DEPARTMENT OF ACCOUNTING

MANAGEMENT ACCOUNTING AND FINANCE 3

EXAMINATION: JUNE 2019

INTERNAL EXAMINER: Ms A van der Merwe

MODERATOR: Prof J Williams

MARKS: 100
TIME: 3 hours

INSTRUCTIONS:

1. You may use the Concise Oxford English Dictionary (or similar available equivalent)
during this examination.
2. There is one (1) question set out on 7 pages in this paper. This cover is Page 1. Check
that your copy of the examination is complete.
3. Answer all questions in blue or black ink. No erasable pens, pencils or correction fluid
may be used.
4. You must clearly indicate all relevant:
(a) assumptions,
(b) workings (including, where relevant, timelines), and
(c) inputs and output when using a financial calculator.
5. Queries will be considered by the internal examiners only during the initial 10 minutes
reading time.
6. The time allocation has been based on you using an additional 30 minutes reading
time before you start writing. Although, in accordance with the University’s examination
regulations, the reading time will not be enforced, it is strongly recommended that you
do not start answering the required during the reading time.

QUESTION BOOK MARKS TIME (minutes)

1 White 100 180
TOTAL 100 180

MAF 3 Exam – June 2019 Page 1 of 7

QUESTION 1 100 MARKS (180 minutes)

Pharmamed Ltd (Pharmamed) is a group of companies that operate in the healthcare industry
and is listed on the Johannesburg Stock Exchange (JSE). The group provides a whole range
of products and services throughout South Africa through their various subsidiaries,
associates and joint ventures situated in Johannesburg, Durban, Bloemfontein and Cape
Town. They operate hospitals and clinics in all of these cities, including the provision of
emergency medical services1. They also manufacture and distribute certain medicine and
medical supplies as well as run a Medical Training Centre in Pretoria.

Pharmamed is strategically situated in the market as a large private healthcare and product
provider. Their share price is currently R56 per share. They are considering expanding
internationally as well as entering into a Public-Private Partnership2 (PPP) with the Department
of Health. Further investigation needs to be done with regards to partnering with government,
due to various concerns in the public healthcare system, including:

• Aging infrastructure and medical equipment

• Poor service delivery
• Lack of competent personnel
• Budget constraints
• Mismanagement of funds

Strategy

Below is an extract of the group’s vision and mission as found in their consolidated annual
report for the year ended 30 April 2019 (FY2019):

“Our vision

Our crystal-clear vision allows us to constantly move in the right direction: our vision is to be
a market-leading, international, diversified healthcare and product provider. We are able to
realise this vision as we support it with our four strategic pillars:

1. Growth

Grow our South African business, establish a sizeable international business, and diversify
our sources of revenue.

2. Efficiency

Deliver cost-effective care by means of efficient, optimal utilisation of resources, technology

and processes.

3. Quality

Deliver market-leading quality care.

4. Sustainability

Effectively engage with our stakeholders to ensure our long-term sustainability.

1
Emergency medical services (EMS), also known as ambulance services or paramedic services, are
emergency services which treat illnesses and injuries that require an urgent medical response, providing out-
of-hospital treatment and transport to definitive care.
2
A public–private partnership is a cooperative arrangement between two or more public and private
sectors, typically of a long-term nature.

MAF 3 Exam – June 2019 Page 2 of 7

Our mission

We improve the lives of people by means of the delivery of high-quality, cost-effective care.
We are always striving to do our best, and a good sign of our performance is our patient
satisfaction, and our care is infused with layers of compassion, enabling us to grow.
Our values form the cornerstone of how we behave – they are the essence of our culture and
the unifying beliefs that connect us.

Thoughtfulness goes a long way, so we aim to leave a lasting impression of understanding,

of meeting patients' needs, and really listening to them.”

Pharmcor (Pty) Ltd

Pharmcor (Pty) Ltd (Pharmcor) is a wholly-owned subsidiary of Pharmamed. Pharmcor is

situated in Johannesburg and manufactures certain medications that are sold to other medical
care providers in South Africa. Below is an extract of the annual financial statements for the
year ended 30 April 2019:

Extract of the statement of profit and loss Notes FY2019 FY2018

R’000 R’000
Revenue 1 23 713 19 967
Cost of sales 2 (14 604) (14 988)
Gross margin 9 109 4 979
Warehouse and storage expense 3 (1 133) (971)
Repairs and maintenance on property, plant and
4 (420) (529)
equipment
Communication expense 5 (1 720) (1 540)
Operating profit 5 836 1 939
Investment property income 6 105 162
Profit before tax 5 941 2 101

Note 1

Revenue was generated by the sale of the following products:

Medication Selling price Number of Total sales

(R) per bottle bottles sold R
in 2019
Atenolol 115 95 100 10 936 500
Bupropion 78 117 850 9 192 300
Cyclobenzanine 22 162 900 3 583 800
23 712 600

The profit-volume ratio achieved for the FY2019 after taking into account all variable costs
was 0,4 (FY2018: 0,45). These PV-ratios exclude variable costs that are included in any
opening or closing inventory that may have existed in each of the respective financial years.

Pharmcor sold a total of 315 850 bottles in FY2018.

MAF 3 Exam – June 2019 Page 3 of 7

Note 2

Information regarding cost of sales for FY2019:

Cost of sales R
Opening inventory 1 844 900
Current year production 18 265 000
Over recovery (630 000)
Closing inventory (4 875 900)
Cost of sales 14 604 000

No over recovery of fixed manufacturing overheads occurred in FY2018.

Production information for FY2019:

Medication Number of Total machine Number of

bottles on hand - hours used in bottles produced
1 May 2018 2019 in 2019
Atenolol 3 200 48 100 96 200
Bupropion 2 510 35 850 119 500
Cyclobenzanine 1 850 32 850 164 250
7 560 116 800 379 950

Budgeted fixed manufacturing overheads were the same as the actual fixed manufacturing
overheads for FY2018 and FY2019. Budgeted machine hours were also consistent between
FY2018 and FY2019. Fixed manufacturing overheads are allocated based on the number of
machine hours used.

Note 3

Due to the great volumes of medications being produced, a warehouse is being rented to store
completed medication awaiting distribution.

Note 4

During 2017, the board of directors of Pharmcor appointed a new Chief Operations Officer,
Mr Samson Buthelezi. Mr Buthelezi has managed to obtain an excellent new service provider
to repair and maintain the production machinery during FY2019. He also negotiated a long-
term agreement with them in return for lower tariffs than their predecessor. Not only did he
manage to save costs, but the machines are also operating as if new.

Note 5

Communication expense is a mixed cost which has a fixed and a variable component that is
based on the number of medication bottles sold in each financial year.

Note 6

A portion of the administrative office is classified as Investment Property in accordance with

IAS 40. Even though this does not form part of Pharmcor’s normal operations, rental income
is received from leasing out this portion.

MAF 3 Exam – June 2019 Page 4 of 7

Tender for Department of Health

The board of directors of Pharmamed is considering whether to tender for a contract offered
by the Department of Health in the upcoming year. This way, they can obtain the experience
of working with government without the long-term commitment that comes with entering into
a PPP.

The tender requires the manufacturing of 22 000kg of surgical gel at a contract price of R730
per kg. This gel is used during surgeries and medical emergencies to slow down blood loss
temporarily so that the patient can be stabilized to receive the necessary care.

Another subsidiary of Pharmamed, Sanimed (Pty) Ltd (Sanimed), is already manufacturing

this gel and would be the company that submits the tender on behalf of the group.

Resources needed for the manufacture of a kilogram of gel:

Skilled labour Note 7 2 hours

Unskilled labour Note 8 6 hours
Total direct labour hours per kilogram 8 hours
Dissolvable fibre cubes Note 9 3 cubes
Liquid solvent P230 Note 10 2 litres

Note 7

Sanimed is currently operating at 80% of their total skilled labour capacity of 240 000 labour
hours. Skilled labourers are permanent salaried employees of Sanimed and are paid at a rate
of R150 per hour. These employees can work overtime limited to a total of 40 000 hours of
overtime which is compensated at 1,5 times their basic rate per hour.

Note 8

Unskilled labour is easily obtainable and considered variable in the short term. Unskilled
labour is paid at a rate of R60 per hour.

Note 9

Sanimed has sufficient dissolvable fiber cubes on hand, since it is regularly used in their
manufacturing processes and will continue to be used.

Note 10

Liquid solvent P230 was specifically purchased in anticipation of another order for a private
clinic in Pretoria. However, this clinic failed to pay the required deposit and thus the order was
never filled. Liquid solvent can be resold.

The FIFO method is applied by Sanimed in accounting for inventory. The following values are
available for materials:

Rand per Rand per litre of

dissolvable fibre liquid solvent
cube P230
Book value 16 60
Current market value 20 64
Net realisable value 18 50

MAF 3 Exam – June 2019 Page 5 of 7

Sanimed uses a single fixed overhead allocation rate for the allocation of fixed manufacturing
overheads. Effective labour hours are used to allocated fixed overheads which were budgeted
at 300 000 hours and R600 000 for the following financial year (excluding the tender). Fixed
manufacturing overheads will increase with R318 000 if the tender is accepted.

Variable manufacturing overheads are accurately estimated at R15 per direct labour hour.

A sales forecast indicated that, if this tender is accepted, sales demand of another product
made by Sanimed, a hand sanitizer named HanSan, will decrease by 9 000 litres in the
following year. Attributable fixed overheads of HanSan will, however, decrease by R98 000.

Information regarding HanSan: R per litre of HanSan

Sales 350
Unskilled labour (4 hours) 240
Direct variable materials 24

Below is an extract of the job costing done by the accountant of Sanimed for the proposed
tender:

Description R
Direct labour
Skilled 6 600 000
Unskilled 7 920 000
Direct materials
Dissolvable fibre cubes 1 056 000
Liquid solvent P230 2 640 000
Variable overheads 2 640 000
Fixed overheads 318 000
Total costs 21 174 000
Revenue 16 060 000
Loss (5 114 000)

END OF INFORMATION

REQUIRED ON NEXT PAGE

MAF 3 Exam – June 2019 Page 6 of 7

 Sub-
QUESTION 1 – REQUIRED: Total
total
a) With regards to Pharmamed considering entering into a Private-
Public-Partnership with the Department of Health:
i) In your opinion, would the proposed partnership positively or
negatively impact on each of Pharmamed's four "strategic 4
pillars"?
ii) For your answers in part (a) (i) above, provide at least 2
motivations for the impact on each of the "strategic pillars", but 10
no less than 10 motivations in total.
Provide your answer in the following format:

Required a) i) Impact of partnership ii) Motivation

Strategic pillar 1 Positive / negative 1.

2.
Strategic pillar 2 Positive / negative 1.
2.
Strategic pillar 3 Positive / negative 1.
2.
Strategic pillar 4 Positive / negative 1.
2.

Communication, layout and logic of argument 2 16

b) Calculate the allocated fixed manufacturing overhead costs that
were allocated to each of the medicines produced by Pharmcor (Pty)
Ltd in FY2019. 18 18

c) Analyse and provide possible reasons for the over recovery in the
cost of sales of Pharmcor (Pty) Ltd for FY2019. 4 4

d) Prepare the statement of profit and loss for Pharmcor for FY2019
based on the variable costing method. You must:

• Indicate clearly the value of opening and closing inventory as well

as contribution for the year.
• Assume a fixed manufacturing overhead allocation rate of
R49,61 per machine hour. 28 28

e) Using relevant cost and revenue principles, calculate and advise the
board of Pharmamed of the desirability of the tender by Sanimed 18 18
(Pty) Ltd.
f) Explain briefly the reasons for any differences between the
incremental relevant profit / loss calculated in part e) above and the
loss as per the job costing done for the tender by Sanimed (Pty) Ltd. 14

Communication, layout and logic of argument 2 16

TOTAL 100

END OF REQUIRED

MAF 3 Exam – June 2019 Page 7 of 7