units. Actual fixed
manufacturing overheads amount to R585 000.
 The actual selling and distribution costs were made up of a variable cost of R9.00 per
unit and a fixed annual cost of R508 500.

Marks
REQUIRED Sub– Total
total
(a) Calculate the following for Biko (Pty) Ltd:
 budgeted break-even point in Rands; 10 13
 budgeted margin of safety percentage; and 1
 comment on the margin of safety percentage and explain its 2
value to management.

Show all calculations clearly.

(b) Using the variable costing system for inventory valuation, calculate
the actual total contribution for each lasagna of Biko (Pty) Ltd for the 12 12
year ended 31 October 2021. A total column is not required.

TOTAL MARKS 25

QUESTION 3 (20 marks)

JamStar (Pty) Ltd (hereafter “JamStar”) is a small company incorporated in Cape Town,
South Africa. JamStar produces a variety of jams and marmalades that it sells to local
supermarkets and farmers’ markets. For the first few years after its inception, the company
made profits because people loved that they could eat homemade jam without the hassle of
making it themselves. To differentiate themselves from all the other products at the farmers’
market, JamStar uses coloured jars that match the flavour of the jam and a signature gold
lid.

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All the products follow the same production process. To improve efficiencies, all products are
produced in batches. The fruits are cooked at a low temperature and then blended with
glucose syrup with added citric acid and pectin. Once all the ingredients are blended into a
jam (or marmalade), it is left to cool off. Once cooled, the jam is poured into one kilogram
jars which are sold for R50 per jar. JamStar’s margins have been tight for the last few
months and the managing director has been keen to determine the cause of the decreased
margins. The company operates a standard variable costing system to value inventory and
evaluate performance.
To respond to the concerns of the managing director, the management accountant decided
to compute the contribution of all the products in an attempt to isolate all the products that
contribute the least to JamStar’s profits. Of all the products JamStar produces, the
management accountant found that the grape jam was making the lowest total contribution.
While investigating the low margins, it was discovered that the sales manager decided to
increase the sales prices by 10% with the hope that all the products would be viewed as
luxury products and this would set them apart from other locally produced jams.
Unfortunately, this resulted in some of the products, the grape jam in particular, experiencing
low margins.
The standard cost data for a batch of grape jam are:

Per batch (R)

Fruit extract 200 kilograms at R16 per kg 3 200

Glucose syrup 350 kilograms at R10 per kg 3 500

Pectin 50 kilograms at R30 per kg 1 500

Citric acid 1 kilogram at R200 per kg 200

Direct labour 20 hours at R32.50 per hour 650

Variable overheads R14 per direct labour hour 280

Total variable costs per batch 9 330

The drought that occurred in the Western Cape during the 2018-2019 season proved
disastrous for grape crops. As a consequence, normal prices in the market for fruit extracts
have been higher than expected. However, as a result of the relationships that were
established with the supplier, JamStar managed to purchase the fruit extracts and citric acid
at prices lower than the current market prices. The price of glucose syrup was impacted by
sugar taxes imposed by the South African Revenue Services as well as the minimum price
fixed for sugarcane.
The company has had some trouble with labour inefficiencies and has decided to initiate pay
cuts in an attempt to motivate the employees to work harder. This has led to negative
publicity for JamStar and they are currently in negotiations with unions to reverse the pay
cuts and possibly even increase the wage rate per hour.
The management accountant determined that the fixed overheads would not change if the
grape jam was discontinued, as a result, these costs have been excluded in the evaluation
of the jam.
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MDAC271: Paper No.1 | 2nd Opportunity 2021 | Full-time
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The actual results for the production of 1 800 jars of grape jam:

Fruit extract 684 kilograms at R18 per kg

Glucose syrup 1 176 kilograms at R12 per kg

Pectin 150 kilograms at R30 per kg

Citric acid 3 kilograms at a total cost of R600

Direct labour 66 hours at R30.00 per hour

Variable overheads R16 per labour hour

Actual sales and production were 1 800 jars of grape jam, which is 25% less than the
budgeted sales and production volumes. There aren’t any normal processing losses. The
management accountant reported the results to the managing director using a contribution
format income statement. The managing director expressed that he was unfamiliar with the
contribution format income statement and struggled to interpret it.
Additional information:
1. JamStar values material using the first-in-first-out (FIFO) method.
2. Each batch produces 600 jars of grape jam.
3. The jars used to package the grape jam have been excluded in the evaluation as it has
been determined that there was no deviation from the standards and as such will not
have an impact on decision making.
4. The standards set have not yet been updated and management has decided to update
them for the forthcoming period seeing as market prices have not stabilized.
5. JamStar does not hold any inventory balances on hand. All jams and marmalades
produced are sold at the end of each reporting period.

REQUIRED MARKS

SUB- TOTAL
TOTAL

(a) Describe the difference between a traditional format income

and a contribution format income statement. Include in your 4 4
discussion the impact these formats will have on the inventory
valuation of JamStar (Pty) Ltd.

(b) Calculate the following variances in as much detail as possible:

 Sales price and volume variances 5 14
 Fruit extract and Glucose syrup material price and 6
usage variances
 Variable overhead rate and efficiency variances 3

(c) Discuss the potential causes of the sales variances. 2 2

TOTAL MARKS 20

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QUESTION 4 (40 marks)

Crushtide Ltd (‘Crushtide’) is a producer and exporter of phosphoric acid, which is a

commodity used locally and internationally to make catalysts, rustproofing materials,
chemical reagents, latex, dental cements, tooth whiteners, toothpaste, disinfectants, food
supplements, carbonated beverages, polishes and animal feeds.

Crushtide is a highly successful company that maintained profitability even during the global
pandemic. The company has been in operation for 35 years and operates an opencast mine
in Phalaborwa and a processing plant in Richards Bay.

Mining of phosphate rock

The production of phosphoric acid by Crushtide begins with the mining of phosphate rock
from the company’s opencast mine in Phalaborwa, Limpopo Province. The mine produces
between 1 200 000 and 1 800 000 tonnes of phosphate rock concentrate annually,
depending on expected market demand.
Production of the phosphate rock concentrate at the mine entails the following key steps:
 Drilling and blasting;
 Crushing and milling of the ore;
 Adding of reagents (substances used to cause a chemical reaction) to the crushed ore
slurry; and
 Filtration and drying to drain water from the phosphate rock concentrate.

Budgeted production of phosphate rock concentrate for the financial year ending
31 December 2021 is 1 400 000 tonnes and the following budgeted costs:

Item Notes R
Direct labour 1 50 400 000
Depreciation 2 ?
Production 3 28 140 000
overheads
Reagents 4 4 424 000

Notes:

1. The mining operations are heavily reliant on labour and machinery. Crushtide
budgeted R50 400 000 for its miners for the 2021 financial year (‘FY2021’) based on
paying its labour force of 467 miners at an average hourly rate of R60 per miner. The
wages of miners are a variable cost and treated as direct labour.
2. The mining machinery are used in the drilling, blasting, crushing, filtration, and drying
processes. The mining machinery was replaced five years ago at a cost of
R686 million. The machinery that was in use at the time was fully depreciated and
broke down often. When the replacement machinery was purchased, it was
estimated to have a useful life of 20 years and a residual value of R86 million.
Crushtide elected to depreciate it using the straight-line method.
3. A pre-determined production overhead recovery rate of R33.50 per direct labour hour
is budgeted for mining production overheads (indirect labour, water, electricity,

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 repairs, etc.). If production of phosphate rock concentrate was budgeted at 1 200 000
tonnes, the pre-determined production overhead recovery rate would have been
R37.00 per direct labour hour for 720 000 direct labour hours.
4. Reagents added to the ore slurry are sourced from local suppliers on a just-in-time
basis. Crushtide does not carry any opening or closing inventory of the reagents. The
budgeted cost of reagents for FY2021 was based on the estimated production
tonnage of phosphate rock concentrate and current market prices and has been
calculated at R4 424 000.

Apart from labour, depreciation of mining equipment, production overheads, and the cost of
reagents, there are no other expenses associated with the production of the phosphate rock
concentrate.

Processing of phosphate rock concentrate

Once crushed, milled, filtrated and dried, the phosphate rock concentrate is rail-transported
to the processing plant in Richards Bay in the province of KwaZulu-Natal, 820 km away.
Crushtide elected to locate its processing plant in Richards Bay due to the port
infrastructure, which is necessary for the export of finished products to global markets and
for importing sulphuric acid (used in the processing of phosphate rock concentrate).

In order to produce phosphoric acid, a reaction is initiated between phosphate rock

concentrate and sulphuric acid to form weak phosphoric acid in slurry form.

The resultant slurry is then filtered to remove gypsum particles. After the filtration process to
remove gypsum particles, the low grade phosphoric acid is converted into concentrated
high-grade phosphoric acid by boiling off excess water.

The processing of phosphate rock concentrate at the Richards Bay plant generally results in
the production of one tonne of phosphoric acid (finished product) for every four tonnes of
phosphate rock concentrate processed.

Joint products

Based on budgeted demand, Crushtide budgets to produce 350 000 tonnes of phosphoric
acid in FY2021, resulting from the budgeted production of 1 400 000 tonnes of phosphate
rock concentrate mined, as explained above. Crushtide currently exports 60% of its
phosphoric acid to Europe and sells 40% locally. This sales mix is based on current
budgeted demand, and can be changed if, and when it is required.

Crushtide treats the phosphoric acid sold to Europe and that sold locally as two different
products, as the phosphoric acid exported to Europe needs to undergo further processing to
make it suitable for the European market. Selling prices for phosphoric acid exported are
budgeted at EUR78.40 per tonne in FY2021 and local sales are budgeted at R1 000.00 per
tonne in FY2021.

Crushtide deems the ‘split-off point’ to be at the end of this boiling process. After the boiling
process, the phosphoric acid destined for the European export market are then further
processed.

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By-product

Crushtide budgets to produce 70 000 tonnes of gypsum particles in FY2021, based on the
budgeted production of phosphoric acid. Normally gypsum particles equal 14% of the total
production of phosphoric acid. Gypsum particles are sold for R72.00 per tonne as a by-
product. Gypsum particles are used as a major raw material in the production of gypsum
boards, which are used for the construction of internal walls and ceilings. The process of
filtering the gypsum particles is highly automated and relies on the use of the sophisticated
and intensive plant built at the Richards Bay plant.

Crushtide spent R12 620 000 on plant and machinery at the beginning of FY20219 to grind
gypsum particles obtained from the filtration process into a fine product that is suitable to be
sold as a by-product. This plant and machinery have a ten-year useful life, with no residual
value and are depreciated on a straight-line basis.

In addition to the infrastructure used to grind the gypsum particles, an average variable cost
of R4.20 per tonne of gypsum particles is incurred during the packaging of the gypsum
particles.

Budgeted costs

A summary of the budgeted costs incurred at the Richards Bay plant, excluding any costs
associated with the by-product, are as follows:

Item Note
Transport 5
Sulphuric acid 6
Production costs 7
Further processing cost of export phosphoric 8
acid

Notes:

5. Crushtide is budgeting to incur a cost of R16 per tonne in FY2021 for transporting the
phosphate rock concentrate via freight rail to Richards Bay.
6. The reaction process requires one tonne of sulphuric acid for every ten tonne mix of
phosphate rock concentrate processed. Crushtide imports sulphuric acid from
Canada at a fixed price (hedged) of CAD12.00 per tonne.
7. The following data has been extracted from the records of Crushtide with respect to
the production costs incurred by the company at the Richards Bay plant for the
current year with regard to the production of phosphoric acid, including the costs of
filtration and boiling:

Financial year Variable Total number of Total plant

production costs employees operating hours
(R)
2020 23 600 000 43 1 180 000

The plant operating hours noted above represent the number of hours the Richards
Bay plant is in operation for processing phosphate rock concentrate into phosphoric
acid. Operating hours at the Richards Bay plant are expected to reach 1 330 000
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 hours, operated by 45 employees, in FY2021. These operating hours have been
calculated based on the number of machines operated at the plant during the
operating hours in a year. The maximum operating hours available at the Richards
Bay plant in the short term is 1 379 400. The average production costs per plant
operating hour are expected to increase by 6% in FY2021 from the prior year.
Crushtide classifies the above production costs of the Richards Bay plant as variable
for inventory valuation and decision-making purposes.
8. The further processing cost of the phosphoric acid for the European market amounts
to R200 per tonne processed.

Crushtide does not have opening or closing inventories of phosphate rock concentrate,
phosphoric acid, sulphuric acid and gypsum particles.

Estimated average exchange rates for FY2021

The estimated average exchange rates for FY2021 for South African rand (ZAR) to EUR and
CAD are as follows:
ZAR17.50 : EUR1
ZAR12.50 : CAD1

Special order

Crushtide has been contacted by a Chinese company to provide them with a once-off
special order to supply 20 000 tonnes of concentrated phosphoric acid. This phosphoric acid
will be of the same quality and standard of the phosphoric acid supplied to the local market
and will thus not require the further processing required by the phosphoric acid destined for
the export market.

Management is confident that they can sufficiently increase production of phosphate rock at
the Phalaborwa mine to satisfy any increase in demand from the Richards Bay plant, but is
unsure whether they have the capacity at the Richards Bay plant to satisfy this order.

Management expects that no additional production costs will be incurred on this order other
than the resultant increase in variable production costs resultant from the increase in
production volume at both the Phalaborwa mine and the Richards Bay plant. No changes
are expected to the variable production cost per tonne or to fixed production cost in total.

One of the requirements of the order is that the phosphoric acid should be packaged in a
certain way to comply with Chinese import requirements. Crushtide will have to buy new
containers that comply with the Chinese requirements, at a price of R600 per container.
Each container has storage capacity of 200 tonnes of phosphoric acid.

REQUIRED: MARKS
Sub- Total
total
(a) Calculate the total budgeted joint production cost, split in fixed and
variable cost elements, for the financial year ending
31 December 2021 for the production of phosphoric acid, from the 15 15
mining of phosphate rock up to the production of phosphoric acid at
the split off point after the boiling process.

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(b) Calculate the budgeted gross profit that will be earned by Crushtide
for the production and sales of export and local phosphoric acid in the
financial year ending 31 December 2021. It is the policy of Crushtide
10 10
to allocate joint costs to the joint products using the net realisable
value method, and the net realisable value of the by-product is used to
reduce to joint costs.
(c) i. Calculate whether the Richards Bay plant of Crushtide has
enough capacity to satisfy the budgeted demand as well of that
of the special order. 3
ii. Irrespective of your answer above, using the net-realisable value
of the two joint products, and ignoring joint costs, advise
management whether Crushtide should sacrifice export or local 3 6
sales, if they have a shortage in supply.
(d) Determine the minimum price that Crushtide should accept for the
9 9
special order.
TOTAL MARKS 40

TOTAL MARKS: 100 MARKS

END OF PAPER

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